The Canadian Revenue Agency sends letters to taxpayers after notice of assessment was issued. The period for receiving this process review letter is from August to December. Don’t be scared or surprised when you receive a letter from the CRA. The blog explains why and how to protect yourself.
The problematic areas in the eyes of CRA for an individual’s tax return?
A tax review might come from random selection or be performed on certain areas they believe are problematic, such as:
- Employment expense
About 2/3 review and reassessment comes from employment expense claim. If you claim employment expense without a T2200, your claim will be declined, and your return will be automatically reassessed. However, T2200 is not a license to deduct everything. It may happen that you get a T2200 and do not allow deduct any employment expense in the eye of CRA.
If your employer does not fill out the T2200 properly or the job duties and expenses do not line up with allowable deductions, CRA will decline your employment expense deduction. For example, If T2200 answer “no” to “home office” question, you cannot deduct home office expenses even if you partially work at home for employment.
Reimbursed or not? If employees were reimbursed, they cannot deduct employment expense in T777. T2200 are linked to individual’s T4, the employees can only deduct difference between income inclusion and the actual employment expenses.
- Significant rental loss
The large rental loss will be closely examined by CRA. The Canada Revenue Agency will look at your intention for renting out your property. Is the renting for making profit or just sharing the cost. CRA will decline your rental loss claim, if they decide your rental income is under market rate and you don’t have a reasonable expectation of profit.
- Home office expense
You cannot use the detailed method to calculate home office expenses unless your employer gives you a T2200 or T2200s. The detailed method allows eligible employees to claim the employment portion of actual deductible expenses paid. the CRA has provided examples and an online calculator to assist. The CRA has provided a list of common office supplies and phone expenses and a list of work space in home expenses that are deductible.
- Moving expense
- Only eligibility relocation can claim moving expenses. If you moved at least 40km to be closer to a new job or to attend school full time, then you may deduct moving expenses paid (not just incurred), up to the amount you earn at the new location or up to the amount of award or scholarship received.
- Did your employer reimburse you moving expense? If any moving costs were compensated by your employer, then the reimbursed amount must be subtracted from the moving costs unless the reimbursement is included in you T4 as taxable benefits.
- You may claim meals and travel expenses, using the simplified method. If you choose this method, such as times the flat rate with days for meals and multiply the number of kilometers by the cents/km rate for the province or territory where the travel began. The CRA may still require documentation to support your claim, such as receipts from hotel.
CRA individual tax review program
When clients receive a letter about their personal taxes, they normally think, “I’m being audited.” Actually, It’s a review program for CRA. it’s beyond CRA’s audit run.
The major types of review programs include:
- Process review program which happens after notice assessment is received. The time frame is August to December each year. Clients will be asked to submit supporting documents or clarify errors. For example, if clients claim medical expenses, CRA may ask them to provide receipts for those claims.
- Matching program – matching T slips on CRA’s file with client’s individual tax return after NOA was issued – reviewing if all T slips were correctly reported on individual tax return. For example, some clients report non-eligible dividends as eligible dividends by mistake or miss reporting T-slips on their tax filing.
- RRSP contribution review program- reviewing if individual made over contribution to RRSP. If a individuals contribute more than $2,000 over their RRSP limits for the year, CRA may tax the over-contribution and impose a late-filing penalty if they determine the T1-OVP should have been filed.
- Special assessment program – review certain section of individual tax return they believe is problematic area such as moving expense, other deduction, northern resident. deduction, eligible dependent amount etc.
How to achieve the best result from individual tax review
- reply to this review letter within 30 days unless you have a reasonable excuse to ask for an extension.
- Pay close attention to what supporting documents are required by CRA. Submit them online or by mail. CRA often decline the entire claim if only one document hasn’t been submitted with the group documents in request. For example, when reviewing a moving expense claim with CRA, they request(may request) T4 slips; employment contract; receipt for the moving; employer’s letter indicating whether the client has been reimbursed and if so, if it has been issued as a taxable benefit on T4; purchase agreement of a new house. If the client missed only one document when submit the group of documents requested by CRA, the entire moving expense claim was declined, and the return be reassessed.
- Keep original documents, submit copies only and call CRA two weeks after submitting all documents in request. Opening communicates with CRA auditor, DO NOT voluntarily provide unrequested documents.
- Remember: don’t forget to file the notice of objection by the deadline.