Why to check your tax return, even if a professional prepared it

Article content

Many Canadians will likely agree that our tax system is overly complex, which is why millions hire an accountant or tax professional to prepare their tax returns each year. But, just because you hire a pro to prepare your return, doesn’t mean you’re not fully accountable — and ultimately liable — for the information contained inside it.

Take this recent Tax Court decision, decided in early October, involving a taxpayer who was reassessed by the Canada Revenue Agency (CRA) beyond the normal reassessment period for her 2012 and 2013 tax returns. Under the Income Tax Act, the CRA is generally prohibited from reassessing an individual taxpayer more than three years after the original reassessment, unless it can be shown that the taxpayer made “a false statement attributable to misrepresentation arising from carelessness, neglect or wilful default.”

Article content

Returns beyond the normal reassessment period are considered to be “statute barred.”

The taxpayer retired after decades working in senior care homes, initially as a healthcare aide, and ultimately as a qualified personal support worker. She grew up in Jamaica and had a Grade 6 level education. She had always hired a professional tax preparer to complete her annual income tax returns as she did “not feel sufficiently knowledgeable of tax matters” to properly prepare her own returns.

Around 2009, some of the taxpayer’s work colleagues recommended she start using a certain tax preparer for her returns, as he had prepared returns for many of them. As a result of their recommendations, the taxpayer engaged this tax preparer’s services for several years, including for both her 2012 and 2013 personal tax returns.

Around 2016, the taxpayer learned that a number of this tax preparer’s clients, including some of her co-workers, were having trouble with the CRA with regards to their tax filings. The taxpayer didn’t want any trouble, so she promptly stopped using this particular tax preparer going forward. It turns out that the tax preparer was involved in making “unsubstantiated claims,” on taxpayer returns, and also forged receipts to lower his clients’ taxes.

Article content

Article content

The taxpayer’s 2012 and 2013 tax returns were initially assessed on Nov. 12, 2013, and Nov. 10, 2014, respectively. The three-year normal reassessment periods for her 2012 and 2013 taxation years expired on Nov. 12, 2016, and Nov. 10, 2017, respectively. Both years’ returns should have been considered statute barred.

But, on March 12, 2019, the CRA reassessed the taxpayer for both years, alleging that she had “made misrepresentations that are attributable to neglect, carelessness or wilful default or fraud … when she claimed … disallowed rental expenses/losses, employment expenses and charitable deductions.”

The CRA claimed that the taxpayer’s “non-review of her returns before signing” was evidence supporting that the taxpayer made misrepresentations in her tax returns that were “attributable to neglect on her part.” In cross-examination, when the taxpayer was asked, “Did you review your 2012 tax filing before it was submitted to Canada Revenue Agency?” She answered, “No. (My tax preparer) does it on his computer … he puts them together, and he put a little X, and he said, ‘Sign your name here.’ … because if I look at it, I wouldn’t understand anything anyway.”

Article content

The taxpayer had claimed rental losses of $7,862 (2012) and $8,165 (2013), based on her renting out a portion of her principal residence, employment expenses of $8,936 (2012) and $6,452 (2013), relating to her use of her vehicle for work, and non-refundable tax credits in respect of charitable donations of $2,660 (2012) and $2,240 (2013) that she made to her church.

At the trial, the CRA conceded that the taxpayer did, indeed, make the charitable donations to her church as claimed in her 2012 and 2013 returns, and that payments of certain household expenses, including property tax, cable and internet, utilities and insurance were indeed paid by the taxpayer.

But in the taxpayer’s 2012 return, she claimed $2,825 for renovations done in her basement. But when asked if she incurred that expense, the taxpayer responded “I did not tell him (i.e., the tax preparer) that.” The judge remarked that the taxpayer “would have recognized this as a wrong statement had she reviewed her 2012 return before signing it, and letting it be submitted.”

In addition, in both her 2012 and 2013 returns, vehicle mileage was reported as an employment expense. The taxpayer testified that the mileage figures were her tax preparer’s figures not hers. In both her 2012 and 2013 tax returns, she is shown as stating that all (100 per cent) of her total kilometres driven in her car for the year were “to earn employment income.” The judge found it to be “highly questionable” that the taxpayer never drove her vehicle at least a bit for personal purposes, such as to visit family or friends, to attend church, or to purchase groceries.

Article content

Prior legal cases found that neglect refers to “a lack of reasonable care,” and the Tax Court has previously found that “a failure to review a tax return before signing it may constitute neglect or carelessness.”

As a result, the judge concluded that the false renovation, along with the 100 per cent mileage claim were “misrepresentations” in both of the taxpayer’s 2012 and 2013 returns, and that they were attributable to neglect on the part of the taxpayer, “the neglect being her not having reviewed either of the subject returns before signing and filing.”

Thus the judge concluded that the two returns were not statute-barred and could be reassessed by the CRA beyond the normal reassessment period. Accordingly, the two appealed reassessments were referred back to the CRA to allow the charitable donation credits, as well as some of the expenses paid for the rental property, but the inappropriate expenses claimed were disallowed.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

If you liked this story, sign up for more in the FP Investor newsletter.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content