Principal Issues: [TaxInterpretations translation] A) In keeping with the reduction of administrative paperwork for businesses to which the federal government adheres, would it not be appropriate to simply add a line to Form T2125 where the preparers of a self-employed worker's return could indicate the amounts already included in the previous year’s income by virtue of the accrual accounting method?
B) Should not the CRA send a request for information to the self-employed person before immediately proceeding to send a notice of assessment?
C) By administrative practice, does the CRA still require T4A slips to be issued by the payer when the recipient of the amounts is a corporation?
Position: A) Request further analysis.
B) Automatic Matching Program. If the taxpayer does not respond to our requests for additional information, the income is added and a new notice of assessment is sent. The assessment may be subsequently reversed if the taxpayer submits the appropriate information.
C) All types of beneficiaries are subject to the same rules. However, under $500, if no withholding tax has been withheld, no T4A is required.
Reasons: Questions answered by other sectors of the CRA. Administrative practices and as prescribed by the Act.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 22
T4A slips, accrual versus cash accounting and issuance of automatic notices of assessment by the CRA
It is common for self-employed workers to receive T4A slips from a payor in respect of amounts paid by the payor in the year to the self-employed person concerned. Consider the following example. Mr. A is a land surveyor and carries out engagements for various corporations and also for municipalities. In February of each year, he receives T4A slips for the amounts paid to him in the previous calendar year. The amounts shown on the T4A slips can vary substantially from year to year depending on the engagements completed.
Obviously, where amounts were billed in November or December of 2010 by the land surveyor, but are only paid in the 2011 calendar year, the T4A slips will not be issued by the municipality or by the corporation in respect of those amounts until February 2012, for the 2011 calendar year. However, under the principles of accrual accounting, the land surveyor has already included those amounts (and also remitted the GST and the applicable QST) for the surveyor’s 2010 taxation year. The T4A slip for 2011 therefore includes certain income that was reportable in the 2010 year, and other income to be reported in the 2011 year.
As we have seen on a number of occasions in practice, notices of assessment for undeclared income are then systematically sent to such taxpayers (which would then refer to 2011 in our example) in respect of unreported income, if the reported business income for 2011 is less than the total of the amounts reported on the T4As for the 2011 year. No courtesy letter or request for information is previously sent to such taxpayers. Numerous administrative and bureaucratic procedures by the land surveyor's accountants result, including numerous supporting invoices to justify the differences between the T4A's cash accounting and the fiscal period that the Act requires.
Questions to the CRA
(A) In keeping with the reduction of administrative paperwork for businesses to which the federal government adheres, would it not be appropriate to simply add a line to Form T2125 where the preparers of a self-employed worker's return could indicate the amounts already included in the previous year’s income by virtue of the accrual accounting method?
(B) Should not the CRA send a request for information to the self-employed person before immediately proceeding to send an erroneous assessment?
(C) By administrative practice, does the CRA still require T4A slips to be issued by the payor regardless of the type of recipient and the payment amounts?
CRA Response to Question 22(A)
Adding a line to the current layout of our form would require more analysis.
We need to determine whether such an addition would be useful and whether additional information should still be submitted from taxpayers to ensure that the income has been properly reported.
CRA Response to Question 22(B)
The Matching Program verifies that information slips filled in by a third party, such as an employer or a bank, match the income reported by taxpayers. Payors and financial institutions provide the CRA with a copy of the slips issued to taxpayers. The CRA then uses that copy to verify tax returns that have already been assessed.
All tax returns are reconciled with the slips issued by third parties. If there is a discrepancy between the income reported by a taxpayer and the income reported by a third party, the CRA may contact the taxpayer or the taxpayer’s authorized representative by mail or telephone for clarification.
If the CRA determines that an adjustment is necessary as a result of that review, a notice of reassessment is sent to the taxpayer.
Where we are unable to determine if the income has been correctly reported, we ask our staff to contact the taxpayer or the taxpayer’s authorized representative for further information. The latter then submits the relevant documentation such as a copy of the statement of income and business expenses or other information judged to be satisfactory. However, if the taxpayer or authorized representative fails to respond or submit the required documentation, we will add the income to the taxpayer's return.
If the taxpayer or authorized representative complies with the request for information after the notice of reassessment has been issued, the necessary adjustments are made.
If taxpayers consider that the process outlined above is not being followed as it relates to them, they should go directly to the Assistant Director, Compliance, of their Tax Services Office.
Response prepared by:
Daniel S. Desjardins
Reconciliation and Cross-referencing Section
Personal Returns Branch
CRA Response to Question 22(C)
The tax provisions related to the requirement to file a T4A are worded in extremely broad terms and apply to any person, whether a corporation or self-employed person, who pays fees greater than $500 to a recipient, whether a self-employed person, a corporation or a partnership. Furthermore, no provision of the Act or Regulations restricts the use of the T4A to employment income or employment-related benefits. However, the CRA does not require the issuance of a T4A in the situations listed under the heading "Do not complete a T4A slip in the following situations" on page 4 of Guide RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary.
Nor does the CRA require that a T4A be issued in the following circumstances:
- Where the payment is less than $500, to the extent that no tax is withheld on the payment; and
- Where services are rendered to an individual, in a personal capacity, by a professional or any other person who practises a trade, or where services are rendered for the repair or maintenance of the principal residence of an individual.
However, this administrative practice could change because, as indicated at the 2009 Conference, we are conducting a study on this subject.
Response approved by:
Michel L. Pilon
Legislative and Technical Support Section for Information Returns section
Information Returns Division
Person in the Income Tax Rulings Directorate:
Nancy Turgeon, CGA
(613) 948-2230
2011-041221