Canadian-tax-form

Most clients rely blindly on tax slips to properly report their income. But if the information contained on the tax slip is wrong or incomplete, is the taxpayer still liable for the taxes owing and any arrears interest or penalty?

That was the issue before the Tax Court in June 2017 (Bolduc v The Queen, 2017 TCC 104) in the case of a Quebec truck driver and an incorrect T4. The T4 slip, known formally as the “Statement of Remuneration Paid,” is one of numerous tax reporting slips that a payor is legally required to complete. The rules surrounding the preparation of the slips are strict. The deadlines are tight and the penalties for not filing, or filing incorrect slips, are severe. Yet mistakes happen.

In the case before the court, the taxpayer worked for five different companies in 2013, each of which issued a T4 slip reporting, in total, about $40,000 of employment income before any deductions withheld at source.

In filing his 2013 return, the taxpayer reported gross income from employment of $16,577 from one of the companies. When that corporation’s payroll accounts were audited by CRA, however, the agency discovered that $7,994 in gross salary had been omitted from the T4 slip issued to the employee—and was consequently not reported on the employee’s 2013 tax return.

CRA analyzed the taxpayer’s 2013 bank account statements, which revealed deposits totaling approximately $36,600 of wages. The taxpayer testified that the only T4 he had received from the company, for the 2013 taxation year, was for $16,577 and he included this amount in his 2013 income. He stated that he never received an amended T4 from the company to account for the additional $7,994 in employment income.

CRA’s representative testified the corporation’s accounting records were “weak and non-existent for one period in 2013.” She contacted the company’s accountant, but even he mentioned that he had difficulty obtaining information from his client.

The CRA auditor compared the cheques issued to the employees against the company’s wage book and noted that the total amount of the cheques issued to employees exceeded the wage total entered in the wage book and, consequently, on the T4s prepared by the accountant. As it turned out, the T4s for 12 employees did not match the amounts on the cheques issued by the company for the 2013 taxation year.

Upon noticing the discrepancy, the CRA auditor sent written notification to the company’s owner inquiring about the difference between the total amounts of the cheques issued to certain employees and the totals entered in the wage book, and requested that the owner contact her to discuss the situation.

The owner never replied to CRA’s request and, as a result, CRA amended the T4s of the 12 employees who had been given deficient T4 slips. The taxpayer was one of these 12 employees.

CRA sent the company the amended T4s for the 12 employees. It was then the company’s responsibility to send the amended T4s to the affected employees. The taxpayer stated he never received an amended T4 for 2013. In addition, the paystubs issued to him “were difficult to understand, as was the record of employment provided.”

The taxpayer testified that since he worked for several employers in 2013, he relied on the T4s he’d received to complete his 2013 income tax return. It was therefore “difficult for him to take into account that the T4 issued by [the company] did not match the amount he had received from it as employment income.”

At trial, once the taxpayer understood that $7,994 of employment income had mistakenly been omitted from his T4, he agreed that this amount had been correctly included by the CRA in calculating his income for 2013.

The only issue left to be resolved, therefore, was the arrears interest charged by CRA. The judge recommended that CRA should forgive the arrears interest involved, saying, “It would seem unfortunate that [the taxpayer] must now pay the interest due to his employer’s errors and negligence.”

The message, however, was that the taxpayer remained liable for back taxes owed on income, regardless of whether it was correctly reported on his T4.

Takeaway for advisors

Advisors are often in the unique position of being able to assist clients in confirming the amounts reported on their T3 and T5 investment income slips with the income or mutual fund distributions reported through their account statement. This could prove to be invaluable should a CRA dispute ever arise as a result of an inaccurate tax slip.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Wealth Strategies Group in Toronto.

Originally published in Advisor's Edge Report

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