How Improper Tax Planning Can Lead You To Income Tax Debt

…and you thought fancy tax planning only backfires on the top 1%?

Not so fast. Middle class Canadians are now being caught as well. Sadly, not occasionally but in the TENS of THOUSANDS.

My practice is focused on helping individuals and businesses recover from debt overload. The frequency with which income tax debt has become a major factor is rampant.

Earlier in my career it were the higher earning, self-employed professionals or business owners whose tax advisors messed up (most commonly by not babysitting these entrepreneurs to make the installment payments, and feeling like heroes when they deferred taxes, or – even worse – employed aggressive tax planning skills).

Now it is the common man. Most earn way less than $100,000 a year. They are not sophisticated financial people. They work on jobs or run a small business.

The most common causes seem to be (I have left the game changer for last, so read on please):

In the later 1990’s and early 2000’s an industry of tax shelter schemes came into being.  These took many forms, but the two main ones were:

The promoters of these funds were not all unscrupulous. Many sought and obtained legal and tax opinions from big name law firms on Bay Street and international accounting firms. These opinions were used as promotional points and selling features. They made the average taxpayer feel safe.

Regular salaried employees have almost nothing they can write off for taxes. So when their tax preparer, trusted friend, or work buddy presented the idea of how they too could legally save a lot of tax money, they bought into the scheme. Just a little money in the first year, but when they saw it “worked” they increased the amount and brought their spouse, brother, friend, etc. to the party.

In true bureaucratic fashion, CRA went about this in the following way (admission: there is some generalization here):

Step 1. CRA admits the tax returns as filed and sends out very nice tax refund cheques for, say, five years.

Step 2. CRA reassesses the returns for the past five years. This is the bureaucratic part – it took five years! They demand the tax refunds back  plus interest plus layers of penalties. And they want the money immediately. Remember you are a regular Canadian working hard to pay your bills – the only way you had something extra these last few years was because of the “scheme”.

Step 3. You call CRA (or more likely the promoter who told you this was all golden). You file an Objection.

Step 4. Objection is denied.

Step 5. You appeal. In many cases the promoters of the scheme handled this appeal for their customers. Some promoters shared the costs between the customers. Some paid for it themselves.

Step 6. You lost at tax appeal stage. CRA may have offered a settlement agreement (like waiving some of the penalties, or some of the interest if you dropped all further appeals). If you accepted the offer you can skip reading steps 7. & 8. But read on because you likely owe more than is fair or affordable to repay on CRA’s terms.

Step 7. Some typical cases were taken to a higher level of Court appeal. The rest of the cases (usually thousands of them) waited for an outcome, but had agreed to be bound by the decision. The appeals were lost.

Step 8. CRA sends all these taxpayers a statement demanding the money. Interest has accumulated – compounded daily, by the way. So often the total now owing with interest and penalties is two times the original amount received. Unless you won the lottery or inherited a big sum, this is not going to be easy.

In all cases, a good debt relief professional has established sophisticated programs to ensure your credit rating stays intact or, if needed, is rebuilt quickly.

Do not worry about your tax debts – call us to find the solution that is best for you.