Switch to electronic tax slip almost costs pensioner a $10,000 penalty
It’s widely stated that Canada’s income tax system is based on “self-assessment,” meaning each of us voluntarily completes a tax return in which we report our annual income to the Canada Revenue Agency, claiming all appropriate deductions or credits.
But, truth be told, there’s far more third-party verification than we might think.
A 2017 CRA study of the tax gap, which measures the difference between the total amount of taxes that would be paid if each Canadian fully reported all their income properly, taking only appropriate deductions and credits, compared to the tax actually paid and collected by the CRA, found that 86 per cent of all income assessed was “assured.”
Assured income is used to describe income that can be independently verified by the CRA by matching information reported by taxpayers with information provided by arm’s-length third parties.
The most common example of assured income would be the income reported on T-slips, such as T4 slips used by employers, or T3 and T5 slips used to report investment income. The CRA is able to conduct post-assessment reviews to compare information on your tax return to information provided by third-party sources, such as your employer or financial institution.
Issuers of tax slips are required to either send two copies of the slip by mail to the recipient’s last known address, or send one copy electronically, either via e-mail or secure recipient portal, provided the issuer has the recipient’s written or electronic consent to do so.
For T4 slips, a change this year now allows employers to distribute T4 slips electronically to current active employees without having to obtain express consent from those employees in advance. Employers are still, however, required to issue paper copies to employees who request them.
But what if you, the taxpayer, aren’t tech-savvy and thus don’t receive a slip issued to you electronically, and then fail to include the income on that tax slip when you file your return?
That was the issue facing an Ontario senior who was hit with nearly $10,000 in federal and provincial omission penalties for the 2012 tax year for failing to include pension income on her 2012 tax return.
The taxpayer was an elderly woman and a registered nurse who looks after her husband and daughter, both living with disabilities. She receives a pension from the Healthcare of Ontario Pension Plan (HOOPP).
The taxpayer generally files her taxes on time and uses a third-party tax preparation service to do so. For the 2012 year, she did not include her “T4A – Statement of Pension, Retirement Annuity and Other Income” when filing as “she did not receive the T4A slip in the mail, which is how she is accustomed to receiving it.”
The tax service advised her to file the tax slips she had for her 2012 return, and that she could file an amendment once she received her T4A from HOOPP.
On Jan. 20, 2014, the CRA reassessed her 2012 tax return to include the unreported T4A income for that tax year, and levied the penalties.
Shortly thereafter, the woman applied to the CRA under the “taxpayer relief provisions” for a cancellation of the penalties, arguing that she did not obtain the T4A until Feb. 6, 2014, by visiting the HOOPP offices in person.
The taxpayer relief provisions provide the CRA with the discretion to cancel or waive penalties and/or interest assessed to taxpayers who, because of circumstances beyond their control, are unable to meet their tax obligations. Examples of these circumstances include misfortunes (sickness, death in the family), natural disasters (fire, floods), service disruptions (postal strike), an inability to pay or financial hardship, or an error by the CRA (incorrect information).
In her request for relief, the woman admitted she omitted some income due to a change in the way her pension provider issues the T4A slip, as it was previously issued on paper but was now issued electronically. She tried to explain to the CRA that she was making earnest efforts to get the T4A slip from HOOPP, in vain, and that “she was unable to access the slip online because she is not proficient in the use of computers.”
The woman’s request for relief was sent for a “first-level review” by the CRA, which was denied. The CRA’s logic was that since HOOPP had also issued a T4A to the taxpayer in 2011, “the (taxpayer) should have been aware of the unreported income, and could have estimated the amount with an accompanying explanatory note.”
In October 2017, the woman again reapplied for taxpayer relief. The CRA conducted a “second-level review,” which again denied her any relief. Again, the CRA maintained that, in this case, she ought to have known that a significant portion of her income was missing from her tax return. The CRA took issue with the woman’s “allegation” that she did not “receive” a T4A, stipulating that “this is incorrect, because it was available electronically.”
The CRA concluded that “a review of this case has failed to show the (taxpayer) was prevented from complying with her filing and remitting requirements due to circumstances beyond her control.”
The taxpayer thus went to the Federal Court in June 2018 to ask a judge to review whether the CRA’s decision to deny her request for relief from interest and penalties was reasonable.
Fortunately for the taxpayer, the judge was sympathetic and found that the CRA’s decision was not reasonable, in that it failed to take into account the woman’s financial hardship, given that she “is 70 years old, supporting a disabled husband and daughter, and solely responsible for paying the bills.”
In sending the matter back to the CRA for a fresh review by a different officer, the judge remarked, “Had the (CRA) considered the totality of the (taxpayer’s) evidence, it is possible that (it) could arrive at a different conclusion.”