Tax time can be a tempting time not to report all your income.
Resist that temptation. While Canada has a self-reporting tax system, the tax office has powerful weapons to "encourage" Canadians to do the right thing.
For example, the information on all those tax slips you have been receiving also goes to the Canada Revenue Agency. A computer can make quick work of comparing what you were paid from those various sources with what you reported on your tax return.
The self-reporting comes more into play with less documented income like self-employment (including tips) and rental property income.
However, if the person who paid you claims the amount as a deductible expense, once again the computer could single out your file to see if you had declared the income.
I always remember a client who had been advised to invent a rental property, then to make up both an income figure and a list of expenses totalling several thousand dollars more than the income. He would then deduct that loss from his other income, typically saving him almost $1,000 in tax every year.
While minimizing tax by using all legal methods is fine, this was a case of tax evasion, which is illegal.
How might he get caught? Well, the computer could check whether the rental property address showed up anywhere else in the CRA system. Or a routine audit would reveal the fraud. And a vengeful ex-spouse or other acquaintance could trigger an investigation.
If the CRA suspects you of significantly under-reporting your income - perhaps by comparing your lifestyle with your reported income - it can reassess you for the income it thinks you should have been reporting. The onus is then on you to prove the CRA wrong.
If you haven't been doing the right thing, the CRA offers a voluntary disclosure program. Provided an investigation into your affairs isn't under way, you may disclose unreported income, and pay only the taxes owing plus interest on those back taxes - but avoid any tax penalties.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]
