Rights and Obligations

Rights and Obligations • Administration of the Income Tax System • I. Filing of Returns • II. Assessment • III. Payment of Tax • IV. Penalties and Offences • V. Objection and Appeal

I. Filing of Returns • Every corporation or a trust, must file an income tax return. • Individuals must file if: • A) balance is owing for year • B) Capital property has been disposed of • C) non-resident has a capital gain • D) HBP or LLP has a positive amount • E) Requested to by the Minister • However, the filing deadline is different for each of these entities.

Corporations • A corporation must file an annual income tax return within six months of its taxation year end, even if it has no income or has no financial activity.

Individuals • Every taxpayer who is an individual must file an income tax return by April 30 for the most recent calendar year. • This date is extended to June 15 if the individual or his/her spouse carries on a business.

Trusts and Estates • Every trust must file an income tax return within 90 days of its taxation year. • The taxation year of an inter vivos trust is the calendar year. • A testamentary trust can choose a fiscal period as its taxation year.

II. Assessment • After receiving an income tax return, CCRA is required to assess it “with all due dispatch.” • CCRA has the right to reassess returns at a later time.

Right to reassess • This right is subject to the following limitations: • A filed return can be reassessed at any time if the taxpayer has made any misrepresentation that is attributable to neglect, carelessness, or wilful default, or has committed any fraud in filing the return or supplying information. • In all other circumstances, individuals, trusts and CCPCs can be reassessed within three years of the date the original assessment was mailed. For public corporations the time limit is extended to four years.

III. Payment of Tax • Individuals must pay tax on certain types of income at the time such income is received; with other types of income, payments must be made on an instalment basis. • Instalment payments are required whenever the individual’s federal tax owing exceeds $2,000 for both the current year and either of the past two taxation years. • Instalment payments are due quarterly, beginning on March 15. • The balance of taxes payable is due on April 30.

Corporations • Instalment payments are the primary method of remitting corporate tax. • A corporation must make 12 instalments per year beginning at the end of the first month of the taxation year. • Unless the current year’s taxes will be lower than in the previous year, the monthly instalment is equal to one-twelfth of the previous year’s tax liability.

Taxes owing • If more tax is owing after all of the required instalments have been made, the amount must, for most corporations, be paid within two months of the taxation year end. • This period is extended to three months if the corporation is a CCPC whose taxable income does not exceed the $225,000 (2003) annual business limit, and if during the year or previous year a small business deduction was claimed.

Interest • CCRA charges interest on any tax that is due and payable but not paid. • Interest is also charged on late or deficient tax instalments. • The rate of interest is the rate prescribed by the regulations and is adjusted quarterly. • Such interest costs are not deductible for tax purposes.

Payment of interest on overpayments • Interest is payable from the latest of: • A) day the overpayment arose • B) Individuals 30 days after balance due day • C) Corps 120 days after end of taxation yr • D) 30 days after the filing date for individual or the day the return was filed for corps

IV. Penalties and Offences • To ensure compliance the Act imposes a number of penalties. • These penalties are over and above any interest costs on late payments of tax.

Failure to File • Failure to file an annual return • Five percent of the tax unpaid for the year, plus 1% for each month after the due date, to a maximum of 12 months. • Repeated failures to file an annual return • Ten percent on a second or further late filing. This 10% penalty is increased by 2% for each month after the due date, for a maximum of 20 months.

Failure to report • Failure to report an item of income • Ten percent of the unreported income if the failure to report occurs more than once in a three-year period. • Knowingly making a false statement or omission • Fifty percent of the tax owing on the excluded or understated amount.

Interest and Penalties • The total of interest and penalties can be a significant amount. • CCRA has the authority to waive or cancel the interest and penalties if the non-compliance resulted from circumstances beyond the taxpayer’s control, such as major illness.

Tax Preparers And Promoters Applicability Culpable Conduct Intentional Indifference To Compliance With Act Willful Disregard Of Law Excluded Activity Promoting Avoidance Arrangements Accepting Consideration For Such Arrangements Penalties

Tax Preparers And Promoters Penalties Gross Entitlements From Planning Or Valuation Activity 50% Of Tax Payable – Capped At $100,000 Penalties

V. Objection and Appeal • Taxpayers who receive an assessment with which they do not agree have the right to appeal. • The first step is to file a formal notice of objection. • A taxpayer who is not satisfied with the result of this first appeal may make a second appeal to the Tax Court of Canada. • A taxpayer who is still not satisfied can then appeal to the Federal Court of Canada, and perhaps to the Supreme Court of Canada.

Fairness Package • Cancellation Or Waiver Of Interest Or Penalties • Disasters • Illness Or Accident • Emotional Or Mental Distress • Department Errors

Fairness Package • Refunds Beyond 3 Year Period • Beyond Normal 3 Year Period • No Permissive Deductions (CCA)

Fairness Package • Auditor General’s Report ($185 Million in 2001) • No Detailed Records Providing Basis For Waiver • No Systematic Review Of The Decisions

Death Of A Taxpayer • Disposition At FMV • Property With A Cost Of $100,000, A FMV Of $80,000, And A UCC Of $50,000. • New UCC = $80,000 • Retain Old ACB = $100,000

Deemed Disposition • Transfers To Spouse • Rollover Under ITA 70(6) • Can Elect Out • Transfers To Others • At FMV • Other Tax Free Transfers • Farm Property To A Child

Filing Returns • Ordinary Return For Previous Year • Between Oct. 1 And April 30 Get 6 Months • Ordinary Return For Year Of Death • Between Oct. 1 And April 30 Get 6 Months

Filing Returns • Rights Or Things • One Year From Date Of Death • Uncashed Bond Coupons, Accrued Interest To Payment Date, Declared But Unpaid Dividends, And Accrued Wages To Payment Date • Unincorporated Business • 6 Months From Date Of Death • Stub Period - Less Than One Year

Deductions And Credits • All Returns • Basic Personal • Age • Spousal • Eligible Dependant • Infirm Dependant

Deductions And Credits • Discretionary Split • Disability • Tuition And Education • Tuition And Education Transfer • Medical Expenses • Donations

Deductions And Credits • With Related Income • CPP And EI • Pension Income • Home Relocation Loan • Stock Option Deduction • Social Benefits Clawback

Deductions And Credits • Ordinary Return • Transfers From Spouse • Capital Gains Deduction • Child Care Expenses • Losses Of Other Years

Other Considerations • Payment Of Tax • Can Pay Over 10 Years • Interest Will Be Assessed • Allowable Capital Losses • Against Any Type Of Income In Year Of Death

Deferred Income Plans At Death • Taxation Of Payments Determined By The Identity Of The Beneficiary • Matured And Unmatured RRSPs And RRIFs • Spouse Or Common-Law Partner • Estate • Other

Special Rules • Charitable Donations • Subject To Limit Of 100% Of Net Income • Not Claimed In Year Of Death, Carry Back One Year • Medical Expenses • Period Extended To The 24 Months Prior To Death

Rights and Obligations