Since 2010, the Canada Revenue Agency has sent out approximately 30,000 letters each year to individuals that they have identified as being at a “higher risk” for claiming inaccurate or false deductions. They refer to this program as their Educational Letter Program and gives the recipient the opportunity to “correct” their previous returns using voluntary disclosure. In other words, the CRA has found a way to turn 30,000 taxpayers into non-gratis tax auditors.
Educational Letters from CRA
You can potentially receive one of two letters: The first one educates the taxpayers about specific claims made on their return and the other notifies the recipient that the CRA may conduct an audit in their activity group.
So, who are the lucky people to receive these letters? So far, my experience has shown that rental property owners, commission sales people and people who are self-employed. In other words, anyone that is not an employee is at risk of receiving a letter. Based on The Globe and Mail article, and Revenue Canada, they have identified areas where common errors or a misunderstanding of the interpretation of the tax law can occur, and by using this letter, they are “educating” the recipient on what is considered a viable expense.
For self-employed and commissioned employees, the CRA will focus on advertising and promotion, meals and entertainment, wages paid to a spouse, business use of home, and vehicle expenses. For rental property owners, it’s the repair and maintenance, travel expenses and capital improvements that seem to be misinterpreted the most.
What Happens Next?
Okay, you have received the letter. Your next step in the process is to review your previously filed returns (three years should be sufficient) and if you find that you have made any errors, this is your opportunity to request an adjustment by using the Voluntary Disclosure Program. If you are confident that you haven’t made any errors, your fiduciary duty is complete.
In most cases, you have probably provided your information to a professional tax preparer to complete your return. And those tax preparers will use the information that you provide to complete your return. Take some time to make sure that you have reviewed any expenses that you are claiming and understand what you can claim as an expense and what you cannot.
As always, you can always reach out and ask questions at any time. Taxes are not everyone’s cuppa tea.
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Until the next time,