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Book Excerpt

The audit: How to survive a visit from the taxman Add to ...

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Tax Beater

Stop the interest clock by paying disputed tax liabilities.

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What If I Have Discovered an Error in a Prior Year's Tax Return?

If you review your tax returns and find that you made an error in a previous years return, you will generally be allowed to request Canada Revenue Agency to go back and make the change. Even though technically the tax department does not have to adjust a prior year tax return without you filing a notice of objection, administratively, Canada Revenue Agency will normally make the requested adjustment. You must however, make your request within three years from the date on the original notice of assessment.

To make a change to a prior year tax return, the tax department would prefer that you file Form T1-ADJ, T1 Adjustment Request. You file a separate form for each tax year in question. Canada Revenue Agency prefers the use of the T1-ADJ form over filing amended tax returns.

Canada Revenue Agency will generally not allow you to go back and make a change to a prior years tax return if you are changing an optional deduction and the change affects the income for that year. A typical example might be to increase or decrease the amount of capital cost allowance (CCA) claimed in a prior year. You can, however, change your CCA claim for a prior year if it has no effect on income. This might be the case where you decrease the CCA claim in one class and increase it in another class so there is no effect on income.

Additionally, if you file a notice of objection within the allowed time frame as discussed above, the tax department will normally allow you to make the CCA adjustment. As well, if a prior year tax return is changed due to the correction of other errors, then the tax department will normally allow you to change permissible deductions for that year.

As mentioned above, the law stipulates that you can only go back three years to make an adjustment to a prior years tax return. After the three-year period, the tax returns are considered statute-barred. However, in 1991 the government introduced rules that enabled Canada Revenue Agency to reassess personal tax returns back to 1985 if requested by the taxpayer.

Under the old rules, if after three years you realized you missed a deduction or hadn't yet filed a tax return, the tax department was not required to issue a refund. Even though you were entitled to the amount and the tax department agreed. If you had not made the request before the three years were up then you didn't get the refund. A severe penalty for procrastination.

Corporate tax returns are, however, still subject to the three year restriction.

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Tax Beater

Request a refund of missed deductions.

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The rules surrounding the time frame for requesting adjustments changed again in 2004. These new rules have limited the time frame for processing adjustments to a ten-year period. The new ten-year time frame is in effect for all requests made after 2004. Therefore, if at some point during 2009 you discovered that there was an error on a previous years tax return, you could only request adjustments for tax returns dating back to 1999. In most cases, Canada Revenue Agency will go back, make the changes you request, and issue you a refund. This assumes of course that you can substantiate the changes and the tax department agrees to them. As well, if you have not filed a tax return in the past and you are expecting a refund, Canada Revenue Agency will refund you any amounts owing. This is a significant win for the taxpayer.

Is There Any Relief If I Have Never Filed a Tax Return or Did Not Report All of My Income?

Canada Revenue Agency's stated objective is to promote compliance with the Income Tax Act. The government wants to encourage all taxpayers to file their tax returns on time.

If you have never filed a tax return or you did not report all of your income on tax returns you did file and you have not been approached by Canada Revenue Agency, then consider contacting the tax department and state that you wish to make a Voluntary Disclosure.

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