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T1 adjustment; changing your previously filed tax return

You can do a T1 adjustment for up to 10 prior years for tax returns filed in that period

by Ron Clarke

Let’s say you have filed your tax return.

You now realize you forgot to report some income, resulting in under reported income.

Or you now realize you claimed a deduction that was too high or credit that you had not qualified for, resulting in under reported income.

What do you do?

You file a T1 adjustment to change your previously filed return.

But what if it was a tax return from a few years back? You can do a T1 adjustment for up to 10 prior years for any tax returns filed during that time frame.

There is an exception to this 10 year time frame.

If Canada Revenue Agency (CRA) adjusts a return that was filed from before that 10 year frame, and if the CRA adjustment does not fully represent all detail, then you can file an objection and if accepted by CRA, you can file a T1 Adjustment to fully disclose all detail surrounding CRA’s adjustment.

If you discover an error in your tax reporting and when this error resulted in a shortfall in tax due, especially if it is of large value, you may wish to make a “voluntary disclosure” to CRA using Form RC199.

This action may mitigate, or perhaps even eliminate, the standard penalty imposed by CRA and perhaps may even reduce the interest charged.

This course of voluntary disclosure to CRA should be a serious consideration if the same or similar, or even different errors, were repeated over a number of years.

It likely goes without saying that when disclosing voluntarily, full disclosure of all errors is required.

If not, and if CRA does a full review and discovers additional errors, no leniency for penalty or interest is likely.

So … self-disclosure is the better path with CRA. Surprise!

But what if you choose to do nothing? What could happen?

CRA operates with an active review period for the current and two prior tax years.

If you are reviewed and if the issue is discovered and if it is serious enough, not only will a reassessment with penalty and interest be charged and possibly maximized, but a full audit may be undertaken if CRA determines that it was careless or negligent tax reporting.

Additionally, this three year review period does not define an end date. CRA can review back seven years.

And noteworthy, in the case of real estate sales, there no longer is an end date for a CRA review, so keep all your real estate sales records for your lifetime.

Wondering what the penalty is if you know something is wrong, do nothing about it, and get caught?

And for the record, doing nothing is an omission not an error, so claiming you made a mistake in your tax reporting has no legs.

Depending on the type of omission, the penalty could be from the low of 10 per cent of the resultant tax owing, up to 20 per cent of the value of the amount of income not reported (not the unpaid tax owing, but the actual missed income) … plus interest.

So far, the scenario has been about not having paid enough tax.

What about a missed opportunity to report an eligible expense or missed opportunity to claim a deduction you were entitled too but because you didn’t do it, you paid more tax than you would have had to have paid.

What to do? File a T1 adjustment?

Correct, but the adjustment to your tax return must be a claim that you clearly would have made at the time of filing your tax return if you had known about it.

As straightforward as that statement appears, what is being made clear is that moving around current claims for expenses and deductions within a tax year or between tax years or between spouses is not permitted.

This is referred to as retroactive tax planning.

There are a couple of classics. One being the desire to move income, expenses, or deductions from one spouse to the other after the returns are filed.

Another being the desire to adjust an already claimed RRSP deduction from one tax year and moving that RRSP as a carry forward to the next tax year. These adjustments are not allowable.

As a last note, to prove that Canada’s tax system is a voluntary reporting system, nothing within the Income Tax Act obligates a taxpayer to correct an error or omission they discover within their filed tax return.

However, as described above, the pocketbook can be greatly impacted if CRA reviews and identifies the issue.

Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.