Tax Tips and Pits: Little known tax penalty is no joke

Canada Revenue can invoke a 20% penalty for failing to report income.

Did you know that if a taxpayer fails to report on their tax return a source of income that is reported on a “T” slip in one year and then within the next three years fails to report another source of “T” slip income, Canada Revenue Agency (CRA) can assess a 20per cent penalty.

And not 20per cent of the tax liability, but 20per cent of the actual income – no April Fools on this one.

Let’s say 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 already have the taxes due and the penalty could still be assessed by CRA.

And CRA is assessing these days – again, no April Fools.

And it doesn’t have to be the same source of income missed twice in that four year period.  Any two “T” sources trigger this penalty, and the second offence is the defining income in terms of the penalty amount assessed.

For example, missing a $500 T5 in year 1 and then a $7,500 T4 in any of the following 3 years, the 20per cent 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 be $100 on the $500.

This April Fools joke just keeps getting worse.

And if you’re thinking CRA won’t catch a missed “T” slip, remember that every “T” slip issued is matched by CRA’s super computer to the applicable taxpayer’s tax return.

Avoiding this penalty involves diligence by the taxpayer. That is, be aware of all the “T” slips due to you. Reviewing the prior year’s return is a good start.  Professional software actually alerts the preparer about slips not input this year that were last year, but not all do-it-yourself programs offer this feature.

Track down the “T” slips regardless of value, and ensure they get entered on your tax return.  And if you can’t get the official “T” slip, estimate the value and enter it, at least then you can say you tried.

And proving you tried is important.  The diligence put forward by a taxpayer is key to challenging such a penalty imposed by CRA.

The Tax Court of Canada has established that a taxpayer who makes the effort to report income when a “T” slip is missing, or if not reported, attempts to report it after the fact, and/or makes the effort to prevent such a miss in the future such as correcting their address on file, may be exempted from the penalty.

To this point, if a “T” slip arrives after you have filed, it might be best to do a T1 adjustment to catch that slip up to your return.  If you ignore it, it could lead to a very costly penalty, and that’s no joke.

Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.