Home Reno Tax Credit and Networth Assessment Results are a Tax Problem

May 13, 2010 by Dan White.

Here is a really good article regarding the home tax credit and what CRA is really up to, which of course is simply generating tax debts which result in tax problems, such as net worth assessments. Net Worth Assessments is a hot item with CRA at the moment and they are going crazy doing this across the country.

Every week we get calls from taxpayers who are finding out how an audit can turn into a net worth assessment. This is very bad for small business but very good for our business of protecting Canadians.

To find out more about net worth Assessments go to www.taxauditsolutions.ca

Dan White

Wednesday, May 12, 2010
The Short Happy Life of the Home Renovation Tax Credit, by Ryan Green.
This April, Canadians across the country will claim the Home Renovation Tax Credit in their tax returns. This will be the only year in which the popular tax credit can be claimed, as the Federal Government recently announced that it will not be renewed for 2010.

Announced as part of the Federal Government’s “Economic Action Plan”, the Home Renovation Tax Credit is generally understood as an incentive to encourage spending in the home renovation sector during bleak economic times. It is less appreciated that the tax credit is also a tax collection measure designed to identify businesses that fail to remit tax as required.

Transactions in the home renovation sector are frequently paid in cash without a written contract or invoice. Relying on the fact that such transactions are more difficult to trace, some contractors do not fully report their income and forgo collecting GST.

Customers take a significant risk when they participate in undocumented transactions. If a dispute ever arises with a contractor, the lack of a written contract means there is no evidence of the work for which the contractor was retained, the agreed price, or the warranties provided. Despite this risk, some customers agree to undocumented transactions as a means of avoiding GST on their home renovations.

The Home Renovation Tax Credit targets tax avoidance in the home renovation sector by removing the incentive for customers to participate in undocumented transactions and encouraging them to report their home renovations to the Canada Revenue Agency (the “CRA”).

The credit equals 15% of eligible home renovation expenses between $1,000 and $10,000. The maximum allowable credit of $1,350 represents 13.5% of a taxpayer’s first $10,000 in home renovation expenses. It is no coincidence that in provinces currently imposing HST (a combination of GST and provincial sales tax), the HST rate is 13%.

To obtain the tax credit, taxpayers must report certain information in Schedule 12 of their 2009 tax return, including the name and GST number (if applicable) of their supplier or contractor. If requested, taxpayers must also provide the CRA with copies of their invoices.

The information provided by taxpayers claiming the tax credit will provide the CRA with a snapshot of the contractors and suppliers in Canada’s home renovation sector. Ingeniously, this valuable information will only cost the Federal Government a one-year tax break for Canadian homeowners equal to slightly more than the sales tax owed on their home renovations – much of which would not have been remitted in the absence of the tax credit.

By examining its snapshot of the home renovation sector, the CRA will be able to target businesses for audit. Once a business is in the CRA’s sights, reliance on undocumented transactions will provide no protection from reassessment.

During an audit, a CRA auditor reviews all deposits into a business’ bank accounts. To the extent that deposits cannot be explained, they are deemed to be sales income. Based on this analysis, the CRA will issue reassessments for unremitted income tax and uncollected GST.

Keeping cash outside of a bank account does not prevent reassessment. CRA auditors will examine a target’s standard of living to determine if it fits with reported income. Where this is not the case, the auditor will calculate the target’s income based on annual expenses and asset growth.

Where the CRA suspects that a person has intentionally under-remitted tax, it will generally impose a penalty equal to 50% of the tax avoided. In particularly egregious cases, the CRA will recommend criminal sanctions for tax evasion.

If you are a contractor or supplier who complies with your tax obligations, you have nothing to fear this tax season. For you, the Home Renovation Tax Credit likely provided a boost to business in a difficult economic period. However, if you have not complied with your tax obligations, the tax credit’s legacy may not be a brief boost to business but instead a costly reassessment.

- Ryan Green

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

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