The dreaded brown envelope arrived just after Christmas. Instant fear! Would it be a full-blown tax take down (called a field audit) or just an inquiry? I’ve experienced the former and a colonoscopy is preferable.
“Our records indicate that you have received income that appears to be partially reported, or not reported on your income tax return,” the Canada Revenue Agency form letter stated. At least the CRA was kind enough to enclose a preaddressed mailing label.
I had been nailed by the T-slip matching program that ferrets out income reported by employers as paid out but not noted as income by the likes of me. The offending amount was $537.83 earned from CBC. The cheque should have been issued to my company not me personally. I deposited in my personal account, transferred it to my company and listed it as revenue, thus compounding the error.
Needless to say the very best way to avoid the beady eye of the CRA is to ensure all T-slips are reported, including those you haven’t received. T3 and T5 slips which detail investment income from interest, capital gains, dividends and mutual funds are notoriously late arrivals.
Because T-slips can easily be misplaced, forgotten or occasionally not arrive at all, a great defensive strategy is to compile a list of expected slips. Keep it handy on your computer’s desktop and add to it as money comes your way, rather than trying to re-create all income sources while completing your tax return.
With roughly 1.3 million returns reviewed annually, chances are you will receive one of those brown envelopes more than once during your working life. An audit is rarer, only 200,000 Canadians suffer this fate. Still, dealing promptly with any CRA request lessens the chances that the agency will dig deeper into your return.
Usually you will have 30 days to respond to a query. In my case, I slogged away unsuccessfully trying to get the CBC to re-issue the T-slip. Despite numerous calls to the CRA to explain that I was working on the problem, time ran out and my personal return was re-assessed. I owed $116.61 and the CRA levied $4.73 in arrears interest. Not the end of the world but annoying and if I don’t cough up the money by March 15, I risk a more extensive review or audit.
Related: How to avoid these 8 tax-filing mistakes
Here are three more common signals that might trigger a second look at your return by the CRA.
1. Double dipping: It’s bad enough when a marriage or common-law relationship breaks down. Even worse is the fact that separated spouses often receive special CRA scrutiny. Check with your ex to ensure only one of you claims things such as the children’s fitness credit (line 365), tuition transfer (line 324) or the amount for an eligible dependent (line 305).
2. Change: If your deduction history deviates from the norm, the CRA might come calling. Say you normally have $500 or so in charitable donations annually, then one of those heart-tugging disasters, such as the recent Somali famine, encourages you to hand over a couple of thousand to help out. The increase in your charitable claim, though laudable, is a red flag.
The lesson here is to keep documentation and receipts close at hand especially when there is a big change in your deduction pattern.
3. Self-employment: According to Industry Canada the number of self-employed grew 12 per cent in the first decade of this century. And this is a gold mine for CRA reviewers, as small business owners and the self-employed are audited more often than the general population. Tax software can lead do-it-yourselfers through the process of listing business expenses. Still, it may be worth spending the money to consult an accountant to ensure you are minimizing the chances of an audit.
Here are five specific deductions at the top of the CRA’s second look list.
1. Other deductions (Line 232 ). The CRA loves to zero in on this category as Canadians try to deduct funeral expenses, wedding costs, loss on the sale of a home and divorce or separation legal fees.
2. Caregiver amount (Line 315) — You can claim the caregiver amount for an eligible dependent over age 18 with a net income of less than $18,906 and who has a mental or physical infirmity. But don’t try it if that person isn’t living with you. And if your 22-year-old broke her ankle skiing, that doesn’t count either.
3. Medical expenses (Lines 330 and 331) — Medical expenses are one of the most confusing categories for tax filers and, according to the CRA, often riddled with mistakes. Guide RC4064 isn’t perfectly comprehensible, (the CRA scores a C in my book for plain English) but it will clear up some confusion for individuals and families.
4. Student loan interest (Line 319) — You may be groaning under the load of student debt but the CRA won’t let you deduct interest paid for a line of credit or family loan.
5. Education and textbook amounts (Lines 321 and 322) — If the number of months you are claiming doesn’t match the number of months you were a student the red flag will be raised. Students often make the mistake of claiming for the academic year, rather than the calendar year.
One caution, there is no way to be completely safe as the CRA randomly selects an unknown number of returns for review each year. However, you can increase the odds of keeping a CRA inquiry or audit at bay by checking the Common Adjustments web page. Be especially vigilant in maintaining records and receipts for the red flag areas.
Related: Where to get free tax advice
Image: Canada Revenue Agency photo.