Canadian Income Tax – Taxation of Unreported Taxable Benefits – Toronto Tax Lawyer Analysis

Canadian Income Tax – Taxation of Unreported Taxable Benefits – Toronto Tax Lawyer Analysis

Introduction – Unreported Taxable Benefits

Gift cards, travel vouchers, pre-paid credit cards, rebates and other “incentives” received from an employer or in the course of business are subject to income tax as taxable benefits under the Canadian Income Tax Act. The Canada Revenue Agency is aware that many employees and business do not report this income and is pursuing the matter aggressively through income tax audits and investigations. A recent tax investigation by the CRA uncovered $58 million worth of unreported income earned by pharmacists in the form of rebates and various incentives given to them by generic drug companies in consideration for prescribing their products. Failing to report these taxable benefits on your tax return will lead to significant financial penalties and could potentially lead to a prosecution for tax evasion or tax fraud. If the CRA has not yet contacted you about your unreported income, the voluntary disclosure program (VDP) may be able to help you avoid tax evasion prosecution and penalties and reduce the interest owed on the unreported income. Our Canadian tax lawyers are experts on the Income Tax Act and the VDP and can provide tax help on whether or not benefits or incentives received in the course of your employment or business need to be reported by you as taxable income.

Benefits and other Incentives are Taxable

The value of all the remuneration or benefits you receive from your employer constitutes income under the Income Tax Act unless specifically exempted by the Tax Act. There are no exemptions for gift cards, travel vouchers, pre-paid credit cards, or other similar forms of compensation. Similarly, if you run a business and receive something of economic value from a supplier or other business contact, you have earned taxable income that needs to be reported. The pharmacies investigated by the CRA were receiving rebates and other inducements from generic drug companies and failed to report them, which constitutes tax evasion. The rebates often took the form of travellers cheques or pre-paid vacations. A business payment received in the form of a rebate, gift card, travel voucher, or pre-paid credit card is no different from a payment received in cash when it comes to reporting your business’s income. It is worth considering whether you or your business is reporting income received in this form since your industry might be next on the CRA tax audit list. It is likely that other industries such as travel agents, tourism and hospitality will also be investigated. The construction, restaurant and retail sectors are already the focus of the CRA investigation of unreported cash transactions as part of the underground economy. Our expert Ontario tax lawyers can provide tax help if you have been audited or charged with tax evasion or tax fraud or need to come clean for unreported benefits.

Significant Tax Penalties and Potential Tax Prosecution for Failure to Report Income

Failing to report income on your tax return can result in severe penalties as constituting tax evasion or tax fraud. Filing a false return knowingly or in circumstances amounting to gross negligence can result in the taxpayer being assessed gross negligence penalties of up to 50% of the taxes owing. Failing to report income received in the form of a rebate, gift card, pre-paid vacation, traveler’s cheque could lead to these tax penalties being applied if the failure to report is discovered by the CRA. Taxpayers who fail to report all of their income are charged interest on the resulting taxes owing, as well as on any tax penalties assessed. The unreported income could also lead to criminal tax prosecution for tax evasion or tax fraud which can result in imprisonment. CRA often levies significant penalties against taxpayers in situations where they are not warranted. If you have been assessed with onerous financial penalties, speak with one of our Toronto tax lawyers to ensure amounts owing to CRA to discuss the ways in which you can challenge them.

File a Voluntary Disclosure to Eliminate Potential Penalties and Prosecution

Taxpayers who have not reported their income from rebates, gift cards or other incentives as required by the Income Tax Act may be eligible for Revenue Canada’s Voluntary Disclosures Program if:

  • CRA has not contacted you about the failure to report the income;
  • At least one year has passed since you were required to report the income;
  • The failure to report income is subject to a penalty; and
  • The voluntary disclosure identifies all areas of the taxpayer’s non-compliance with the Income Tax Act.

If the above pre-requisites are met, a taxpayer has a strong chance of making a successful voluntary disclosure to CRA for the failure to report the income. A successful voluntary disclosure completely eliminates penalties, removes the possibility of criminal prosecution and often offers significant interest relief on any taxes that may be owing. Our Toronto tax lawyers deal with voluntary disclosures (VDP) on a daily basis. If you think you may be eligible, please consider speaking with one of our top Calgary income tax lawyers.

Conclusion – Incentives and Taxable Benefits

Benefits such as gift cards, rebates or pre-paid vacations received in the course of employment or business are generally subject to income tax. Failure to report these taxable benefits on your income tax return can result in severe financial penalties. The CRA  has been aggressively pursuing the under reporting of these taxable benefits. If the CRA has not contacted you yet these penalties can be eliminated through a voluntary disclosure. Contact one of our experienced Canadian tax lawyers for immediate tax help.

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