It’s a little-known fact that when CRA first receives an income tax return and sends the taxpayer a Notice of Assessment, they do little to no review of what is actually in that tax return. Unless your return has been selected for a pre-assessment review, for the most part CRA just goes along with whatever has been filed and assumes it’s correct. That’s right: most returns are just accepted as-is.
At least, at first. CRA accepts returns without scrutiny at first simply because tax filing time is too busy to allow for a closer look. When that frenzy is over, CRA engages in their review process, which includes the Matching process.
Matching: Where CRA Takes a Closer Look
CRA has copies of every slip that has been issued to you from any source (your employer, your bank, your investments, etc.). Matching is the process by which CRA actually looks at the slips they have on file for you and checks to see that all of them have been included in the return and entered correctly.
If they believe they’ve found an error or omission, they usually re-assess the return with the correction in place, and the majority of the time this change triggers an increase in tax liability. In that case, the taxpayer receives a Notice of Re-Assessment and a request to pay the extra amount of tax. Alternatively if they’re not sure it’s an error they may contact you by phone (never by email) to ask about it.
A Reassessment Isn’t the End of the World
It’s important to put this in perspective. The additional tax is not a punishment, it’s a correction. And CRA recognizes that the omission of a slip usually isn’t done on purpose. For example, we find that sometimes when people have moved, some of their slips from investments may get sent to the old address. The taxpayer, already drowning in paperwork, isn’t aware of the slip and doesn’t know it’s missing.
When CRA Matching Makes a Mistake
However it is also possible for CRA to make an error here, and charge tax that the taxpayer actually doesn’t owe.
CRA matches a tax slip by looking at the return where the slip is supposed to go, and seeing if it’s there. But sometimes there’s more than one place to report a slip. So CRA can think a slip is ‘missing’ (and therefore the tax hasn’t been applied) when in fact it’s been reported elsewhere in the return and taxed appropriately.
An example of this is when a taxpayer who is self-employed has some freelance income shown on a T4A slip. For a self-employed person, this income can (and usually should**) be reported as part of business gross or professional gross on the self-employment part of the tax return. With the T4A income reported this way, the appropriate amount of tax has been assessed. There is no error or omission in the return.
But for people who are not regularly self-employed – which is the majority – a T4A slip is reported as ‘Other Income’ on Line 130, and that’s where CRA tends to look for it. On the self-employed taxpayer’s return, CRA Matching sees the empty Line 130, believes the slip/income was never reported, adds it to the taxpayer’s income, and sends the taxpayer a reassessment and a tax bill.
It’s therefore important, when you receive a notice of reassessment, to read the paragraph in the Notice of Reassessment where CRA explains what they’ve changed, and make sure it makes sense. If they’re wrong, you can notify CRA and they’ll generally work with you to correct the error.
How To Fix a CRA Error
If you have reviewed your Notice of Reassessment and believe CRA to have made an error, you must send CRA a Request for Adjustment, which is their fancy term for requesting a change to a return.
If CRA is in error on a return filed by Personal Tax Advisors, we will make this adjustment free of charge. Call today if you think this may apply to you.
A request for adjustment can be done in writing by sending a letter and/or a completed T1-Adj form (available on CRA’s website) to your tax office, or by using the MyAccount system to make the requested change online. CRA will review your request and respond in writing as to whether they have accepted your change or not.
If you think CRA has made an error and you’d like us to look into it, contact us today.
*That’s why Personal Tax Advisors offers a free service to our clients to automatically download all slips from CRA’s servers into our tax software. Even if you’re missing slips, we won’t.
** Personal Tax Advisors generally report T4As as business or professional income for our self-employed clients. This has the advantage of ‘counting’ towards the Canada Pension Plan (meaning a higher pension at retirement) and creating RRSP contribution room, among other tax advantages.