Qian vs. The Queen (2010 DTC 1357 (TCC)) illustrates a few key factors that apply to any business owner. And, of course, real estate investors are business owners. In this case, the taxpayer was found guilty of not declaring income for her business. The judge’s decision and resulting actions of the Canada Revenue Agency provide three key lessons to investors.
Honest and integrity
First, honesty and integrity is the always the best policy. The judge found the taxpayer to have no integrity and therefore approved the CRA’s extensive penalties.
Poor accounting records = more problems with the CRA
Second, poor accounting records got the taxpayer into deeper problems – an issue professional real estate investors can easily deal with. Importantly, the CRA was allowed to assess the taxpayer beyond the normal limitation period and assess “gross negligence” penalties because the taxpayer was found to lack credibility by providing contradictory evidence and insufficient records.
In my opinion, the notion of a statute of limitations no longer exists in Canadian tax rules. The courts have smashed the interpretation of “gross negligence” over the past 10 years. Gross negligence used to be more indicative of fraud, but is now, in my opinion, barely more than failing to dot an “i” or cross a “t”. Unfortunately, if someone is found guilty of gross negligence, the CRA can reassess prior tax years indefinitely for as long as they wish.
Let me say that again:
if someone is found guilty of gross negligence, the CRA can reassess prior tax years
indefinitely for as long as they wish
No real estate investor wants to give the CRA this kind of power.
Poor records = free ride for the CRA
Third, because the taxpayer had poor records, the CRA was largely allowed to make up the numbers on which to base the penalties because the taxpayer could not reliably dispute the figures.
So, the taxpayer lied, had poor records, and the CRA was able to assess penalties based not on what the taxpayer actually did, but on what the CRA thought happened because the taxpayer couldn’t prove otherwise.
So, please…get your accounting in order.
Maintaining your integrity, having defendable interactions and keeping reasonably accurate records (for example, using systems like accountant in-a-box) will get you through many tax problems. Clearly a little knowledge and planning will put you in a superior position. Please contact your tax advisor to ensure you are ready for a CRA challenge.
If you’re interested in an excellent series on Real Estate Investment Bookkeeping, see The Engaged Investor.
Portions of this article appeared in April 2011 Canadian Real Estate Magazine.
