With tax season in full swing I have been coming across a few interesting tax myths that still exist out there.
Yes, most people hate tax, but the more you know about the tax system – the more you can ultimately use strategies to reduce the taxes you pay.
Here are a few of the biggest tax myths I have come across in the recent past.
Myth: Missing T-Slips Are No Big Deal
When you receive a tax slip for common types of income like employment income or investment income, the issuer (such as your employer) has already sent a copy to CRA. The amounts of income claimed on your tax return should match these amounts.
In 2012, CRA created the matching penalty – any missing income from T-slips that is not claimed (doesn’t match CRA records) is assessed a hefty penalty. The penalty is 20% of the income not claimed.
The penalty only kicks in if there are two cases of missed income in a four year period.
So if you forget to include some employment income you’d be safe the first time but any other missed income after is fair game for the 20% penalty.
If you earned $100,000 of employment income and fail to report it (a second time), the penalty would be $20,000! Half this amount is provincial (10%) and the other half (10%) is federal.
Not only that, if the amount owing is late you will likely be assessed interest on the amount on top of the penalty.
Click here for more information from CRA about the penalty.
Myth: It doesn’t pay to be a tax snitch
In the past, individuals have been able to make anonymous tips to CRA on those who they believe are not paying enough in taxes. There has never been a monetary reward attached to these tips – until now.
In January 2014, CRA announced they will pay 5-15% of any additional taxes collected that are directly related to a tax tip from an individual.
In my experience CRA has been hesitant to become aggressive towards tax evaders but this signals a change in their policy, and perhaps their attitude towards tax evasion.
Under the new program, an individual enters into a contract with CRA while they pursue the tip(s). If the information results in money collected, CRA pays the individual based on the terms of the contract.
The United States has a similar program already in place and in 2012 awarded an individual $104 million for information leading to taxes being recovered.
Click here for more information about the tax evasion information program from CRA.
Myth: Charitable donations are not significant
In 2013, CRA announced the Charitable Donation Super Credit . This is a credit that allows first-time donors to earn more for their donations than they would prior to the credit being introduced.
The credit allows you to earn an extra 25% for any donations up to $1,000. It can also be shared between spouses and can be claimed once between 2013 and 2017.
CRA considers someone a ‘first-time donor’ if they (or their spouse) haven’t made a charitable donation in the preceding 5 tax years.
Myth: Filing via regular mail reduces the chance of an audit
The method of filing a tax return depends on the complexity of the return, and doesn’t affect the odds of being audited.
Related: How Does CRA Decide Who to Audit?
There are two ways CRA chooses who to audit: random selection and targeted selection.
Random selection is essentially just that – having the (bad) luck of being selected randomly.
Targeted selection is a bit more complicated and is based on whether CRA deems the individual as ‘high risk’ based on factors like: significant changes in income from the prior year, a business with years of losses, unusual expenses and large charitable donations.
Whether you file via regular mail or online doesn’t change your chance of being subject to either type of tax audit.
Conclusion: Two things are certain in life: death and taxes. The more a taxpayer knows about how taxes work, the more likely they are to be in a position to reduce their own taxes.
What tax myths have you heard?