The 2-out-of-4 rule. Heard of it?
Did you know that if a taxpayer fails to report a source of “T” slip income on their tax return and then within the next three years fails to report another source of “T” slip income, Canada Revenue Agency (CRA) assesses a 20 per cent penalty.
Not 20 per cent of the tax liability on that income, but 20 per cent of the actual income. So if it’s $10,000 worth of T5 investment income or T4 wages, the penalty is $2,000 plus the taxes due.
And this penalty applies even if taxes had been withheld at source and forwarded to CRA. In other words, CRA may very well already have the taxes due, and then some, and the penalty could still be applied.
And it doesn’t have to be the same source of income missed twice in that four year period. Any two sources generate this penalty, and the second offence is the defining income in terms of the penalty amount assessed.
For example, if you miss reporting a $2,000 T4 in year 1 and then a $7,500 T5 in any of the following 3 years, the penalty is assessed on the last offence. That’s a $1,500 penalty on the $7,500. If the offences were reversed in timing, the penalty would have been $400 on the $2,000. I guess you want miss the small one last!
So if you’re thinking that the T5 slip showing a couple of hundred dollars of interest income isn’t a big deal, just remember that if you miss reporting it and then miss a highly valued “T” slip within three years after that, it’s that last one – the big one in this case – that will be the basis of the 20 per cent penalty.
And don’t think CRA won’t catch this missed “T” slip. Every “T” slip issued to a taxpayer has a copy sent to CRA and yes, they are input by CRA and matched to the applicable tax return. Then you get the reassessment in the mail. Ouch … if that is the second one in four years.
Avoiding this 2-out-of-4 penalty involves due diligence by the taxpayer. That is, be aware of all the “T” slips due to you, track them all down regardless of value, and be sure to input them during tax preparation.
Having a perpetual list or checking your prior year’s return may draw attention to missing slips. I can’t speak for do-it-yourself software programs, but professional programs flag any year-over-year difference at the time of tax preparation – a great prompt to ask a client about a missing “T” slip.
Finally, if a “T” slip arrives after you have filed, my recommendation is to do a T1 adjustment to catch that slip up to your return. If you ignore it … regardless of value … it could be costly.
Benefits families should know
There are lots of benefits and credits to help families with their expenses throughout the year and reduce the amount that they owe at tax time.
· Children’s fitness tax credit – Did your children play soccer, take ballet classes, or participate in a program of physical activity in 2012? If so, you may be able to claim up to $500, per child, of the cost of these activities for a non-refundable tax credit of up to $75 for each child. You may claim an additional $500 for each eligible child who qualifies for the disability amount and for whom you have paid a minimum of $100 in eligible expenses.
· Children’s arts tax credit – Did your children participate in a program of artistic, cultural, recreational, or developmental activity in 2012? If so, you may be able to claim up to $500 of the money spent per child on these activities for a non-refundable tax credit of up to $75 for each child. You may claim an additional $500 for each eligible child who qualifies for the disability amount and for whom you have paid a minimum of $100 on registration or membership fees for an eligible program.
· Child care expenses – Did your children attend daycare or a program such as a summer day camp in 2012? You or your spouse or common-law partner may be able to claim what you spent on eligible child care in 2012.
· Family caregiver amount – If you have a dependant with a physical or mental impairment, you may be able to claim up to an additional $2,000 when you claim certain non-refundable tax credits.
· Home buyer’s amount – Did you buy a home in 2012? You may be able to claim a non-refundable tax credit of up to $750 for the purchase of a qualifying home.
·Child disability benefit – You may be eligible for this tax-free benefit if you cared for a child under the age of 18 who is eligible for the disability tax credit.
· Canada child tax benefit – A tax-free monthly payment that helps eligible families with the cost of raising children under the age of 18. To find out if you qualify for this benefit as well as others, use our online benefit calculator.
· Universal child care benefit – If you have children under the age of six years, you may be eligible for this taxable benefit, which supports child care choices for families.
· Medical expenses – You may be able to claim a non-refundable tax credit based on the medical expenses paid for you, your spouse or common-law partner, or your children for any 12-month period ending in 2012.