# Extremely Bad Tax Situation



## AbstractAngel (Sep 9, 2011)

This is going to be a big question, not sure if I will get answers to it or not, but it's worth a try! 

_*Moderators if this kind of thing is not allowed (I did a search for the rules so I'm not sure what is and isn't allowed as a discussion), just remove my post I promise I won't re-post. Not sure of the legalities and such on this one.*_

Someone I know to me has had this problem that has only recently come to light, and I'd like to do what I can do to help as well as convince them of how big a deal it is, but the situation is so out of hand I am beside myself. I've tried searching, and talking to a professional, but people don't seem to want to give general help unless it pertains to you yourself... 

So this person is a musician, and until this year hasn't had an actual job with a T4. Instead of filing taxes they have just left them, because they lived at home and their "employer" or band leader as it were gave them no receipts. This has been going on for several years, not sure how many to be honest but I believe it's been almost ten since I remember them having a non-musician related job. I know other musicians, but they all seem to keep records and receipts, _what a concept_.

I've tried to explain (and please correct me if I'm wrong as I would love to be), that not only is it a serious offence, but going that far back the it's bound to be inaccurate (averaging maybe 3 a week at $100 a pop for ten years give or take). Where do we even begin to help this person?


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## the-royal-mail (Dec 11, 2009)

Don't worry about it. It's not your problem.


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## MoneyGal (Apr 24, 2009)

This is quick, but here's some thoughts:

1. Has CRA been requesting that he file returns? IF NOT (for some bizarre reason), he should go forward to CRA under the Voluntary Disclosure Program: 

http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html

If CRA has NOT been asking for him to file, he can come forward and avoid penalties associated with late/non-filing. The penalties can be as much as or more than the interest associated with late filing. CRA will not negotiate on taxes owing or interest on taxes owing. 

However, if CRA has been asking him to file, he is no longer eligible to come forward under the voluntary disclosures program (because this is no longer a voluntary disclosure). 

2. Once he has come forward, he needs to file his returns *to the best of his ability.* 

In this situation, CRA might simply assume that every deposit into his bank account is taxable income. They can and will get the bank to release his account statements in order to do this. 

3. Based on what you've said, he might have around $15,000 - $16,000 of taxable income in a given year. This might mean he has no or very little taxable income - perhaps $600 of taxes owing in a given year, for which the GST credit (if they will give it to him retroactively) would knock off $250 or so. 

So, this isn't necessarily a big disaster. I've certainly seen worse. If he follows these three steps, he can clear up his outstanding taxes fairly quickly.


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## Charlie (May 20, 2011)

Per MG's post -- it's probably not that big a deal given his income levels. In fact -- you're not even required to file unless you've got a tax liability or they request a return. Since he's living with his folks I'm guessing he's just not making much.

He'd probably have some deductible expenses from his $15k gross -- travel/instruments/drugs/groupies etc. 

I did a dummy return for him, assuming 12K net income and Ontario residency. He'd owe $185. (a bit of tax, $840CPP offset by the working income supplement). And he'd get $525 in HST rebates. So he'd be up $300+

Tell him to spitball the last couple of yrs, and keep better records going forward. He's likely losing money by not filing. Not a great way to stick it to the man! 

Rock on.


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## marina628 (Dec 14, 2010)

I have a very good friend who use to work half the year framing houses and he was paid cash .He ball parked he had made about $16,000 -$20,000 a year cash but had no records of his expenses.After he split with his ex and had to deal with the court system to get his access to kids he called CRA told them he had not filed in 10-15 years but the last 3 years he did have a job earning $45,000 a year and paid his taxes.He went in person to an office in the Toronto area .They went back 7 years and accepted what he said on the $16,000 a year income AS THEY had no records on hand for him .He did his entire 7 years and he owed $3300 after his $3800 in entitled refunds were considered.He made monthly payments for 9 months but I can tell you he felt like a big weight had been lifted off his shoulders to get the tax situation behind him.I think CRA appreciates people coming forward rather than they having to hunt people down.


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## sags (May 15, 2010)

The key is if he is making a profit from the business, or has a reasonable expectation to make a profit. 

If he has lost money from his business every year, then he has a "hobby", not a business, and he isn't required to file a return.

He is missing out on HST rebates, and isn't contributing to EI or CPP and will not be building benefits for future years.

But the choice is his.


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## MoneyGal (Apr 24, 2009)

No. He has income which he must report. CRA may disallow expenses if they feel a business is not truly a business - but this in no way means that the income is not reportable and taxable.

Editing to add: It isn't up to the individual to determine whether income is taxable. You are responsible to report your total income in Canada, with a few very specific exemptions, which CRA lists in the General Income Tax and Benefit Guide. If you have deductions/credits against total income, CRA will review and allow or disallow those deductions/credits. You don't do both steps yourself and then decide to report income or not.


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## AbstractAngel (Sep 9, 2011)

Thank you all for your quick replies, I really appreciate it! 



MoneyGal said:


> This is quick, but here's some thoughts:
> 
> 1. Has CRA been requesting that he file returns? IF NOT (for some bizarre reason), he should go forward to CRA under the Voluntary Disclosure Program


Thanks so much for this information! I actually don't think he has been contacted, and as for a bank account, because he mainly dealt with cash (and very little of it), he just got a bank account this year because we bugged him to. I will take a look at this information for him and see if it fits! 



Charlie said:


> He's likely losing money by not filing. Not a great way to stick it to the man!
> 
> Rock on.


That would be a best case scenario, and I'm sure there would be some kind of interest on what he didn't pay even so. We'll be going over it all with him this Sunday so I'll have more info by then, but thanks so much!



marina628 said:


> I have a very good friend who use to work half the year framing houses and he was paid cash .He ball parked he had made about $16,000 -$20,000 a year cash but had no records of his expenses.After he split with his ex and had to deal with the court system to get his access to kids he called CRA told them he had not filed in 10-15 years but the last 3 years he did have a job earning $45,000 a year and paid his taxes.He went in person to an office in the Toronto area .They went back 7 years and accepted what he said on the $16,000 a year income AS THEY had no records on hand for him .He did his entire 7 years and he owed $3300 after his $3800 in entitled refunds were considered.He made monthly payments for 9 months but I can tell you he felt like a big weight had been lifted off his shoulders to get the tax situation behind him.I think CRA appreciates people coming forward rather than they having to hunt people down.


I really hope it turns out like this, and that's a good idea about coming forward. We told him that even owing money it'll be a big weight off his shoulder, but we did scare him a little with the whole "tax evasion" being a law breaking issue (oops! lol)



sags said:


> He is missing out on HST rebates, and isn't contributing to EI or CPP and will not be building benefits for future years.
> But the choice is his.


Yep!



MoneyGal said:


> No. He has income which he must report. CRA may disallow expenses if they feel a business is not truly a business - but this in no way means that the income is not reportable and taxable.
> 
> Editing to add: It isn't up to the individual to determine whether income is taxable. You are responsible to report your total income in Canada, with a few very specific exemptions, which CRA lists in the General Income Tax and Benefit Guide. If you have deductions/credits against total income, CRA will review and allow or disallow those deductions/credits. You don't do both steps yourself and then decide to report income or not.


Yes the intent is that he'll claim everything he got and cross out fingers. We're not nearly tax savvy enough to determine that king of thing on our own to be honest.

Thanks so much everyone! I will let you know how it turns out!


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## sags (May 15, 2010)

MoneyGal said:


> No. He has income which he must report. CRA may disallow expenses if they feel a business is not truly a business - but this in no way means that the income is not reportable and taxable.
> 
> Editing to add: It isn't up to the individual to determine whether income is taxable. You are responsible to report your total income in Canada, with a few very specific exemptions, which CRA lists in the General Income Tax and Benefit Guide. If you have deductions/credits against total income, CRA will review and allow or disallow those deductions/credits. You don't do both steps yourself and then decide to report income or not.


As I understand it........

Income is revenue - expenses.......income must be declared.

If total expenses exceed total revenue...there would be no income to declare.

Or...am I wrong and the words..."income" and "revenue" are interchangable?


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## OhGreatGuru (May 24, 2009)

I guess the rest of us can look forward to supporting this tax evader in his old age thru OAS, GIS, & Welfare.


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## OhGreatGuru (May 24, 2009)

sags said:


> ...
> Income is revenue - expenses.......income must be declared.
> 
> If total expenses exceed total revenue...there would be no income to declare.
> ...


No, you are confusing Gross Income (Revenue) with Net Income.

Net Income = Gross Income - Allowable Expenses. But the tax payer doesn't get to unilaterally decide that his expenses are "allowable". He has to file a return spelling them out to see if CRA agrees.


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## MoneyGal (Apr 24, 2009)

sags said:


> As I understand it........
> 
> Income is revenue - expenses.......income must be declared.
> 
> ...


This is not correct. From the general guide: 

*Lines 135 to 143 - Self-employment income*

Enter on the appropriate line your gross and net income or loss from self-employment. If you have a loss, show it in brackets. Include with your paper return a statement showing your income and expenses.

http://www.cra-arc.gc.ca/E/pub/tg/5000-g/5000-g-02-10e.html#P757_89923

On your return, you show your gross earnings from self-employment and your net income (gross income less deductions). Deductions from gross income must be verifiable with records.

Editing to say I somehow missed OGG's post which makes the same point.


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## AbstractAngel (Sep 9, 2011)

Yes we plan on filing all of it, and to sags yes I got net and gross confused one year when looking over my T4, I think they are right.


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## sags (May 15, 2010)

So granny knits a sweater that cost her $100 in wool. 

Someone comments how much they like the sweater and would like to buy it from her. Granny, being a good hearted soul, sells the sweater for $50. 

She is "required" to report the revenue and claims the loss of $50 and while she is at it, she may as well claim for knitting needles, a new light fixture, a computer, a cellphone, a home phone, internet service, and possibly office space.

Multiply the scenario by tens of thousands of other scenarios, and it gets ridiculous.


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## MoneyGal (Apr 24, 2009)

Believe it or not, CRA has thought about this scenario. Take a look at this circular (one among several on the topic from CRA): 

http://www.cra-arc.gc.ca/E/pub/gl/p-176r/p-176r-e.html

Granny is not in business; she doesn't have business income and she doesn't have allowable losses. The circular I linked above uses the example of a guy making furniture at cost for friends in the first few paragraphs as an example of a "hobby" and not a business. 

Quoting from the circular: _The profit test is well developed in the income tax area. There are numerous cases which discuss the term in the context of specific fact situations._


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## sags (May 15, 2010)

That circular relies heavily on the use of the "reasonable expectation of profit" clause, and was printed prior to the most recent Supreme Court rulings on the subject. Much of the criteria listed by the CRA as instructive in their decisions to allow or deny business expenses, was struck down the the SCC.

Nevertheless, I am not sure where all this leaves Granny.

Does she have to report the $50 and pay tax on it?

Or, is she not required to report the $50, as she has a "hobby"?


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## MoneyGal (Apr 24, 2009)

We've actually discussed this particular issue here at CMF before.

REOP wasn't struck down by the SCC. Instead, they put two new criteria in place for the REOP test. 

CRA absolutely still requires that taxpayers have a reasonable expectation of profit in the activities they undertake for profit (or losses can be disallowed). 

If you search for "reasonable expectation of profit" on the CRA site, you will find many citations. Go ahead and rely on any of those. The REOP test is alive and well.


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## ghostryder (Apr 5, 2009)

sags said:


> That circular relies heavily on the use of the "reasonable expectation of profit" clause, and was printed prior to the most recent Supreme Court rulings on the subject. Much of the criteria listed by the CRA as instructive in their decisions to allow or deny business expenses, was struck down the the SCC.



You might want to actually read the court decision.


_The “reasonable expectation of profit” test should not be accepted as the test to determine whether a taxpayer’s activities constitute a source of income for the purposes of s. 9 of the Income Tax Act. 

*The following two‑stage approach should be employed to determine whether a taxpayer’s activities constitute a source of business or property income:* (i) Is the taxpayer’s activity undertaken in pursuit of profit, or is it a personal endeavour? (ii) If it is not a personal endeavour, is the source of the income a business or property? The first stage of the test is only relevant when there is some personal or hobby element to the activity. Where the nature of an activity is clearly commercial, the taxpayer’s pursuit of profit is established. There is no need to take the inquiry any further by analysing the taxpayer’s business decisions. However, *where the nature of a taxpayer’s venture contains elements which suggest that it could be considered a hobby or other personal pursuit, the venture will be considered a source of income only if it is undertaken in a sufficiently commercial manner.* In order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behaviour which supports that intention. Reasonable expectation of profit is no more than a single factor, among others, to be considered at this stage.


_


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## Charlie (May 20, 2011)

to answer Sags question -- granny doesn't pay tax on the $50 since her expenses exceeded her revenue. However, she cannot claim a loss even though the sale did not cover her wool costs as the knitting would be considered personal in nature.


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## sags (May 15, 2010)

Thanks for the reply.

That makes sense, as she gets to deduct the expense associated with the income.


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