Mar
10
By Fin MacDonald
Fin MacDonald has over 20 years’ experience providing retirement and Income tax planning advice. Readers are however cautioned that responsibility falls on the taxpayer to ensure that all information is adequate and correct.
This month I will look first at the updates flowing from the Federal Budget. Second, I will discuss the two main scams being perpetrated that pretend to be from the Canada Revenue Agency (CRA). Third, I will look at two scams/frauds being used by Tax Preparers; and lastly, the CRA’s imposition of “Gross Negligence” penalties.
Budget Updates
The Federal Budget brought changes to taxes, tax credits and Tax Free Savings Accounts (TFSA).
On the tax front, two new federal tax brackets and rates will be created for the 2016 tax year (not the 2015 tax returns being filed over the next two months). One bracket, from $45,282 to $90,563 and its rate of 20.5% (down from 22%) implements the “Middle Class Tax Break”. The other new bracket is for those with taxable income above $200,000. The tax rate on incomes above $200,000 will be 33%, up from 29%. As of the date this is being written for the March edition of the Beacon (February 11), the Provincial Budget is still in the offing - any changes Minister DeJong announces I will update in the April issue of the Beacon.
The “Family Tax Cut” (FTC), which enabled two income couples with children under nineteen to income – split with maximum savings of up to $2,000, will not be available for 2016 and onwards. It will still be available for the 2015 returns. An expanded Canada Child Tax Benefit will begin in July to replace the FTC.
The increase in the TFSA limit for 2015 from $5,500 to $10,000 remains. However, for 2016 and on the limit returns to $5,500, subject in future years to indexing. The total TFSA limit for a person who was 19 and resident in Canada in 2008, and who has never contributed, is now $46,500.
Scams
Criminals pretending to be CRA employees have expanded their efforts to defraud Canadians. The first ten months of 2015 saw a 900% increase in the number of fraud attempts reported to the National Fraud Hotline in North Bay Ontario.
The scams fall into two main categories. The first is an email or phone call telling the would be victim that they have an income tax refund of $400 to $1,000. To access this refund you are asked either to click on a link in the email, or to give the crook on the phone your banking or credit information. I have received calls from my clients asking if these emails or phone calls are legitimate. NONE of them are; they are all ‘phishing’ attempts – trying to get your personal information so that they may empty your bank account or run up charges on your credit cards.
The second and more sinister scam is the phone call, often with a CRA phone number showing up in the call display on your phone. The criminal tells you that you owe $1,000, $5,000, $10,000 or more to the CRA. He orders you to go to a local pay day loan company or cheque cashing company and buy sufficient pre-paid gift cards to pay the sum he is demanding. He will call back after you return with the cards and take the serial numbers on the cards. If you demur he threatens your with immediate imprisonment. In some cases these thugs have shown up at the victim’s door and threatened them with bodily harm if they do not cough up what is demanded. In Victoria there have been incidences of people going to the police station to surrender themselves when they did not have the money demanded.
What can you do? First, the CRA will not phone and demand cash. The CRA will not threaten you with imprisonment. Second, phone the CRA 800-959-8281 and ask if you have an outstanding balance; or, call your tax preparer. Your preparer will be able to reassure you that this is a scam and to ignore it.
More Scams From Your Tax Preparer
As part of staying up to date on tax laws I regularly read decisions from the Tax Court of Canada. When you or the CRA disagree with an assessment of your taxes for a certain year there are procedures to follow. For a taxpayer, you request an Adjustment; if this is not done to your satisfaction you may then file a Notice of Objection. If this is not satisfactory, you may then file with the Tax Court of Canada. Still not happy, there is the Federal Court of Appeal and the Supreme Court.
On the CRA’s side, with most tax returns being e-filed, they will send a letter asking for receipts or statements to back up your claims. If they are not happy with this, they issue a Notice of ReAssessment (NOR). Either side may go back up to ten years to request changes or issue NORs. If the CRA feels that you deliberately misstated the true state of affairs, they may try to persuade a judge to waive the ten year rule and go back further.
The two main scams tax preparers try to use both appeal to an individual’s greed. The first is the Charitable Donation scam. You bring your taxes to be prepared and the preparer says he has a way for you to make a donation, of say $1,000 to a charity, but receive a deduction of $10,000 or more for it. The old adage: “If it looks too good to be true, it is” applies to this type of scam and the following one. You can check the CRA’s Charitable Listings or call the CRA 800-959-8281 to see if the charity is registered.
The second and more prevalent scam is the Fake Business Losses Scam. When you are self-employed you are able to claim the expenses of your business. Especially in the early years you may not have any income because your expenses are more than your income. An example: you begin a landscaping business. You need to buy a truck, a trailer, mowers and rakes and all sorts of tools. You have other expenses such as advertising, gas and oil, insurance, maintenance, dump fees, business license, salaries for any help you hire. If you have losses from your self-employment income, you may apply those against your other income in that tax year. If the losses are more than your other income, you may carry them back up to three years and generate refunds from those earlier years.
Fraudulent tax preparers, will suggest to clients, clients who have no business or self-employment activities, that they claim business losses in the tens of thousands of dollars. Often times, as greed takes over, the taxpayer will not look too closely at the reason she/he now has thousands of dollars of new refunds. In both these frauds the tax preparer will often demand exorbitant fees, often 25-50% of the ‘savings’.
When the CRA gets around to taking a closer look (sometimes years later) they go through the process outlined above, and add penalty and interest to the amount you now owe.
“Gross Negligence”
Gross negligence penalties under subsection 163(2) of the Income Tax Act can be imposed when the CRA can show that a taxpayer knowingly, or under circumstances amounting to gross negligence, makes a false statement or omission in a tax return. The penalty for doing such is equal to the greater of $100 and 50% of the tax due to the false statement or omission. In five recent Tax Court cases the CRA was able to impose the 50% penalty, and in each case the Judge ruled in the CRA’s favour. The amounts repayable, taking into account the tax owing, interest, penalties and gross negligence penalties, can often be four or five times the amount of the ‘refunds’.
Next month: filing your 2015 tax return. As always, using my lens of Helping You to Keep More of YOUR Money, I enjoy trying to explain the maze that is the tax system.