CRA Tax Audit of Building Contractor Unreported Income
The building sector is one of three sectors, the other two being restaurants and retail sales, that CRA has said it is targeting as part of its announced crackdown on unreported income and the underground economy. CRA has taken some innovative tax audit approaches to detecting building contractors with unreported income as part of the CRA focus on the cash economy that has been a CRA priority for several years. The building construction industry has been identified as being of particular concern for unreported income.
In one project CRA auditors obtained lists of municipal building permits in some communities to check on worksites for unregistered building subcontractors. That tax review of 8,396 building permits identified 2,751 unregistered building contractors. The result of the CRA tax audit and enforcement was an income tax collection of $4.5 million.
Another approach of this construction sector tax audit crackdown tax had tax auditors targeting installers who work for hardware and home improvement stores. CRA tax auditors investigated 93 hardware stores in 19 different communities, and found that 7 percent of installers had unreported income. CRA tax collectors harvested $4.5 million in taxes, $559,000 in interest payments and $843,000 in tax penalties.
An extension of this audit technique saw CRA approaching at least 20 hardware and big box building supply chains and asking for details of their clients who had registered in their contractor programs. Most of the building supply retailers complied with the requests and released names and details to the CRA tax auditors. An exception is Rona, one of the bigger building supply chains in the country. They have opposed the CRA request for confidential client information on the basis that CRA is trying to intimidate the industry. However CRA has been successful in the past in the courts in obtaining third party information to carry out tax audits of clients or customers of a third party, most recently with banks and offshore accounts. These third party “fishing expeditions” are generally upheld by the courts even when opposed by a Canadian tax lawyer.
As a result of the underground economy tax audit project CRA has already investigated almost 6600 building contractors and found over 1200 who had failed to file a tax return at least once in the period from 2008 to 2012.
There is a safe haven for buisling contractors, or anyone else, with unreported income. Canadian taxpayers, including building contractors who have unreported income or unreported GST/HST, or unfiled tax returns, can submit a CRA voluntary disclosure (VDP or tax amnesty application) through a Canadian tax lawyer. If a voluntary disclosure is submitted before CRA tax auditors target the building contractor there will be no tax evasion prosecution, no civil tax penalties and an interest reduction on the unpaid taxes is sometimes available as well. A building contractor with unreported income who wants to come back onside should seek tax help from a professional Canadian tax lawyer before CRA finds them and it is too late.
The CRA's website provides up-to-date federal and provincial income tax rates for individuals. As an independent contractor, you're required to complete Form T2125 (Statement of Business or Professional Activities). Complete a separate copy of Form T2125 for each business that you operate. At the top of Form T2125, you enter the amount and type of income you earned, such as fees and sales commission.
Income from freelancing must be declared when filing your taxes. In Canada, declare your freelancing income on Form T2125, which is part of your T1 (individual) tax return. One of the great things about running a side business is that you will be able to claim business expenses on your income tax. If you work out of your home, use your personal car, or incur other expenses in order to generate revenue for your freelancing work, these all can be calculated as part of your business expenses.
Yes, the CRA provides the information to the Internal Revenue Service (IRS) in the U.S. and the IRS provides the CRA with information on accounts of Canadian residents held at U.S. financial institutions.
"These articles provide information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."