Accountants are vulnerable to Third-Party Civil Penalties
If you are wondering should you hire a accountant to fight CRA for you, you may ask what does an accountant have to fear in fighting CRA. Let me make it clear, I am not knocking accountants. I am just pointing out the challenge they have in trying to fight the Canada Revenue Agency (CRA).
CRA gives just cause for accountants and other tax preparers to worry when there is an audit. If you are being audited, your accountant is on the hot seat. They become vulnerable to civil fines and are even liable for the taxes you owe if you can’t or don’t pay the tax bill. Fighting CRA is risky for accountants, so we offer a safe solution where the accountant can get off the hot seat and still keep their clients.
What we offer is to take over the file for the years in question and handle everything leaving the accountant out of the loop. When the matter is resolved, we turn the client back over to their accountant to resume their relationship as before.
There is no risk to the accountant that we will keep the client after the audit is over, because we are not in the tax preparation business. The nature of our business does not allow for us to be derailed at tax filing deadlines.
Handling CRA audits and other tax problems, requires a Tax Representative that specializes in dealing with CRA issues and knows how to handle agressive CRA staff and has no reason to fear the wrath of the taxman. Accountants have to much to lose in engaging in war with the Canada Revenue Agency.
Accountants have just cause to be concerned that the CRA can apply the penalties on the tax preparer for honest mistakes, oversights or differences of interpretations where there is bona fide uncertainty as to the status of the law.
Information Circular 01-1, Third-Party Civil Penalties, outlines the CRA’s guidelines and processes for applying the third-party civil penalties and includes examples of situations where the CRA believes the penalty should not be applied as well examples of where the penalties should be applied.
Imposing penalties is something CRA likes, as it dramatically increases their tax revenue. If the auditor is going to assess a penalty against the tax preparer, the auditor must complete a penalty report in every case where the penalty is proposed. The report sets out the criteria being considered in each case recommending a penalty, including any information or explanations from the third party that may mitigate or counter imposition of the penalty. The penalty report will be available on request at the objection stage.
The CRA controls the application of the penalties. To this end, the CRA established the Third-Party Penalty Review Committee. The Committee is comprised of senior representatives from the CRA and from the departments of Finance and Justice.”
CRA also deals with RRSP related fraud and imposing Third-Party Penalties on the promoters of tax schemes (lawyers, accountants, and evaluators) .”
CRA’s reassessment policy has always been to reassess the annuitants who engage in these tax schemes. These RRSP schemes often involve non qualified investments.
Now that the audits on the donors in charitable and loss sharing tax schemes is over the hill, CRA is now taking an aggressive stance against the promoters and accommodators (lawyers, accountants, valuators) whose actions and documents give legitimacy to the schemes in the eyes of the taxpayers.
You can now expect that CRA will be applying third party civil penalties, as defined in section 163.2 against these parties who facilitate the RRSP Strip schemes.(A strip scheme, is a plan to strip the RRSP of funds without paying tax on the withdrawals of funds.) If the money was placed in on qualified investments, then the money withdrawn from the RRSP is considered a taxable withdrawal of funds.
Where the tax schemes used RRSP funds, these are all being caught. If the RRSP subsequently disposes of a property that was a non-qualified investment when it was acquired, subsection 146(6) allows as a deduction in computing the income of the annuitant for the year of disposition an amount equal to the lesser of the amount previously included in income at the time the property was acquired pursuant to subsection 146(10), and the proceeds of its disposition.
CRA has been not been overly proactive in exposing the potential downfalls of these schemes to the general public. Tax alerts have been prepared warning taxpayers of the consequences they face by participating in these schemes, including the loss of retirement savings and the reassessment action by the CRA. The CRA has also met with Trustees to have them increase their diligence and adopt policies that will guard against these RRSP strip arrangements.” Let’s just say that CRA has done a better job of promoting TFSAs then they have of educating the public about the pitfalls of tax schemes.
When you are involved in these types of schemes, and need help with your tax problems, you need to consider being nice to the accountant who prepared your tax returns in the year/s in question by having an independent Tax Representative take on the responsibilities in doing damage control.