Vancouver Tax Audit Services: the CRA’s Negligence Penalty
The CTV news show W5 aired an episode on February 9, 2014 called Punitive Penalties about a program named the Fiscal Arbitrators where 1804 Canadian taxpayers paid thousands of dollars to be part of what they thought was a legal tax scheme. The scheme did not end well as the participating taxpayers were later reassessed by CRA.
The “news” part of this story is that CRA also slapped the taxpayers involved with gross negligence penalties, amounting to 50% of the tax evaded.
This handful of duped taxpayers were interviewed for W5 and all confessed truthfully to being unsophisticated and to lacking knowledge in tax matters. I saw the W5 show recently and I’m under the impression that the program gave far more time paying sympathy to the “victim” taxpayers than CRA’s plight in trying to enforce the Income Tax Act in a fair manner in order to deter abuse. The show went a step further by stating that the gross negligence penalty is a discretionary penalty for the CRA to assess, the emphasis being placed on the word “discretionary”.
My experience as a long-term providing Vancouver tax audit services tells me that there is a small percentage of taxpayers who can’t resist temptation when promised something that sounds too good to be true, regardless of prevailing common sense or professional warnings. Yes, I too have a client who is being reassessed for a charity scheme that promised big tax refunds. I do remember the first year the client claimed the deduction, and as his professional tax advisor, I warned him that this scheme likely would not pass the test with CRA. He bought into the scheme for a few more years because he received the refunds as promised by the charity every year. It took the CRA a few years to take notice of the scheme, which begs the question: was my client an innocent victim or was he culpable as he continued onward with the scheme despite my professional warnings?
Professional Chartered Accountants like myself do not need to read the fine print that comes with these types of tax schemes. History tells me that if something sounds too good to be true, it likely is, and the CRA will sniff it out eventually.
My client also made the argument that one of his friends had contributed to the charity scheme, then claimed the deduction, and had no problem with the CRA a year later. CRA has many tax returns to go through every year and tax remittance is based on an honour system – just because the friend received a refund for the previous year or two does not mean he followed the law. It just means he got away with one for now and perhaps forever. Or in my client’s case, it is only a matter of time before the CRA sniffs out the illegitimate tax scheme that brought him the large unlawful refunds.
The problem here is that taxpayers fail to properly assess the risks and penalties of these types of situations. I can’t really blame them. The Income Tax Act is complicated. There isn’t enough information available and, yet, there is way too much information available for the average taxpayer to properly assess a tax-driven product.
The larger point the W5 show Punitive Penalties makes is not complicated for the unsophisticated taxpayer to retain – STAY AWAY FROM TAX PRODUCTS YOU DO NOT UNDERSTAND…or ELSE…
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