While the Canadian tax system may very well be one of self-reporting, where
each taxpayer is required to disclose, report and pay tax on his or her income
voluntarily, the Canada Revenue Agency (CRA) does have the ability to
double-check your numbers -- and hit you with interest and penalties for failing
to report income.
Keep in mind that these penalties can apply to you even if you use an
accountant to prepare your return. Taxpayers are responsible for reviewing their
returns and, particularly, the income reported to ensure that nothing has been
omitted. Just blindly signing your return and sending it in is not an excuse.
Judy Saunders learned this lesson the hard way in a tax case decided last
year. She requested the CRA waive the penalty assessed for failing to report
income in more than one tax year.
Under the Income Tax Act, if a taxpayer doesn't fully report his or her
income in any two of the last four tax years, the taxpayer is liable for the tax
plus interest accruing from the due date. As well, he or she may also be subject
to the "repeated failures" penalty, which is equal to 10% of the unreported
In 2001, Ms. Saunders failed to report a $2,000 RRSP withdrawal in her income
as the T4- RSP slip for the withdrawal was "missing, for reasons that are not
The following year, Ms. Saunders lost her job when her employer shut down its
Canadian operations. The employer failed to send Ms. Saunders a T4 slip for
2002, and $18,000 of employment income was not reported by her on her 2002
return, owing to "a misunderstanding between Ms. Saunders and the accountant"
who prepared the income tax return.
The CRA assessed a penalty of 10%, or $1,800, for repeated failure to report
income in two consecutive tax years. Ms. Saunders appealed to the Tax Court to
have the penalty waived or reduced to take into account the mitigating and
The courts have dealt with such requests in the past and in some cases, have
indeed cancelled this penalty if the taxpayer was able to demonstrate due
diligence in the preparation of his or her return.
In order to demonstrate such diligence has been exercised, the court has come
up with a number of factors: the size of the income omission relative to the
total income declared; the opportunity the taxpayer had to detect the omission;
as well as the taxpayer's education and intelligence.
The judge weighed these factors and concluded that a due diligence defence
was not established in Ms. Saunders's case since she did not carefully review
her tax return before it was submitted.
So, before submitting your return this year, you may wish to take an extra
moment to ensure that you've reported all your income.
Jamie Golombek, CA,
CPA, CFP, CLU, TEP is the vice-president, taxation and estate planning, at AIM
Trimark Investments in Toronto.