The desire to reduce the tax burden which will be incurred on death is the main motivating factor behind income tax succession and estate planning.
A tax audit is a frightening experience, and if the results are bad it can be a very expensive one. The CRA tax auditor will ask to see books and records and bank account statements. There may be questionnaires to be filled out. Any information that is wrong, even if due to an error, will be used against the taxpayer. A tax professional such as a Toronto tax lawyer should be involved as soon as the auditor contacts you.
Problems with the tax man require immediate response by one of our top Canadian income tax lawyers. The initial CRA contact will usually be either from an auditor or a tax collections officer. We will help you so that you can sleep at night.
Taxpayers are often overwhelmed by a tax assessment or a Tax Statement of Account that shows a balance owing that is impossible to pay. One common reaction is to ignore it since you can’t afford to pay.
Income Tax Debt
A CRA tax debt has to be addressed immediately. If it is ignored a CRA collections officer will commence tax enforcement actions. This means your bank account will be seized, your wages or accounts receivable or rents will be garnished, and your house may have a lien registered.
Dealing with the CRA tax collection officer yourself is usually a mistake. Collection officers are very aggressive and will come to your home or office with one purpose – collect as much as possible as quickly as possible. They have many collection powers, but may mislead taxpayers as to your rights are.
You need to retain a professional as soon as CRA notifies you of a tax debt. We have been solving tax debt problems since 1987. We may be able to challenge the tax assessment by filing a Notice of Objection. If you owe the full tax debt we may be able to reduce penalties and interest by filing a Taxpayer Relief (Fairness) Application. We are usually able to negotiate affordable payment arrangements with the tax collections officer in order to avoid enforcement actions such as bank account seizure or wage garnishments.
If the amount is too large to ever pay off we will direct you to a bankruptcy trustee who will either make a consumer proposal or submit a bankruptcy application to fully eliminate the taxes owing.
Estate Planning Methods
Gift To A Spouse Or Spousal Trust
One of the simplest ways for an individual to defer capital gains tax on death is to transfer the family business to a spouse or a trust for the spouse. This, however, does not defer the tax on the accrued value of the business when transferred to the next generation, which tax will occur on the death of the surviving spouse.
An election can be made under the Act so that a transfer to a spouse or to a spousal trust will occur at fair market value rather than on a rollover basis. This enables the personal representatives of the deceased entrepreneur to elect to realize sufficient gains to absorb any capital losses owing on death.
The business cannot fund the tax liability arising on death, the parent can transfer the property to a spousal trust. This allows capital gains tax to be deferred until the death of the spouse but ensures that the family business is eventually transferred to the next generation. This approval also defers the problem of funding the tax liability to the children.
A spousal trust will, however, not be appropriate in all circumstances. Vesting of the family business in the children will be delayed until the death of the spouse. The desire of the children to increase the value of the business by reinvesting income to allow for expansion may be at odds with the surviving spouse’s need for income. Perhaps most likely to cause problems is the transfer of a family business to a spousal trust for a second spouse where the children are actively involved in the family business and the relationship between the spouse and the children is not good. In such a case, the potential for disruption of the operation of the family business may be sufficiently serious to forego the tax deferral and to make instead a direct transfer of the family business to the next generation. However, in Ontario, a spouse’s right to elect to take an equalization of net family property rather than what is provided under the will must also be considered.
Property in the U.S
If you own property in the U.S., your estate may have to pay U.S. estate tax on the property after your death. The U.S. imposes its estate tax on all assets owned by Canadians that it considers to be U.S. property, which includes real property such as vacation homes and may include other items such as furniture. In addition, shares in U.S. corporations and U.S. Government Savings Bonds are considered U.S. property even if the certificates are kept in Canada.
Where there are significant assets outside the family business, some thought should be given to establishing both a spousal trust and a family trust under a will, so that assets with an inherent capital gain can be transferred to the spousal trust and the tax deferral obtained and other assets with little or no inherent capital gains can be available for the children.
Tax Audit Assistance
There are over 350,000 audit and review actions conducted by the Canada Revenue Agency on ayearly basis. Around 15,000 of these audits deal with “cash only” businesses (i.e. the underground economy). Additionally, an estimated 35,000 are tax shelter audits. Read more
Tax Audit Process
What happens when you are audited? Typically, you will first receive a notice from CRA of their intention to audit. The notice will usually outline the preliminary information that they require from you. They may then follow up and request more information. The beginning of an audit is the best time to obtain legal representation. Tax auditors are not always reasonable, and may not listen to your reasoning for filing your returns the way you did. We will speak to the auditors on your behalf, and begin the necessary legal work it takes to resolve all issues relating to your tax return.
If you disagree with the outcome of an audit, it is especially crucial to obtain representation as soon as you have been reassessed by CRA. You have appeal rights, but you only have 90 days to appeal by filing a Notice of Objection. As experienced Ontario tax litigation lawyers, we can provide detailed assistance in filing your income tax objection.
Notice of Objection
The result of an income tax audit by the tax auditor is a reassessment by the Canada Revenue Agency. The Canadian taxpayer’s first step is to file a Notice of Objection requesting an internal review of audit by an Appeals Officer with a mandate to make an independent review of the case. The Notice of Objection has to be filed within 90 days from the date of the Notice of Assessment/Reassessment, with extension requests allowed, but not always granted, for an additional year from the expiration of the 90-day objection period.