The key to family tax happiness is to file to a family’s best benefit. That means avoiding the Canada Revenue Agency’s tax penalties on failure to report income properly. And those penalties can really add up. Here’s how to make sure you do it right.
Failing to report income can be 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 penalties on gross negligence (50% of unpaid taxes) and tax evasion (up to 200% of unpaid taxes), plus interest.
What this means is that if you missed claiming a $1,000 income amount in the current year and in any of the three prior years (2011, 2012, 2013), you’ll pay a $200 penalty – that is, 10% of $1,000 to the each of the federal and provincial governments – ouch!
What is “income”?
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 the CRA and can even include such things as 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 their commercial value, such items 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 you, 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.
Your cheque is in the mail…
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 you 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.
Courtesy Fundata Canada Inc. © 2015. Evelyn Jacks is president of Knowledge Bureau. This article originally appeared in the Knowledge Bureau Report. Reprinted with permission. All
