|Card Money from New France. Photo Credit: The Canadian Paper Money Society.|
When I was working as a federal tax prosecutor, I would see people construct what they thought were these elaborate evasion schemes with the intent of stopping the government from getting any of "their" money. Turns out if they had been keeping proper records, and filed a proper tax return, the government would have owed them money!
They expended immense time, effort and expense, fearful the government was going to grab a big chunk of the income they had worked so hard to bring in, only to find out when we uncovered whatever evasion scheme they had dreamed up that they hadn't been committing an offence after all. Didn't even civilly owe taxes. They did what they did out of ignorance, and had they been better informed about Canadian tax law they would have worried a whole lot less, and been financially better off.
Now a private practice tax lawyer in Cornwall and Eastern Ontario, I believe that disputes with the Canada Revenue Agency (CRA) can often be avoided with a little knowledge on the part of the taxpayer. Here are five things you need to know about income tax law in Canada.
1. The fact that taxation in Canada is based on a self-reporting, self-assessment system fundamentally shapes the powers, modes of operation, and rulings of the CRA and the courts. In some countries, the government tells you what taxes you owe - in Canada, you tell the government what taxes you owe. Sure the government may eventually challenge you on it - but often it won't. As a result, you need to hold onto your tax records for quite a long time in case you do get asked for them, and you need to be aware that the government possesses some pretty intrusive powers to make you and your associates talk about your taxable income.
2. Everyone does not have to file a tax return every year. But corporations (other than charities) regardless of their tax position and individuals who have tax payable, a taxable capital gain, or who have disposed of capital property in that year must file. There are legal benefits for individuals filing every year even when they do not have to pay any tax for a particular year.
3. All "residents" of Canada are taxed on their worldwide income. The Income Tax Act deems you to be a resident if you sojourn in Canada for over 182 days in a taxation year, or you have certain connections to the Government of Canada such as being a member of the Canadian Forces. Sojourning that leads to deemed residence can amount to multiple, unconnected visits to Canada which add up to 183 days. And even if you are not in Canada for over 182 days in a year, the law may still find you to be a resident if your dwelling place, family connections, or personal property and social ties are in Canada. Although a tax holiday through moving outside Canada is attractive to a lot of Canadians, in order to terminate your Canadian residency you must sever as many ties to Canada as possible, and usually live outside of Canada for over two years.
4. The General Anti-Avoidance Rule (GAAR) of the Income Tax Act empowers the CRA to deny a tax benefit where a transaction is not undertaken for primarily bona fide purposes other than to obtain a tax benefit. The bona fide purposes do not have to be related to business reasons, and for example could be for family purposes. The GAAR will not apply where no provision of the Income Tax Act has been misused and there has been no abuse of the Income Tax Act read as a whole. When the GAAR is or is not triggered is therefore fraught with uncertainly, and it's wise to seek an advance ruling from the CRA before proceeding with a questionable transaction that might trigger the GAAR.
5. If you disagree with the Notice of Assessment you have received from the CRA, you usually have only 90 days from the date of the mailing of the Assessment to file a Notice of Objection. The first stage of a tax appeal is before an Appeal Officer within the CRA. Should you not be satisfied with the result, you have 90 days from the date the CRA mails the Notice of Confirmation to file an appeal with the Tax Court of Canada; for relatively small amounts in dispute you may choose the “Informal Procedure” which will usually be much quicker than the “General Procedure” that must be used for larger amounts of federal tax in dispute. You may seek to appeal a decision of the Tax Court to the Federal Court of Appeal within 30 days of the Tax Court judgment issuing. If you chose the informal procedure there is no route of appeal, but a more restrictive “judicial review” may be sought. After the Federal Court of Appeal, you may seek leave to appeal to the Supreme Court of Canada, but leave will usually only be granted where the issues is of "national importance."
If you're unsure about how to handle you taxes, you should: (1) call the CRA - it's an endless source of free, detailed advice; (2) see an accountant; or (3) see a lawyer who deals with tax law. Be aware that there are a lot of accountants out there who deal with tax issues and not many lawyers. For routine tax matters an accountant will usually be the way to go if you aren't getting the answers you need from the CRA, but for heated disputes or risky transactions a lawyer is the one who can give you formal legal advice and represent you in court.