This week, the Canada Revenue Agency held a media briefing to usher in the beginning of the 2019 tax filing season. But unless you’re certain that you’ve already received all of your tax slips for 2018, you may want to hang on a bit before filing your return.
While waiting for those remaining slips to arrive, take some time this weekend to get organized, making sure you have the necessary receipts to back up all your deductions and credits. Failure to provide proper receipts to the CRA could not only lead to a denied deduction, but could also result in a gross negligence penalty, as an Ontario taxpayer recently found out.
The case, decided last week, involved the child care deduction and illustrates the importance of getting appropriate receipts to back up your claim. The taxpayer has five children, but only her youngest two children lived with her from 2003 to 2007, the tax years under review.
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The taxpayer testified that she only needed child care for her youngest son, who was three years old at the beginning of 2003. As a result, the taxpayer hired two caregivers to care for her youngest son: from 2003 through 2005, she hired a close friend of one her older sons to babysit and, in 2006 and 2007, she hired her nephew, who lived nearby.
2006 and 2007 tax years
In 2006 and 2007, the taxpayer claimed child care expenses of $4,000 and $1,067, respectively, for amounts she claimed she paid to her nephew. The CRA asked for proof she actually paid the amounts in question. Indeed, the obligation to obtain a receipt for child care expenses is required under the Income Tax Act, which states the taxpayer must be able to substantiate the amount paid “by filing with the (CRA) one or more receipts each of which was issued by the payee and contains, where the payee is an individual, that individual’s Social Insurance Number.” This latter requirement is in place to ensure the child care provider includes the amount received in his or her income.
The instructions to Form T778, Child Care Expenses Deduction, state that if you are filing online, “keep all your documents in case we ask to see them at a later date. If you are filing a paper return, attach your completed Form T778, but do not send your other documents. Keep all your documents in case we ask to see them at a later date.”
In 2009, when the CRA audited the taxpayer, she went to both caregivers and asked them for receipts for what she had paid them in the relevant years so she could provide them to the CRA. Copies of five handwritten receipts were shown to the court.
The receipts with the notations “January 1, 2006 – December 31, 2006” and “January 1, 2007 – December 31, 2007” were “undated and unsigned and were admitted to have been prepared in 2009.” As a result, the judge questioned the veracity of the receipts, concluding they “do not assist (the taxpayer) in establishing her child care expenses in 2006 and 2007.”
Now, a lack of proper receipts isn’t necessarily fatal to a taxpayer’s ability to claim child care expenses; however, absent appropriate receipts, the court must examine other evidence to substantiate whether a taxpayer has, indeed, incurred a specific child care expense.
In this case, the taxpayer had no cheques, bank withdrawal slips nor any records whatsoever to substantiate the amounts she claims to have paid the caregivers, testifying that “she did not keep records” nor did her caregivers keep records. Rather than paying an hourly wage or weekly amount, “she paid him cash as she went, paying him more when she had more and less when she had less.… When and the amount she paid depended on how much money she had at the time.”
The judge found it surprising that, despite a lack of records, “somehow (the caregivers) could remember at the end of each year how much she paid them and give her a receipt and she was satisfied … that the receipt was correct.”
Added the judge, “With respect, no matter how good one’s memory is, it is not credible that a person who paid (or was paid) varying amounts, at irregular intervals over the course of 12 months could, at the end of that 12-month period, without any records, remember how much was paid.”
Another suspicious circumstance concerned the $1,067 of child care expenses claimed in 2007, which was equal to the maximum amount allowed based on 2/3 of the taxpayer’s earned income. As the judge observed, “this amount matches exactly the amount on the receipt for 2007 purportedly given to her in 2009 by (her nephew) after he recalculated what he had been paid in 2007. This appears to me too much of a coincidence.”
The judge denied the child care expenses for 2006 and 2007.
2003, 2004 and 2005 tax years
The CRA also reassessed the 2003, 2004 and 2005 tax years in which the taxpayer claimed child care expenses of $4,800, $4,000 and $5,245, respectively. Normally, these tax years would be considered “statute-barred,” since the CRA is generally prohibited from reassessing a taxpayer more than three years after the original reassessment unless it can be shown the taxpayer “made a misrepresentation in filing her returns … for these years that is attributable to neglect, carelessness or wilful default.”
The judge concluded the taxpayer “did not pay the amounts for childcare she claimed she paid in 2003, 2004 and 2005 and that she therefore made a misrepresentation in her tax returns.”
Gross negligence penalties
Finally, the CRA assessed the taxpayer with gross negligence penalties, which can be applied where a taxpayer “knowingly … has made … a false statement … in a tax return.”
The judge upheld the penalties, finding the amounts claimed for child care expense “were false…. (H)er explanations for how she knew the amounts were correct, did not ring true.”
While the judge acknowledged the taxpayer needed child care for her son so she could work, the judge simply was not convinced “that (the caregivers) provided nearly as much childcare as she claims they did, or that she paid them anything close to the amounts she claimed she did.”