Published: 19 July 2006
When you first arrive in a new country, the last thing you want to do is to get on the bad side of the government. But for immigrants who have arrived from a country with an undemocratic or unfair government, it’s difficult to shake off the fear and suspicion of those in power.
In Canada, where taxes are higher than many countries, the dreaded tax auditor is probably the most feared government official. We have a tax system that is based on the idea that you will report all the income you earned to the government, take only those deductions that are available to you and then pay your fair share of the taxes due on that residual income. Because we have this self-assessment system, some people are tempted to cheat the system, so the government sends out auditors to check up on us on a regular basis.
So how is it that we can be selected for audit? There are four main reasons for being audited.
You may be randomly selected. The Canada Revenue Agency’s computers will select a bunch of income tax returns that share a common parameter. For example, any returns with interest expenses that increased from year one to year two by more than 10 per cent will be selected and then sent to an audit supervisor to check manually. Some returns will be dismissed from audit while others will be sent to an auditor who will investigate the issue further.
Another reason the government may choose to audit someone is if they have been tipped off that the person is evading taxes. Be it a disgruntled employee, a spiteful relative or a jealous friend, anyone who informs the government of possible tax evasion or fraud will be taken seriously. If you are implicated, an audit may be conducted no matter how “clean” your tax return and financial statements appear.
Third, your name might come up in another audit. While auditing another corporation or individual that you are linked with, the auditor may notice something that should be investigated further, and a flag is put onto the file. For example, an audit of a restaurant indicates payments made to their bookkeeper totaling $6,000 per year, but the bookkeeper only reports income of $5,000. In this case, the next available auditor would flag the bookkeeper’s return for audit.
Then there is the matching program. The Canada Revenue Agency automatically conducts a matching program. If a bank sends you a T5 slip for interest income, your return will be reviewed to ensure that you reported the income. If the T5 was missed for any reason, an adjustment will be made.
So now that you know how you get selected, what happens if you did make a mistake?
If the mistake is an honest error, you will have to pay the additional taxes due plus interest. For example, if you claimed 60 per cent of your car expenses as business expenses and it should only have been 50 per cent.
If, however, you made a negligent mistake and you should have known better, such as not reporting your tip income that you received as a waiter, then you will not only have to pay the additional taxes and interest, but you could also face some pretty hefty penalties.
Finally, if you were fraudulent in your “mistake” by creating false expenses, for example, on top of the taxes, interest and penalties you may also face a criminal conviction, jail time and deportation.
You worked so hard to get to Canada, so please ensure you follow our rules. Seek the advice of a professional accountant. They can help you file your tax returns correctly, especially in the first few years when things can get very complicated.
This article was written by Gabrielle Loren -- a partner with Loren & Company, CGA's located in North Vancouver, BC and can be reached at firstname.lastname@example.org, at 604-904-3807 or check out their website at www.loren.bc.ca