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[H&R Block Insight - July 2008]
[Fighting for your tax rights]

Even with the best planning, life can be unpredictable. Life events such as moving or dealing with a death in the family can cause major disruptions and upheavals. There is a huge amount of work involved in dealing with a change.

Though it is not always apparent, life changes can have a significant impact on your tax situation and it is important to try and make sure the right forms and information are in place. However, there might be relief for taxpayers who may have overlooked some paperwork during a life change.

H&R Block recently fought for a client in British Columbia under the taxpayer relief provision, formerly known as the fairness package. This client was an 87-year-old widow who moved into a nursing home in 2000. She decided to rent her house rather than sell it.

Under the Tax Act, your principal residence is exempt from taxation on the capital gain. Even if there is a change of use, you can apply for an exemption - also called an election - to continue to designate the property as principal residence for another four years.

With the move to the nursing home, the client failed to file the proper paper work with the Canada Revenue Agency so the house was no longer considered her principal residence. When she sold the property in 2004, it was subject to capital gain taxes and resulted in a tax bill of nearly $20,000.

H&R Block worked with the taxpayer to apply under the taxpayer relief provision for a late election due to the stress involved in moving into the nursing home. The initial requests to the CRA were denied so H&R Block took the case to the Federal Court for judicial review.

In February 2008, the Federal Court decided in her favour and the exemption was granted. The court recognized the need for relief from certain provisions of the Act that can result in undue hardship because of the complexity of the tax laws and the procedural issues entailed in challenging tax assessments. As a result, there was no longer a tax bill for the client.

Life changes can complicate your tax situation so it is important to consult a tax professional to ensure you comply with the Income Tax Act. And if you disagree with the CRA, you may be able to take steps to ensure your situation is dealt with fairly under the taxpayer relief provisions.

 

[You Got Mail... From the CRA]

After every tax season, the Canada Revenue Agency conducts a number of reviews to ensure that income, deductions, and credits are accurately reported and filed. There are three main types of reviews:

The Pre-assessment Review Program electronically analyzes individual income tax returns. This program looks at various deductions and credits on a tax return before the processing and issuing a Notice of Assessment. The peak period for this review is February to July.

The Processing Review Program occurs after a Notice of Assessment is issued and involves reviewing individual income tax returns to ensure that the deductions and credits are accurate and supported by documentation. The peak period for this review is June to November.

The Matching Program ensures that information slips filed by a third party, such as your employer or bank, correspond to the information reported by the taxpayer. The peak period for this review is September to March.

The CRA reviewed over 1.2 million tax returns using the Pre-assessment and Processing Review programs in 2006. The CRA also reviewed almost 1.5 million tax returns using the Matching Program. Matching may benefit the taxpayer; almost a quarter of a million tax returns were adjusted resulting in close to $75 million in refunds.

There is no scientific method to how the CRA selects tax returns for review. There are a number of reasons why a tax return may be selected for review under the Pre-Assessment Review, Processing Review or Matching programs:

  • random selection;
  • comparison of information to third-party information sources, such as T4 information slips; or
  • types of deductions or credits claimed and an individual's review history

The selection process for reviewing returns is the same whether the return is filed on paper or electronically. This means any tax return may be selected.

There are some credits and deductions that are commonly reviewed including:

  • RRSP deductions
  • Annual union or professional dues
  • Moving expenses
  • Northern residents deductions
  • Amount for an eligible dependant
  • Medical expenses

If your tax return has been selected for review, you have to respond to the CRA by the deadline. For taxpayers who do not respond, the tax return is adjusted, your tax payable will be calculated based on the re-assessment numbers. This could mean a tax bill.

If you have questions about any CRA correspondence, a tax professional can provide advice on your situation.