Tax Incentive Plan:  Understating Income is Expensive

There are many ways to compute a tax return mathematically correctly. 

The key is to file to a family’s best benefit and that includes avoiding CRA penalties on failure to report income.  This is prohibitively expensive:  failure to report income on the current tax return and in any of the three prior tax returns can result in a penalty of 10% of the missed income to each of the federal and provincial governments. This is in addition to possible gross negligence (50% of unpaid taxes) and tax evasion penalties (up to 200% of unpaid taxes), plus interest.  What this means is that if you missed claiming a $1000 income amount, in the current year and in any of the three prior years (2011, 2012, 2013) you’ll pay a $200 penalty – 10% of $1000 to the each of the federal and provincial governments – ouch!

But, just what is the definition of income for tax filing purposes? It’s an important question, because the word “income” has a broad meaning in the eyes of CRA and can include barter transactions.

In fact, unless specifically exempt, the definition covers most amounts that are received in cash or in kind within the calendar year; that is, January 1 to December 31. Reporting income for certain businesses and investments may be possible under a different fiscal year.

Income received in kind (barter transactions) must be included at fair market value.  This can include, at its commercial value, such as a bushel of grain, a gaggle of geese, gold, shares or a variety of services. The onus of proof for fair market valuation is on the taxpayer. Therefore, all indicators (appraisals, newspaper clippings, etc.) to justify the value put on those items must accompany the tax filing documentation, just in case CRA asks.

When is income considered to be received?  For most taxpayers, income will be reported when actually received. This is called the cash basis of reporting.  But, it technically doesn’t have to be received by the taxpayer. It can come through an agent, be deposited directly in a bank account and so on.   'Though more rare these days, in the case of a cheque, the money is considered to be received for tax purposes when it is deposited at the post office (i.e. when it leaves the hands of the sender).

This gives important guidance when you are trying to decide when to report that December-dated cheque received on January 3 in the last tax year (2014) or the current one (2015).  These fundamental income reporting basics can make a big difference not only in the taxes payable, but also in the amount of tax credits a family will receive.

It’s Your Money. Your Life.  Filing on time and without penalty will ensure families get the very best benefits from Canada’s complex tax system.   But if you need help, now is the time to make an appointment with a DFA-Tax Services Specialist, to pre-interview with all the slips and valuations needed to file family tax returns to your optimal benefit.  Or, if you’re a do-it-yourselfer, there is still time to do the Knowledge Bureau’s Basic T1 Tax Course online – a great investment in a skill you’ll need the rest of your life.