How Does the Canada Revenue Agency Find Unreported Income?
The Canadian tax system operates as a self-reporting system. Each taxpayer is responsible for reporting their total income, deductions and credits claimed to determine their total tax owing. The Taxpayer must file a tax return in order to access benefit programs offered by the federal and provincial/territorial governments.
For more information on the types of income to include in your tax return, click here.
The amount of benefits received will depend on a multitude of factors, which includes the amount of reported income on the taxpayer’s tax return. Taxpayers reporting lower amounts of income may qualify for more benefits than they may normally receive. Thus, verification of information relating to a taxpayer’s tax returns is a critical element of ensuring compliance.
How Does the CRA Find Unreported Income?
The CRA searches financial records, real estate records, social media and any other information they can gather looking for unreported income.
The typical way is for them to find unreported income is to intimate an audit where they will review a taxpayer’s books and records to determine if any income is not being reported. However, how does CRA decide who to audit? We will first discuss a typical audit before we explain the various ways that CRA looks for unreported income.
Audits are an essential part of the CRA’s vast range of investigative tools to ensure taxpayers are accurately reporting their income.
A Canada Revenue Agency (CRA) auditor will contact you to start the audit and may provide you with a date, time, and location of the audit. If required, the CRA auditor can enter any premises to examine documents or property of the taxpayer or any other person. If the audit is remote, the auditor may begin by requesting information and documents related to the issue at stake.
The Auditor can examine a range of books and records, documents, and information, including those readily available to the CRA (such as your tax returns and tax information slips).
The CRA has access to, and is sent financial records from any financial institution in Canada. These include information about bank accounts, stock holdings and sales, transfers of funds, and cryptocurrency holdings. They are also sent financial information from all over the World through what is known as the Common Reporting Standards.
They then search these financial records and match them up with taxpayer’s tax returns. If the information does not match, an audit will likely be initiated.
Real Estate Records
The real estate sector is one of the many sectors that the CRA addresses through audits into real estate dispositions.
The CRA is able to access information in the Land Titles Office to determine changes in names coming on and off titles. They then match up this information to ensure that the sale was reported on tax returns. If no sale was reported, an audit will likely be initiated.
Additionally, if a Taxpayer lives in a home that they cannot reasonably afford based on their income, it is likely that the CRA will initiate an audit to determine how the home could be afforded, assuming that there is unreported income involved.
The CRA is able to investigate social media postings of taxpayers looking for any lifestyles or assets that do not match filed tax returns. Where they see evidence that a taxpayer owns something outside of their ability to afford, an audit will likely occur.
Digital Sales / Gig Economy
For the CRA, the digital economy is worth tens of billions of dollars in potential taxes. The digital economy can be broken down into four categories: the sharing economy (such as AirBNB and Uber), the gig economy (Doordash or Fiverr), peer-to-peer sales (eBay), and social media influencers. Thus, the CRA is forced to innovate their auditing techniques in the face of this large market where unreported income is common.
The CRA receives information from the vast majority of these companies detailing what Canadian taxpayers were paid for their involvement in these economies. If the records received do not match tax returns filed, then an audit will likely commence.
Leads from the Public
The CRA regularly receives tips through its Leads Program from members of the public who report suspected tax evaders. Members of the public can anonymously report suspected tax or benefit cheating by providing key information and supporting documents to the CRA.
The CRA will then take steps to verify the lead using the information and documents provided to take the appropriate action to address the specific type of cheating. If they suspect there is unreported income, then they will move forward with an audit.
What Happens if I Failed to Report My Income?
If the CRA assesses you for undisclosed income, it would likely result in more than just a tax bill.
You would be subject to interest on the amounts owing. The CRA charges a 5% interest rate compounded daily on overdue income taxes and penalties. The CRA’s interest rates are notorious for compounding tax arrears over a period of years, especially when the reassessment may not be issued until many years after when the debt was originally due.
You may also be hit with various penalties such as if you knowingly, or under circumstances amounting to gross negligence, made a false statement or omission on your tax return. The penalty for this is the greater of $100 or 50% of the understated tax and/or the overstated credits related to the false statement or omission.
What Should I Do If I Have Undisclosed Income?
If you report the undisclosed income before the CRA catches on, then you may seek interest and penalty relief through the Voluntary Disclosures Program. The Voluntary Disclosure Program provides taxpayers with an opportunity to proactively fix errors and omissions in their tax filings before the CRA knows or contacts them about it.
If the individual has already been notified by the CRA regarding the undisclosed income, then an audit will ensue and you will be forced to deal with a CRA auditor.
If you have undisclosed income and want to discuss your options, contact us today for a consultation with one of our experts. We are here to help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.