It may seem like table stakes to ensure any business – real estate, healthcare, or so many others – need to have proper bookkeeping nad accounting records to operate. However, I have seen too many instances of poor accounting records when I start to work with clients. This leads to not only issues with the running of the business, but if Canada Revenue Agency ever comes knocking, this could also mean huge costs in interest and penalties. I’ll illustrate with a court case that highlights the issue.
Court case: Poor bookkeeping records
Qian vs. The Queen (2010 DTC 1357 (TCC)) illustrates a few key factors that apply to any business owner. 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.
1. Be honest and have 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.
2. Poor bookkeeping records = more problems with the CRA
Second, poor bookkeeping records got the taxpayer into deeper problems – an issue real estate investors, medical professionals, and business owners can easily deal with by either hiring or getting training on the best way to manage their books. 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”. 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 one wants to give the CRA this kind of power.
3. Poor bookkeeping = 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.
Get your house in order
So, please…get your accounting in order. Have solid bookkeeping, organized records, and stay on top of it.
Maintaining your integrity, having defendable interactions and keeping reasonably accurate records 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.
Resources
For additional resources related to getting bookkeeping and accounting organized, see:
More questions?
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
