"You've got tax questions? We've got the answers! Quickly and easily!" Thus
reads the exclamatory headline of the Canada Revenue Agency's latest brochure,
encouraging taxpayers to contact them directly for answers to their tax
inquiries.
With the tax-filing deadline only six days away and millions of Canadians
scrambling to complete their returns on time, calling the CRA for tax advice
might seem like a quick way to get answers to your tax questions. The problem is
that not only might the answers be incorrect, the CRA is not liable for "bad
advice."
Let's take, for example, the 1999 case of Joyce Watanabe, a Vancouver teacher
who wanted to "buy back" some registered pension plan years of past service and
did so by making what she thought was a fully deductible contribution to her
plan.
Wanting to ensure that the amount was deductible, Ms. Watanabe contacted the
CRA on several occasions to confirm the correct tax treatment. She was even
provided with a copy of the CRA's own Interpretation Bulletin on the RPP
contribution rules.
Ms. Watanabe relied upon the advice she received from the CRA -- advice that,
as it turned out, was wrong, and therefore she was unable to deduct the full
amount.
Unfortunately, the law in this area is clear -- based on her own specific
situation, the amount was not fully deductible despite CRA's advice and there
was really nothing the judge could do to remedy this as he must apply the law,
as written by Parliament. As the judge concluded after denying the deduction,
"the situation remains highly unsatisfactory...if she is not entitled to deduct
the past-service payments that she made to the RPP, she will nonetheless be
required to include the same amount in income ... when it is paid to her out of
the RPP as a pension benefit" resulting in double taxation of the same amount.
A similar case in 2002 involved another teacher, Gary Moulton, who attempted
to deduct an RPP pension buyback in the year following the actual RPP
contribution -- something not permitted under the Tax Act.
He phoned the CRA twice, spoke to two different officials who both stated
that the amount would indeed be deductible in the following year. He relied upon
the advice given by the CRA, to no avail, as the law, again, is clear -- the
amount was simply not deductible and the judge ruled accordingly.
As the judge wrote, "[Moulton]) argues with great conviction that he should
be entitled to rely on advice given by the CRA and relied upon by him in good
faith. I agree that the result may seem a little shocking to taxpayers who seek
guidance from government officials whom they expect to be able to give correct
advice. Unfortunately such officials are not infallible and the court cannot be
bound by erroneous departmental interpretations."
So, what's a taxpayer to do? A survey conducted last year found that while
less than half of Canadians use an accountant or tax service to prepare their
income taxes, 72% of Canadians said it would be worth it if this saves more in
taxes than cost of using the service. Perhaps seeking some professional tax
advice from a qualified accountant or lawyer may indeed be money well spent.
And, unlike the CRA, at least professional tax advisers can be held accountable
for incorrect advice.