By Michel Chevalier
In my last column I promised to share a case history that would illuminate how the process of standing up to Canada Revenue Agency (CRA) actually worked.
The taxpayers in this case were a small corporation and its two owners. In the beginning, the owners did most of the work and only occasionally hired part-time help. They paid the help as contractors and did not deduct tax at source. After the first couple of years, as the company grew and took on full-time employees, a formal payroll was established.
The partners were always were aware that they might owe CRA money for those early years because they had treated employees as contractors. The owner/directors also went for many years paying themselves as contractors, before the company accountants finally browbeat them into becoming T4 employees of their own corporation…something that went severely against the grain.
Even though they did not deduct and remit tax in the startup years, they always remitted Workplace Safety & Insurance Board (WSIB) premiums.
Some years later, the corporation received a letter that had both the WSIB and CRA logos as part of the letterhead. This letter indicated that CRA and WSIB cross-referenced their files. This caused a slight ripple of fear because the early years of paying WSIB and not withholding and paying source deductions would obviously pop up as an anomaly. Why is this company paying WSIB premiums and not withholding and paying source deductions, was the obvious question.
Well, another year or two went by and the letter was forgotten…until the company received a letter from CRA advising that they wished to carry out a payroll audit. This caused another and greater ripple of fear and guilt. So the process began…boxes of records were dredged up and taken to the companies’ accountants’ office and the auditor came and spent a couple of days going through the ‘stuff’ and causing the accounting bill that month to increase somewhat.
Then nothing was heard from CRA for several months…until the phone rang again and the same auditor needed to come back. This happened a third time, although on this occasion it was a different auditor. Of course, each time this happened the accounting bill hiccupped upwards.
A good many months went by before the company finally received the audit report, which was followed by the Notice of Assessment. It stated that the corporation owed some $23,000, which included some actual tax money owed and a lot of interest and penalties.
A portion of the money was certainly owed because of those early years. However, a very large percentage of the assessment related to CRA having assessed the two owners/directors as employees of their own corporation and issuing T4s on their behalf. So began the next stage of the process.
After receiving a Notice of Assessment, the taxpayer has 90 days to file a Notice of Objection, which goes to the Appeals Division within CRA. The company filed a Notice of Objection and three months later received a letter explaining that a small portion of what had been assessed was being subtracted…about $3,000. This was not acceptable at all to the owners/directors because the CRA had ignored some blatant math errors made by the auditors, which had been pointed out. Also, the CRA had chosen not to accept the representations made in the objection to the effect that directors should not be forced into being T4 employees of their own corporation.
The stage was then set for the next evolution of the process… an Appeal to The Tax Court of Canada. Again there is a 90-day window to file this appeal after receiving the Notice of Re-Assessment resulting from the objection. The Notice of Appeal was drafted and submitted to the Tax Court and seven more months went by. At this point the company was contacted by the Ministry of Justice, whose lawyers represent CRA in tax court, and advised that on the advice of Justice, CRA wished to withdraw and not go to court over the matter…Eureka! The company had won!
By this time the amount owing had escalated to $29,000 and the partners calculated that, having won the case, the actual amount owing should be in the order of $9,000.
But the story is far from over. I’ll continue this saga in my next column.
Michel Chevalier has many years of business experience, combining over 20 years managing multiple trade associations representing several dozen industries; building his own small business from the ground up; and more recently as a consultant specializing in helping individuals and small business significantly reduce taxes by implementing legal business strategies. He also represents clients in audit and other difficult situations with Canada Revenue Agency. Email: [email protected]; www.taxaction.net.