Mark Feldstein & Associates

A resident of Stoney Creek, Colin Fox, pleaded guilty in the Ontario Court of Justice in Hamilton, on October 22, 2010 for failing to comply with a court order to file his 2004 income tax return. Since this was the third time Mr. Fox was convicted of this offence he was sentenced to four months imprisonment and a fine of $2,000.

If Mr. Fox applied under tax amnesty program and filed his tax return before CRA commenced an investigation then he would not have been prosecuted and penalized. He would only have to pay interest and taxes.

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David R. Bucknell of Vienna, having pleaded guilty to eight accounts of failing to file tax returns, was fined $1,000 for each count, resulting in a total fine of $8,000. As well as paying the fine imposed, it is required that the taxpayer file their tax return, pay their taxes, any interest owing and any civil penalties charged by Revenue Canada.

Mr. Bucknell neglected to file personal income taxes return from 2000 to 2008. He was given five months to file these returns with the CRA.

It is possible to avoid tax problems by filing outstanding tax returns or reporting undisclosed income via voluntary disclosure. When individuals disclose this information voluntarily, prior to any action or investigation by the CRA they will not be penalized or prosecuted. As a result of voluntary disclosure the taxpayer may only be required to pay the taxes and any interest owing.

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Arlen Scherba of Sombra, an officer of 952768 Ontario Limited which operates as Restoration Masters pleaded guilty in the London Ontario Court of Justice for GST and income tax evasion. The corporation was fined $129,177. Scherba also pleased guilty personally on three counts of tax evasion and was fined $99,771. The fines delivered by the court represented 90% of the taxes evaded which is in addition to any taxes and interest due. CRA’s audit of Restoration Masters determined that during the years 2002 to 2004, the company understated its taxable income by $494,557. This resulted in reducing their corporation income tax by $133,935 and their GST by $9,595. Scherba did not report shareholder loan appropriations totaling $384,158 on the 2002 and 2004 personal income tax returns. Consequently, there was $110,856 in federal taxes evaded.

The CRA investigation determined that the company used different methods to reduce taxes, including corporate officers claiming personal expenditures as business expenses. Scherba claimed costs relating to renovating his home, landscaping services, furniture and electronic purchases, golf membership fees, sporting goods and family vacations. The son- in law of Scherba claimed boat repairs, towing, dockage fees, flooring costs and electrical work for the home, insurance, clothing and sporting goods as expenses charged to the company. When a shareholder and their families claim personal expenses as business expenses in a company, CRA will add back these expenses and will increase the corporations taxable income. They will also add back to the shareholder the benefit derived by the company paying for their personal expenses. For example, if a corporation paid $100,000 in personal expenses and claimed them as a business expense, CRA on an audit would add the $100,000 to the taxable income of the corporation and a another $100,000 to the taxable income of the shareholder. Therefore, the corporation and the shareholder will be taxed on a total of $200,000 plus penalties and interest. It is very costly to claim personal expenses in a corporation.

If Mr. Scherba and the 952768 Ontario Limited applied under the voluntary disclosure before a CRA investigation began, then they would be exempt from penalty or prosecution. They would only be liable for the income taxes and the interest.

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Stylianos Timkoglous of Stoney Creek pleaded guilty on June 3, 2009 on three counts of failing to file corporate income tax returns for the years 2004 to 2006. Timykoglous was fined $3,000 for failing to file the corporation tax returns. Colin Michael Fox also of Stoney Creek pleaded guilty on July 3, 2009 for failing to file his 2004 to 2006 personal income tax returns. Mr. Fox was fined $4,500 and if the fine is not paid according to the court, then there will be jail time on each charge. CRA made several requests for the missing returns before serving notices. These two individuals could have applied under the voluntary disclosure program to correct their tax affairs. They would not have been penalized or prosecuted if they contacted CRA before there was any action started on their file by the agency.

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CRA will commence auditing EBay sellers this fall. Jean-Pierre Blackburn, the Revenue Minister announced on July 30, 2009 that anyone who has sold products on EBay could avoid audits, penalties, interest and criminal prosecution by doing a voluntary disclosure and declaring the income to the CRA.

Doing business on EBay is no different than regular business and the income should be reported.

CRA won a decision in the Federal Court of Canada against EBay Canada and now has access to EBay sellers’ revenue information. CRA is not interested in individuals who infrequently sell personal items at a loss. You do not pay tax on personal use property at a loss. CRA obtained information from EBay and is now going through a matching process to look for potential audits. They will be matching the information from EBay to GST and tax returns filed. CRA has now put EBay sellers on notice.

Once a voluntary disclosure is made with CRA the taxpayer has 90 days to amend or file the tax or GST returns. During the 90 day period, the taxpayer is protected from prosecution.

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There are a number of situations that would lead to someone being accepted into the Voluntary Disclosure program. The program applies to people:

• who have not filed their personal tax return, trust return or corporate tax return or who have failed to report income. This includes foreign pension income that was never reported.
• who have not filed GST returns. Input tax credits may be claimed after four years for those who did not remit source deductions for employees.
• who have filed, but whose return includes mistakes or inaccuracies, for example, claiming too much in expenses.
• who have made fraudulent claims.

Other situations that might apply include people not reportinig income earned off-shore or from a cash basis. In situations like these, the chartered accountant may use a “No-Name” disclosure which allows the taxpayer to keep their identity unknown to the Canada Revenue Agency for 90 days without prosecution while the information is being submitted to the government. The taxpayer can correct any mistakes and submit a complete disclosure without interference from the government. After 90 days, the file is considered closed.

Overall, the system works well because it benefits everyone and it is not adversarial. There is a 10-year limit on eligibility for the Voluntary Disclosure program but the key is that the taxpayer must apply for amnesty before the government starts investigating for tax irregularities.

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Abosede Adeoye of Toronto was found found guilty of GST fraud on January 28, 2009. There were six counts of filing false GST returns. On April 30, 2009, Mr. Adeoye was sentenced to 90 days in jail, three years probation and fined $12,050. The fine represents 50% of the amount of false GST refund obtained and attempted to obtain.

CRA’s investigation revealed that Mr. Adeoye claimed $342,114 of business expenses and received a GST refund in the amount of $19,355 and he attempted to receive a GST refund of $4,595 for 1999 tax year. CRA’s analysis confirmed that Mr. Adeoye never operated a business.

Taxpayers who claim false returns are subject to a maximum penalty of 200% of the tax evaded and up to five years in jail. Mr. Adeoye could have come clean by applying under the voluntary disclosure program before CRA commenced their investigation. Penalties would have been waived and there would be no criminal prosecution.

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The Canada Revenue Agency is warning taxpayers about tax investment schemes that will increase tax losses. These investments are watched closely by the CRA and if reassessed there can be substantial penalties and interest charged.

The typical scenario is where a taxpayer buys a non-registered investment with large losses in excess of their investment. The loss usually results in a substantial tax refund. Typically, these are poor investments and they will often be reassessed by CRA. Do not be fooled by the fancy promotions that the promoters provide. If the tax shelter sounds too good then it is probably not.

If the Canada Revenue Agency denies the tax shelter deduction then the cash investment will also not be deductible since it was acquired to produce tax losses. If the taxpayer knowingly participated in a unregistered tax shelter to get a tax benefit, then the penalty could be an additional 50% of the taxes payable.

If you are involved in a tax shelter arrangement and want to avoid penalties, you can apply under the voluntary disclosure program before enforcement action has been taken against you. You will have to pay the taxes plus interest but will not face penalties and prosecution in the courts.

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Joseph Kolic of Thunder Bay, pleaded guilty on February 17, 2009 on two counts of tax evasion in the Ontario Court of Justice in Thunder Bay. He was fined $24,449 which is 100% of the taxes that he attempted to evade. Mr. Kolic also had to pay civil reassessments amounting to $76,559 for federal taxes, provincial taxes, GST, penalties and interest.

Mr. Kolic operates Joe Kolic Masonry and failed to report business income in the amount of $74,230 on his personal return and his GST returns. The total tax evaded was $19,300 in personal tax and $5,149 in GST. The CRA investigation revealed that the unreported business income was deposited into the personal bank account. If Mr. Kolic would have decided to come clean; he could have applied under the voluntary disclosure program and he would not have been penalized or prosecuted. He would only have owed the income taxes, GST and interest.

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On January 9, 2009, Morley Brian Haynes of London Ontario, pleaded guilty in the Ontario court of Justice in London Ontario for failing to file income tax returns. Mr. Haynes was charged four times and was fined $1,000 per charge totaling $4,000.

In addition to fines, penalties and interest, individuals and corporations are still required to file past tax returns and pay the amount that is due. Mr. Haynes, was fined for not filing his 2003 and 2004 personal income tax as well as two quarterly GST returns for his business. Mr. Haynes filed the outstanding tax returns after CRA charged him.

Mr. Haynes could have applied under the voluntary disclosure program to avoid penalties and prosecution as long as he was not notified first by CRA. Once CRA contacts the tax payer, it is too late to apply under the voluntary disclosure program. The voluntary disclosure program provides a one time gift to a taxpayer to avoid penalties and prosecution. Under some circumstances, CRA will allow a second application under the program.

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