The tax system in Canada is a self reporting process. It places the taxpayer in a position of substantial trust and power.
This means that Canada Revenue Agency (CRA) is dependent on taxpayers to be honest in their reporting obligations.
That is why when CRA does find individuals who have not been properly reporting and have become involved in a tax avoidance scheme presented by a tax preparer, there can be very serious consequences. These can result in significant negligence penalties being assessed against the taxpayer in question.
The vast majority of tax preparers are honest and hardworking, but in the last few years there has been a marked increase in those who appear as legitimate business people with offers of obtaining tax refunds that are quite extraordinary.
In a recent Canadian tax court decision, an auto worker was reassessed by CRA and assessed a gross negligence penalty of almost $52,000. Deputy Judge D. W. Rowe sympathized with the tax debtor but was unable to reduce this penalty, which the person will be forced to pay. The tax preparer involved has disappeared.
This scale of penalty can easily derail a family’s financial well-being. It can cause years of hardship and even marital breakup.
The judge was also very harsh in his criticism of CRA’s lack of a system whereby such schemes are caught early and therefore disallowed. But he nonetheless laid the ultimate responsibility upon the taxpayer to at the very least question the blatantly false claims being made on their behalf by the “fraudster” or “con artist” in question.
In our practice we deal with individuals’ personal finances and recently we have seen many individuals with such significant tax liabilities as a result of involvement in such schemes. They are unable to pay these tax arrears penalties.
These tax preparers have claimed business losses for a business that never existed or claimed significant charitable donations that were never given. CRA has now audited and disallowed the claims and has assessed gross negligence penalties against the taxpayers in question.
So what are the warning signs that you may be involved in such a fraudulent tax scheme?
- If you are feeling hurried or hustled when you go in to sign your tax return and don’t get a proper opportunity to review the return and ask questions before you sign
- If you do not receive a copy of your return
- If you are suddenly claiming an extraordinary increase in your refund but have had no significant changes in your financial situation
- If you are asked to make donations to an unfamiliar charity with the promise these donations will be matched and significantly increase a refund
Remember you are ultimately liable for any false information on your tax return and you will suffer the financial consequences.
If you find yourself in a tax avoidance scheme of this nature, talk to a certified financial professional. A Chartered Professional Accountant (CPA) is governed by a professional association with a strict set of professional rules of conduct. A Licensed Insolvency Trustee (LIT) is also governed by professional conduct guidelines (CAIRP) and is licensed by the federal government to provide counseling and advice on all matters of debt, including personal income tax liabilities.