Once they’ve completed and filed their 2016 tax return, most Canadians give a sigh of relief that the dreaded annual chore is done, and that income taxes will be out of sight and out of mind until the next filing deadline rolls around.
If all goes as planned, that is how events will unfold. In the best case scenario, the Canada Revenue Agency (CRA) will issue a Notice of Assessment which indicates that the Agency agrees with the taxpayer’s summary of his or her income, deductions, credits, and taxes payable for the past year, and that it has no further questions or concerns. And, for the vast majority of Canadians, that is exactly how things will unfold. For many others, however, there will be a few more questions to be answered or steps to be taken before the tax filing and assessment process for the year is finally completed.
The first indication that a taxpayer may have that there is more to be done is the receipt of a letter from the CRA. Despite what most taxpayers think, the arrival of such a letter doesn’t mean that the Agency necessarily doubts the information the taxpayer provided on his or her return, or that claims made for deductions or credits on that return are going to be denied. Most often, such communication from the CRA is part of the Agency’s standard return review process. This year, between mid-February and late May, the Agency received over 26 million individual income tax returns. For several years, the CRA has encouraged taxpayers to file their returns online, and Canadians have clearly received the message. This year, nearly 23 million of those 26 million returns were filed online
There are, clearly, a lot of advantages to online filing. It’s much quicker and taxpayers can use tax return preparation software which does much of the calculation work, once the required figures are input. What online filing lacks, by definition, is a paper trail. While the CRA will have received copies of T-slips documenting employment income, pension income, or investment income received by taxpayers, claims made by taxpayers for child care expenses incurred or medical costs paid during the year are received by the CRA without any form of documentation. And, while the returns filed by most Canadians are accurate and complete, there will inevitably be exceptions, whether inadvertent or deliberate. The CRA clearly can’t seek out and review documentation for every deduction claimed on every return filed, but it does carry out its return review process as a way of minimizing those exceptions. Often, a letter received as part of the return review process will simply ask the taxpayer to provide documentation, by way of receipts, for amounts (like medical expenses or child care costs) claimed on the return.
In other cases, the CRA will contact a taxpayer before issuing a Notice of Assessment where figures reported on the return don’t match those which appear on information slips filed by employers, pension plans, or financial institutions. Quite often, this is the result of an input error by the taxpayer, who has received $32,546 in pension income but inadvertently enters that amount as $32,456 in completing the return. While tax return preparation software correctly calculates the tax payable by an individual, it does so based on the figures with which it is provided and any input error will be incorporated into its calculations.
Queries issued by the CRA before a Notice of Assessment is issued for a particular return are part of what is known as the Agency’s Pre-Assessment Review Program. And, at this stage, most such queries are raised either on a random basis, or to clarify what seems to be an obvious error or inconsistency which appears in the information provided on the taxpayer’s return. Such queries are not, contrary to what most taxpayers think, a clear sign that the taxpayer involved is going to be audited in the near future.
What is the case, however, is that where the CRA asks a taxpayer for confirmation or clarification of information provided on his or her return, the taxpayer is required to respond. In most cases, providing a prompt response is also in the taxpayer’s best interests. While taxpayers aren’t required to provide receipts or other documentation when they file their returns, the CRA does have the right to ask for such documentation.
Where a request for documentation is received from the Agency, the taxpayer should follow the following instructions in responding:
- include the reference number found at the upper right corner of the CRA’s letter;
- send the reply and all requested documents to the address in that letter within the time frame indicated; and
- provide all receipts and/or other documents requested.
Finally, it should be noted that the Agency can only assess on the basis of the information with which it is provided. Where a taxpayer ignores the CRA’s request for documentation of an amount claimed by way of credit or deduction, the CRA is entitled to and will assess on the basis that such documentation does not exist, and the taxpayer’s claim will be denied.
