August 21, 2007 by Dan White.

The importance of paper

Members of WNBC have been told time and again that if you really want to save money on your taxes you have to work hard at it.  This not about working hard at running your business or at your job it is all about keeping detailed receipts and proper books and records.  No one can make you do this, you can hire people to help keep your books and receipts in order but no one can make sure the detailed receipts and documents are complete except you.  The Best Bookkeeping System (BKS) is an exceptional tool but only if you use it and keep with it your receipts (with the stories on the back) and the documents used to support your tax deduction claims. 

Nowhere is this more evident than in actual real life cases that I, as counsel for WNBC, defended against the Canada Revenue Agency.

CASE #1

Our member had just gone through a vigorous audit.  The CRA had a great deal of difficulty with some of his expenses considering he was employed by a company.  The CRA just could not understand how someone who was working for a company could properly incur these expenses and list them as employment expenses.  They denied a large part of his Motor Vehicle expenses (no proof of lease agreement or cost of use after lease return), no expenses for cost of installation of product and complete denial of home workspace. 

We objected and the appeals officer focused on the areas of that the auditor had said that proof was missing so denied.  I contacted the member he attended the office with his papers and immediately produced the lease agreement, a letter from his company explaining the need of the employee to buy his own parts for installation, and lastly he produced rent receipts.  These items were faxed to the appeals officer and the next day she called back and allowed the motor vehicle expense of $3838.00, the parts expenses for $4754.00, and the home workspace for $1800.00 for a total increase of $10,392.00.  Simple with no arguing or bickering back and forth,…Case closed.

CASE #2

Our member had a long and protracted bout with the CRA and had exhausted all objections and the only route to go was to the Tax Court of Canada.  We helped them put their case together and launched their appeal.  The most significant issue here was the denial of interest on $80,000.00 of a mortgage because it was not used to make an investment.  Our member insisted that it was used for stocks and margin and so the interest should be deductible.  The member did not however, have the paperwork to support the flow of monies from the mortgage to investment.  At the time of audit and appeal he did show enough paperwork to have CRA allow interest on $130,000, but the 80K was denied.  They had kept meticulous records on other expenses such as phone (which was allowed at appeal for the full 100%), the cost of a computer (the capital cost allowance was allowed to be deducted), and business training and meetings which again was allowed for the full cost.  There was nothing to support his $80,000.00.

Our member testified at the Tax Court of Canada hearing about this money and how it was used for stock purchases and he actually did quite well on the stand and withstood the cross examination of the Department of Justice counsel.  I certainly believed him as to how the money was spent but we could not produce any documents to support his claim as they had either been misplaced or destroyed by a basement flood.  The court rendered its decision and denied the full amount of 80K claimed in the appeal.  The court noted that it could not rely solely on the “self serving” of the taxpayer and needed some documents to show the flow of money from mortgage to investment and since that was not produced and we had the burden of proof she ruled against us.  That amounted to a significant amount of expense and despite the small victories in the other areas appealed the member walked away unsatisfied with the result of the appeal.

So you have been presented with two stories with significantly different results and all because of the proper use of documentation.  I am convinced  that if our member in the tax case had all the documents beforehand and we could have produced them to the DOJ lawyer we would have settled the matter thus avoiding the need for a full day hearing.  When you have a strong case to present there is no need to fight about it.  The other party usually sees that your case is a good one and it is not worth putting up a fight and so they settle. 

Preparation is key when dealing with the CRA and it starts with your bookkeeping to support the tax return you initially filed.  It is here that the preparation for objection and appeal starts.  Simply put, if you are ready at the beginning you will be ready right up until the end and nobody likes to fight a losing battle,…not even the CRA. 

Patrick Mlot

Legal Counsel to WNBC

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August 15, 2007 by Dan White.

Ottawa, Ontario, August 13, 2007…In support of the new Taxpayer Bill of Rights, Carol Skelton, Minister of National Revenue, is urging Canadian taxpayers to be wary of promotions of tax shelter gifting arrangements promising huge tax savings. Many of these arrangements are currently being aggressively promoted.

“If it sounds too good to be true, don’t fall for it.  Taxpayers need to know that the Canada Revenue Agency (CRA) is auditing all tax shelter gifting arrangements,” said Minister Skelton.  “Under the new Taxpayer Bill of Rights, you can expect the CRA to provide information to help you recognize the types of tax schemes that are out there, and to warn you about the consequences of participating in risky investments.”

The minister noted that people should read the fine print even if a promoter states repeatedly that the tax scheme is acceptable. “Ask questions, and when in doubt, seek advice from an independent tax professional who is not associated with the scheme.”

The CRA reviews all tax shelter gifting arrangements to ensure that the tax benefits being claimed meet the requirements of the Income Tax Act.  New schemes are being marketed that claim to be different from those for which the CRA has previously issued warnings.  Taxpayers should avoid all schemes that promise donation receipts equal to 3 or 4 times the cash payment.

 

**** Dan’s comments… re the 3 to 4 times the cash payment… that leaves only 2 times the donation amount. That is your break even amount. So the conclusion is that these schemes are only good for those who are mathematically challenged.

 

So far, the CRA has audited over 26,000 individuals who have participated in these tax shelters and as a result, about $1.4 billion in claimed donations have been denied. The CRA will soon complete audits of another 20,000 taxpayers, involving close to $550 million in donations, and is about to begin auditing another 50,000 taxpayers who have participated in tax shelter gifting arrangements. To protect Canadian taxpayers and maintain fairness in the tax system, CRA will audit every tax shelter gifting arrangement.

 

Recent CRA Alert is as follows.

Warning: Participating in tax shelter gifting arrangements is likely to result in a tax bill!

Despite numerous warnings and audit actions by the Canada Revenue Agency (CRA), taxpayers are still participating in tax shelter gifting arrangements. The CRA is urging taxpayers to avoid these schemes.

The CRA is auditing all gifting arrangements

Taxpayers should be aware that the CRA plans to audit all tax shelter gifting arrangements. Every audit completed to date has resulted in a reassessment of tax, plus interest. In many cases the CRA has denied the “gift” completely. Penalties will be considered, especially where an investor was audited and reassessed for previously participating in a gifting arrangement.

Stats and Facts

• To date, the CRA has reassessed over 26,000 taxpayers who participated in these schemes, and denied about $1.4 billion in donations claimed.
• Audits of another 20,000 taxpayers involving $550 million in donation claims are just about complete.
• Audits on other arrangements involving over 50,000 taxpayers are about to begin.

Current Promotions

New schemes are being marketed that claim to be different from those for which the CRA has previously issued warnings. Taxpayers should avoid all schemes that promise donation receipts for 3 to 4 times the cash payment. It is the CRA’s position that the proposed legislation, effective since 2003, will apply to reduce the donation credit to no more than the actual cash payment. Furthermore, as indicated above, completed audits have shown that there was effectively no gift being made in many cases, and as a result, the donation was reduced to zero.

Packages promoting these schemes sometimes include letters of commendation about the particular charity, which can give the impression of endorsing the scheme itself. These letters should not be interpreted as providing any assurance that these schemes do what they claim to be doing or that the promised tax benefits are in accordance with the Income Tax Act.

Get professional, independent advice

If you are still thinking about participating in a tax shelter gifting arrangement, it’s very important that you get independent legal and tax advice. Independent advice means advice from a tax professional that is not connected to the scheme or promoter. If property is involved, you should also get independent advice on its true value. Packages from promoters will often claim to have legal or tax opinions from a law firm. You may find that these opinions contain very general comments and do not provide unconditional support for the scheme. Ask to see them, and have them reviewed by an independent professional.

In addition, participants who have been reassessed for previous participation in these schemes may also wish to obtain independent tax advice to determine their best options.

Tax shelter identification numbers
The CRA reminds taxpayers that tax shelter numbers are used for identification purposes only. These numbers identify both the schemes and those taxpayers who participate in them. They do not guarantee that taxpayers are entitled to receive the proposed tax benefits.

Not been contacted by the CRA yet?
The CRA generally has three years from the date of assessment to reassess taxpayers, and these audits can take over a year to complete. The fact that investors in these tax shelters have not been contacted and/or reassessed should not be interpreted as the CRA’s acceptance of their claim.

Previous Tax Alerts and Fact Sheets
For more information on previous tax alerts and fact sheets, please visit the Taxpayer Alert section of CRA’s website at www.cra-arc.gc.ca.

Tax Alerts:

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August 13, 2007 by Dan White.

BOUNCED CHECK” Shown below, is an actual letter that was sent to a
bank by an 86 year old woman. The bank manager thought it amusing enough to
have it published in the New York Times.
       Dear Sir:
       I am writing to thank you for bouncing my check with which I
endeavored to pay my plumber last month. By my calculations, three
nanoseconds must have elapsed between presenting the check and the arrival
in my account of the funds needed to honor it.
       I refer, of course, to the automatic monthly deposit of my entire
pension, an arrangement which, I admit, has been in place for only eight
years.
       You are to be commended for seizing that brief window of
opportunity, and also for debiting my account $30 by way of penalty for the
inconvenience caused to your bank. My thankfulness springs from the manner
in which this incident has caused me to rethink my errant financial ways.
       I noticed that whereas I personally answer your telephone calls and
letters, — when I try to contact you, I am confronted by the impersonal,
overcharging, pre-recorded, faceless entity which your bank has become.
       From now on I choose only to deal with a flesh-and-blood person.
       My mortgage and loan repayments will therefore and hereafter no
longer be automatic, but will arrive at your bank, by check, addressed
personally and confidentially to an employee at your bank whom you must
nominate.
       Be aware that it is an offense under the Postal Act for any other
person to open such an envelope. Please find attached an Application
Contract which I require your chosen employee to complete. I am sorry it
runs to eight pages, but in order that I know as much about him or her as
your bank knows about me, there is no alternative.
       Please note that all copies of his or her medical history must be
countersigned by a Notary Public, and the mandatory details of his/her
financial situation (income, debts, assets and liabilities) must be
accompanied by documented proof. In due course, at MY convenience, I will
issue your employee with a PIN number which he/she must quote in dealings
with me
       I regret that it cannot be shorter than 28 digits but, again, I have
modeled it on the number of button presses required of me to access my
account balance on your phone bank service. As they say, imitation is the
sincerest form of flattery.
       Let me level the playing field even further.
       When you call me, press buttons as follows: IMMEDIATELY AFTER
DIALING, PRESS THE STAR (*) BUTTON FOR ENGLISH!
       #1. To make an appointment to see me #2. To query a missing payment.
#3. To transfer the call to my living room in case I am there. #4. To
transfer the call to my bedroom in case I am sleeping. #5. To transfer the
call to my toilet in case I am attending to nature. #6. To transfer the
call to my mobile phone if I am not at home #7. To leave a message on my
computer, a password to access my computer is required. Password will be
communicated to you at a later date to that Authorized Contact mentioned
earlier. #8. To return to the main menu and to listen to options 1 through
       7 #9. To make a general complaint or inquiry. The contact will then
be put on hold, pending the attention of my automated answering service. #
10. This is a second reminder to press* for English.
       While this may, on occasion, involve a lengthy wait, music noise
will play for the duration of the call.
       Regrettably, but again following your example, I must also levy an
establishment fee to cover the setting up of this new arrangement. May I
wish you a happy, if ever so slightly less prosperous New Year?

       Your Humble Client

       (Remember: This was written by a 86 year old woman) ‘YA JUST GOTTA
LOVE” THE SENIORS” !!!  

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