will also likely file a corporate tax return as well as one or more GST or HST returns per year.
The tax filing system in Canada relies on taxpayers to self-asses their income, and when filing their returns, the majority of taxpayers provide complete and accurate information. Despite the possibility of serious penalties and potential imprisonment, a great many are not so forthcoming with correct information. Some people intentionally try to avoid taxes by failing to declare all their income, or by inflating their expenses or charitable contributions, and a great many others make unintentional errors on their returns. Although the odds are against a taxpayer being audited for any given year, despite the possible upside of paying less tax by being dishonest on one’s return, the penalties can be so severe that most people don’t attempt it.
While allowing the taxpayers to self-assess their income, and without having massive audit departments, the CRA is successful at collecting hundreds of billions of dollars per year without having more than a couple hundred convictions in court each year for failure to file returns and tax evasion.
1. The Filing Mechanics
Once the taxpayer has filed his or her return, the CRA processes it and makes a determination as to whether it should be accepted as filed. CRA will then assess the return based on the return filed and on information it has obtained from employers and financial institutions, correcting it for obvious errors. Other times, the CRA has questions regarding certain amounts and may ask the taxpayer for clarification. Within a few weeks of filing, the CRA typically has finished processing the return and has determined a taxpayer’s tax liability. At that time it issues a Notice of Assessment, which left unchallenged, dictates the amount of tax owed by a taxpayer.
A taxpayer who disagrees with CRA’s assessment of a particular return may appeal the assessment. The appeals process starts when a taxpayer formally objects to the Notice of Assessment with a Notice of Objection (see Sample 1), which must be filed within 90 days of the assessment, and must explain, in writing, the reasons for the appeal along with all the related facts. The objection is then reviewed by the appeals branch of the CRA, which over the last few years has been taking in excess of nine months in order to assign an Appeals Officer — creating a very lengthy process while interest will continue to accumulate on the taxes owed.
Sample 1: NOTICE OF OBJECTION
Once the Appeals Officer has made his or her decision, the CRA may vary, confirm, or vacate the appealed assessment. If the CRA varies or confirms the assessment, the taxpayer is entitled to yet another appeal to the Tax Court of Canada, and if still unsatisfied he or she may further appeal the decision to the Federal Court of Appeal. (See Chapter 14 for more information about fighting CRA in court.)
2. Personal Income Tax Returns (T1 Return)
As noted previously in Chapter 2, a taxpayer is required to file a return if he or she owes any taxes to the CRA for the relevant reporting period, or if he or she has been requested to file by the CRA. There are also various other reasons why a taxpayer may be required to file a return:
• You owe taxes.
• CRA sends you a request to file a return.
• You and your partner (i.e., spouse or common law) are splitting pension income.
• You received Working Income Tax Benefit (WITB) advance payments.
• You disposed of capital property (e.g., you sold real estate or shares) or you had a capital gain (e.g., if a mutual fund or trust attributed amounts to you, or you are reporting a capital gains reserve you claimed on your previous year’s taxes).
• You have to repay Old Age Security or Employment Insurance benefits.
• You have not repaid money withdrawn from your registered retirement savings plan (RRSP) under the Home Buyers’ Plan or the Lifelong Learning Plan.
• You have to contribute to the Canada Pension Plan (CPP). This can apply if, for the previous year, the total of your net self-employment income and pensionable employment income is more than $3,500 (as of the time of this book’s publication).
• You are paying Employment Insurance premiums on self-employment and other eligible earnings.
If none of the above reasons apply, you may still want to file for the following reasons:
• To claim a refund.
• To claim the Working Income Tax Benefit (WITB).
• To apply for the GST or HST credit (including any related provincial credit).
• You have incurred a non-capital loss in the previous year that you want to apply in other years.
• You want to or your partner (i.e., spouse or common law) wants to begin or continue to receive the Canada Child Tax Benefits payments.
• You are carrying forward or transferring the unused portion of your tuition, education, and textbook amounts.
• To report income for which you could contribute to an RRSP in order to keep your RRSP deduction limit for future years up to date.
• To carry forward the unused investment tax credit on expenditures you incurred during the current year.
• You receive the Guaranteed Income Supplement or Allowance benefits under the Old Age Security program. You can renew your benefits by filing the return by April 30. If you miss this deadline, you will have to complete a renewal form.
In Canada, personal income tax is levied on the worldwide income of individuals considered to be Canadian residents for the purposes of income tax, and also on certain types of Canadian-source income earned by non-resident individuals.
Canadian taxpayers must file their T1 Tax Return by the due date yearly. Every year the returns are due following the completion of the calendar year on April 30. If you are self-employed, or a spouse or common-law partner of a contractor, returns are due June 15. For all returns, amounts owing must be received by the CRA on or prior to April 30 to avoid being subjected to interest charges or penalties.
Individuals may determine the amounts owing by first determining their yearly taxable income. The CRA is entitled to collect the personal income tax through a variety of means, such as the following:
• Installment payments, which certain individuals are required to make every quarter throughout the year instead of paying at the end of April following the tax year.
• Deductions at source. This is where direct deductions from the pay of an individual are remitted to the CRA.
• Voluntary payments.
• Payments obtained by CRA Collections Officers.
3. Corporate Returns (T2) and Other Business Returns
While individuals file T1 income tax returns, corporations file corporate T2 returns. The type of business being operated will determine which return needs to be filed by the organization. Chapter 4 outlines
