Why is the government auditing my tax return? Now what?

April 30th has come and gone and every good Canadian has dutifully sent in their Tax Return. Some still have their fingers crossed and many spent their refund long ago on bills, extravagant dinners, Tim Horton's, a little vacation... but wait, why did I get this letter asking me for more information? The questions that jump to mind are "Why am I being audited?" and "Am I going to owe the government my refund back?"

A Review is Really Just a Spot Check of your Return

Because Canada has a "Self-Reporting" tax system every tax return is pledged with a promise that we have done our best, but could be subject to a random check at a later date. Most of the 25 Million filed returns are submitted electronically or with paper forms that don't require sending most receipts. Instead of burying the government in all those receipts, and leaving them with a serious storage problem, you are supposed to retain proof of your claims for possible future review for 6 years. 

There is also a big difference between being selected for Review (spot checking of your claims for everyone) and an Audit (full scale review of your tax filing/records, normally for businesses). However, nobody likes being scrutinized by the government and it generally leads to nightmares, profuse sweating and severe stomach cramps. And no wonder we are scared with what we see of the American IRS on our mostly american TV programming. So any letter asking for information is often perceived as the ominous and frightening "audit".

In reality, a full Audit is quite rare and the most common thing is for taxpayers to receive one of 4 types of review letters: 

• Pre-assessment Review Program - before they process your tax return
• Processing Review Program - after processing your tax return
• Matching Program - checking your return against T-slips issued to you for missing ones
• Special Assessments Program - targeted reviews of certain types of income/claims, like Tips or employment expenses

Most common is the 2nd and 3rd... and you will receive a letter between May and December to spot check submitted claims or inquire about differences between your income slips reported and slips in their system.

The letter will request supporting documentation for whichever claim is being looked at. And the practice is not to ask for more than 3 years back unless there is real grounds for a more serious look. These are usually a simple look at your receipts, and no government ghoul will ever show up with a warrant... they will just request the appropriate supporting documents to prove your entitlement to the claim, and if for whatever reason the papers aren't acceptable or you have claimed something in error, the worst case scenario is that you pay back the tax owing on that item. 

Why were you chosen? Well its really nothing personal. All returns are scanned by a computer system and the factors are:

• random selection - they will select 150,000 people with a specific claim for example
• comparison of information on returns to information received from third-party sources, such as T4 information slips - so something may not appear to match your slips
• types of deductions or credits claimed and an individual's review history - something that seems out of the ordinary for you or an unusual amount for you that could be an error, like a large claim for Spousal Support deductions, and you were never married... or something that you have had rejected before and claim again

Usually a review gives you 30 days to submit the paperwork, but if you need more time, call and ask for an extension. You can usually be granted one or two extensions with a simple phone request. If you fail to respond, expect a reassessment of your claim and to pay back any related tax owing. There are no penalties for the tax assessed resulting from this, but you will have to pay interest backdated to April 30th.

Keep in mind if you miss the deadline and get Reassessed, or if the government doesn't agree with your receipts its doesn't mean its the end and you have to pay... you can still request an adjustment to put it back in later with the proper paperwork for up to 10 years. Hopefully it won't take that long to find the right receipts wherever you stored them! 

If you are still not sure how to deal with a review or you have had your claim rejected, seek out help. Ignoring the letter or not sending correct documentation will result in a loss of tax credits that you may still be entitled to. 

Pain Free Tax & Bookkeeping handles reviews as part of the cost of doing your taxes, but we also help people who filed their own taxes or at other firms. We are very experienced in handling reviews and successful in getting valid claims reinstated after a rejection. And where the individual really isn't entitled, perhaps the tax return requires other changes because of it - such as changing the best amount for a pension split, medical, RRSP's, etc.

If you haven't yet filed your return, do so now to avoid being cut off of benefits such as Child Tax Benefit or Guaranteed Income Supplement.

What do Day-Camp, Babysitting, Preschool, Summer Camp, Nannies and Boarding School have in common?

Childcare Expenses are Deducted Dollar for Dollar
from your income saving more tax than other expenses.

Besides providing wildly entertaining activities designed to amuse your kids... and give you a moments peace... all of these are types of Childcare that could be valuable Tax Deductions you aren't fully taking advantage of.

Childcare Expenses are deducted off your earned income dollar for dollar for tax purposes, so essentially that income is cancelled out. That is why it's more valuable to you than other types of Tax Credits like Bus Passes or Medical Expenses.

While most people are aware that they can claim Licensed Daycare or After School Care when it comes to some of the other eligible Childcare Expenses it can get confusing. But the rule of thumb is if the activity you have enrolled your child in is allowing you or your partner to go to school or do an income earning activity, in general, it can be claimed. The expenses are eligible where the primary goal is childcare for earning income but if the expenses don't line up with your specific work hours that doesn't mean they aren't eligible... they still allow you to keep your sanity after all. The total expenses for the year are claimed against your annual income, not on a day by day or month by month basis. It is accepted that you may not always be "at work" while your child is in paid care, but being free to do other activities during that time may allow you to work "overall" so CRA doesn't get involved in those personal choices so as long as your are earning eligible income to deduct it from, that is sufficient.

Under CRA's rules, if you are married or common-law, childcare must be claimed by the person who has the lower net income. Except if that person was incarcerated, incapacitated by illness, or in school. If those situations apply then the higher income person can claim those weeks which usually results in a bigger deduction. See form T778.

Eligible Expenses (up to annual combined limit of $4000-$7000 for each child based on age/disability). The age limit for the child being eligible is 16 unless the dependant is disabled.This cannot be money paid to a blood-relative under 18 or a spouse.

• Daycare of After School Care costs, Licensed or not. Individuals must provide their name and SIN if they are not a Daycare Center. If the daycare is a business, no SIN is needed.
• Babysitting costs. You need the individuals name and SIN number (note sometimes people are hesitant to declare the income but for teenagers with no other job, this is unlikely to be enough income to be taxable and exceed their personal exemptions). 
• Nannies. The cost of their Salary, plus taxable benefits and expenses such as CPP/EI.
• Preschool fees, including mandatory registration costs. 
• Summer Camps/Overnight Camps/Overnight Sports Schools. Subject to a weekly limit based on age of $100-$250.
• Day Camps/Day Sports Schools: The most frequently misunderstood and neglected expenses. This is treated as normal daycare, even if its a super fun activity centered camp like golf, laser tag, dancing, sports, etc. If its more than 5 days long, see below.
• Educational Institution Fees, for the part that relates to childcare and not education if you can be provided a receipt that details supervision costs during recess and lunch, etc.
• Advertisement and Placement Agency Fees may also qualify if needed in order to find a suitable childcare provider or nanny for your situation.

A few common pitfalls and tips for Day-Camps and other Childcare:

• If you have no eligible income to use Childcare against (EI or Social Assistance for example) it cannot be carried forward and may be wasted, but consider if it is also eligible for the Fitness or Arts Credits instead or if your situation allows the higher income spouse to claim it instead.
• If the lower income person is non-taxable but has income, it can reduce their income to qualify for more child tax benefit or increase spousal credits for their spouse.
• 5 day camps are also allowed to be claimed as a Fitness or Arts expense when it would be more valuable to claim it as Childcare and not be subject to the respective $500 limits per child for those Tax Credits. Sometimes the issuer will "helpfully" stamp it as being an eligible fitness credit, but won't mention it may be more beneficial to claim it as childcare.
• Claiming Day Camps as "Camps". Sleep away/Summer camps and Boarding School costs are limited to a weekly Maximum in order to exclude all the other components that aren't eligible, but Day Camps are not. This is a most common error when using software where people enter the expense as a Camp instead of Daycare, which adds the limitation. This limitation does not apply to Day Camp activities you enroll your children in and should be claimed in FULL.
• If you have reached your maximum for Childcare, consider 5 day camps as Fitness Expenses instead of allowing them to be wasted, for example if you have a nanny as well.
• If you have reached your childcare limit on other expenses and have your child in preschool, consider using the preschool expense as the Arts Credit instead rather than wasting it.
• If you have a child with a disability, and do not have other Arts and Fitness Credits over $100 each but also have a 5 day camp that could also qualify, use one worth at least $100 to receive the "bonus" supplemental $500 increase to your expense for fitness or arts to $600 or more. This is the one exception where it can be more than valuable than Childcare if you have income.

Pain Free Tax is a BBB A+ Company that offers free reviews of your tax returns to see if you might be eligible for adjustments to anything you may have missed on your last 10 tax returns. Contact us at service@painfreetaxes.ca for help. We offer mobile service and helpful advice.