Here is the video transcript from the Voluntary Disclosure and HST for Real Estate Investors Presentation Presentation
Speaker 1: We’re going to bring up JP. Apparently, JP and Fabio are going to run in from the side of the hall here. So John Paul – sorry, it’s not JP and Fab. It’s John Paul McDonald and Fabio Campanella. I haven’t even congratulated Fabio yet. I think he just had a baby two days ago. Did he? What day? On Thursday. So he had a baby on Thursday, but he’s obviously committed to all of us. So we don’t know how happy your wife is right now, but here is Fabio. So these guys know their stuff. We’ll exit the stage and let you guys take over.
Fabio: My wife did all the work, so…I give the encouragement.
John Paul: So I am John-Paul and this is Fabio. I’m the McDonald and he is the Campanella. Today, we’re going to be talking about topics from the slides.
Fabio: We also have an IT service department as well.
John Paul: So today’s lecture or today’s presentation is to talk about pretty much voluntary disclosure program. It’s a very interesting topic that I’m sure some of the people here could use. HST on new bills this is something that we run into a couple times a month. It’s one of the scarier topics that CRA could really get you on. We’re going to talk about CRA’s annual office audit letter campaign.
Fabio: So really, the main purpose is to help you spot problems before they occur, but if they do pop up, we’re going to teach you how to fix them.
John Paul: So Campanella McDonald’s, Fab and I, Fab called me about five years ago and said he wanted to start a business. I said sure let’s do it. Now we’re a four partner firm and we’re adding services such as business valuation. We have a SHRED department and we’re looking at some other stuff in the works. So next year will be a bit different again.
Fabio: So managed businesses, independent professionals. Independent professionals being real estate agents, mortgage brokers, so on and so forth. I’d say about a third of our practice is actually concentrated specifically on real estate investors.
John Paul: So we have to for you guys specifically. So again, today’s topics, we’re going to go in voluntary disclosure program, what is it, who is it going to be applicable to. We’re going to look on HST on new builds only, HST on – it’s one of the most complex topics. So we’re going to focus specifically on new builds for HST and how it to the audience here. And again, we’re going to look at the audit campaign letter. That is CRA pretty much telling us who they’re going after this year for the 2015 and 16 files. So what is the voluntary disclosure program? It is a special program at the CRA. What it is, is if you have “messed up”, then you have the ability to combat* CRA and say, “We messed up and we want to fix kind of what’s happened in the past couple of years.” There’s some limitations to this, but one of the biggest things with compliance – actually, before we go, we don’t have slides for you guys. So at the end of the presentation, we will give you the opportunity to get all the slides. So no need to take notes or anything like that. The program itself is designed to limit prosecution and penalties for people that have filed incorrect returns. One of the biggest things that happens is if you have an incorrect filing, you owe the tax audit three years down the road, but CRA comes back and* really, really heavy with penalty. In a lot of cases, what we see is if you saved $500 on taxes that you really should have paid, you owe $1000 because the interest of the penalties tends to equate to what you actually saved. So this program…
Fabio: So we use the program a lot. I’m sure you’ve all heard – if you have a television or a radio, I’m sure you’ve all heard [inaudible 04:43] sort of scare tactics, where they’re talking about the CRA coming after you. They have disclosure program which is going to work a miracle. So in the end, it’s not really going to do any miracles. If you’ve noticed that you made a mistake or if you’ve outright even made it a fraud, you can use this program to voluntarily come forward with the mistakes, correct the past, and they can actually – there’s actually legislation that allows the CRA to forgive penalties and to avoid any particular prosecution that may come from, let’s say your tax fraud or things like that.
John Paul: Yeah, we’re dealing with one right now, who’s a home builder. He’s actually facing – how many years in jail? Yeah, quite a few. So this program is used primarily for prosecution and saving the penalties.
Fabio: The other beautiful thing is that we can make an anonymous disclosure. So if you come to us or if you come to a lawyer and you’ve made some errors in the past, we can make an anonymous disclosure without giving the tax payer’s name or identification, just to see if they’ll even take it.
John Paul: Show of hands, who might have had a…okay, we have a lot of business in this audience. So summary, it’s a special program that’s designed to help you guys, help actually the public, come clean about what might have gone wrong in the past. There are a lot of accountants out there that shade clients if they’re wrong, have used giving them poor advice. There’s people new to real estate that try and write everything off with people such as Nick* telling them that you can write everything off. So again, this is a one to come clean with the government and say I get it wrong, but don’t penalize me and don’t put me in jail, and we’ll do it good* pulling forward.
Fabio: Pretty much. So the next thing, new build. I’m sure if I ask for a show of hands…
John Paul: Who here has – show of hands – rental property, new build construction, who’s bought* one?
Fabio: Like a condo…
John Paul: New condo.
Fabio: So HST on new build properties, HST on major renovations, a really complicated area of taxation. It’s [inaudible 07:21] HST legislation, non-income tax legislation. So it’s an even more complicated – for today, what we’re going to concentrate on only is house purchase from a builder, not you’re not moving into. So we see this all the time and it’s going on all the time. So everybody knows anybody who’s bought a new build property, they know that if they mark off that they’re moving into it or if they have a direct relative moving into it, you’re eligible for up to $30,000 of HST rebate, using the GST/HST new housing rebate program. Basically, the property has to be your primary place of residence. You [inaudible 08:01] condo and you’re going to move in, or you buy an apartment for your kid and your kid is going to move in. What’s happening is everybody is falsely claiming that they’re moving into these properties, but then they turn around, they change their mind, the property closes and they lease it out to someone. The builder will apply for the HST rebate in the background and he drops the price of the property. So everybody is doing it. It’s nothing to be ashamed of here. Now the CRA is actually catching everybody…
John Paul: They know everybody is doing it.
Fabio: Yeah, they know everybody is doing it. The CRA doesn’t tell you, it doesn’t tell the public exactly what they’re doing or how they’re doing it. You can tell from the symptoms of the problem, aka, they’re catching everybody, that they are concentrating on this now. They have access to my registry. They obviously have access to your tax return. They know you haven’t moved into the property, because you bought the property as a new build and as a primary residence, but you’re reporting a different residence on your tax return. Pretty straightforward.
John Paul: We think someone at CRA or a team is actually sitting there going through condo buildings, new buildings. They’re going unit by unit and they’re matching up addresses.
Fabio: It’s obviously happening most in places like big, big urban places in Toronto, Vancouver where there is a lot of action especially in the condo market. So what’s happening? You buy this property. You buy it at a lower price and then boom, all of a sudden, you get a letter in the mail saying give us $30,000. So everybody panics.
John Paul: Plus interest entitlements.
Fabio: Yeah, plus interest entitlements. So everybody panics. They think they’re in the whole $30,000. Realistically, you could have avoided the problem in the beginning. So the first things first, don’t lie on your application because you’re going to get caught. The second thing is if you’re going to rent the property out, there is another HST rebate available to you. You just pay the HST upfront and then you make an application for a similar credit on rental properties. So if you put somebody in for a year, you come to your account, you go to your lawyer – you go to anybody who knows how to fill the forms out. You provide them with a bit of background and you’re going to get that money anyway and you’re going to avoid penalties in the first place.
John Paul: The only caveat with this is that you have to fund the HST upfront. So open the line of credit to your house and pay the HST with it, and then get the refund. The refund is the same whether or you move into it or not. If you have a renter, you’re getting the application filled by CRA, you’re getting your money back.
Fabio: So the only caveat, and I’ve seen this before, is some people buy these condos downtown or they’ll buy a new build property and then they’ll Airbnb it. If that’s what your plan is, you’re not going to get that rebate. You need actually to have somebody move in, and it’s their primary place of residence. So if you’re going to do short term rentals, there’s actually other tax considerations. There’s property tax considerations. The municipality can actually deem the property via commercial property and double your property tax, but that’s a whole other talk. So once again, it’s a pretty straightforward process. You just make the application and you get the check down the road. The only problem with it is you have to fund the HST at the beginning. So you’re [inaudible 11:24] for a couple months, $25-$30,000. Now the other thing too, the reason that we brought up voluntary disclosure program, is that this type of filing actually qualifies for the voluntary disclosure program. So if you are this situation and you want to avoid penalties, you can actually prepare all the documentation and submit it under a voluntary disclosure. I wouldn’t necessarily say you to need to do an anonymous disclosure, because they’re probably going to accept it. So if a year has gone by and nobody has sent you a letter yet asking for money, you can come forward, make the application, and the CRA will actually offset the credit that you received in the past with the credit that you’re supposed to get now. You should be good on not paying any penalties. If a year hasn’t gone by, you can take your chance and wait for a year to go by because one year late is one of the conditions to file voluntary disclosure, or you can just make the proper filings right now and hope that they won’t apply a penalty. I’ve seen in the past that they actually don’t apply the penalty if you come forward, even without the voluntary disclosure.
John Paul: What’s the time limit on the file leaves HST application? What if you try to file it three years down the road?
Fabio: They’re accepting it, they send you the letter and they find out that you’re making improper application for the new home HST credit, they’re actually allowing a late filing.
John Paul: So a lot of you in the room, this might not be applicable to you, but this is going to be applicable to someone that you know. Nine times out of ten, the person that you know that bought a condo, they bought it without paying an HST, claimed it as principal residence. CRA, we think, is going to come back at them, ask for about $40,000, and that person is going to cry. When they could come now, come clean, file the correct applications and they’re free and clear. So take that away, past the good news on to your friends and family that might have or be in this situation.
Fabio: It’s not an expensive fix, so you don’t need to run to a [inaudible 13:38] tax lawyer to take care of something like this. It’s a pretty easy fix.
John Paul: So CRA’s annual office audit letter campaign. What is this? This is something that came about seven years ago. CRA audit, how do they audit? They’ve always said it’s random, pulling out of the hat. It’s not. It hasn’t been for seven years. In some cases, it still is, but they have moved over to what’s called a risk based audit approach. So last year, this year, what they’re focusing on is – I should probably stay in focus with this. This is designed for behavioral changes. That’s the focus of their audit campaign. That is pretty much – it’s a scare tactic. They’re sending out 30,000 – they did in January. Anyone get a letter from the CRA this month? You got one? Last year? Intent to audit letter. It doesn’t mean you’re being audited. It means that you fit the criteria for the risk profile that they’re looking at. So it does not mean 100% you’re getting audited, but it is based on risk. It is an intent to have such as yourself, come forward with any potential mishaps or misfilings that might have happened in the past. One of the caveats for the voluntary disclosure program at the beginning when we were discussing that, is you cannot file a voluntary disclosure if CRA has contacted you. So if you haven’t filed three years worth of taxes and you want to file them under the voluntary disclosure, if CRA has contacted you, you are not allowed. You are at their mercy. This attempt to audit letter does not fall under their program of…
Fabio: It will disqualify you.
John Paul: Yeah, it will disqualify you from voluntary disclosure. So what are they going after in 2016? This is the really interesting one. We get asked this all the time. What happens if I have business losses? What happens if I have rental losses? Employee claiming expense, we’ll talk about after. Those two, CRA are going after. We’ve seen a huge jump in it over the last couple of years and it looks like we’re going to see it again. So if you’re getting the advice to just wait* everything through, expense, expense, it’s bad advice. CRA knows you’re given the advice. They know what you’re doing. They’re going to want to see your documents. So come clean. Employees claiming employment expenses.
Fabio: Yeah, so if you are an employee, you get a T2200 at work allowing you to claim expenses on your personal tax returns; auto expenses, home office, so on and so forth. Over the years, people have become really aggressive with that and the rules are actually very specific. If you’re not following the rules specifically and you’re audited, then obviously, we know the drill; they disallow things, they attach penalties, they attach interest. The CRA, once again, doesn’t tell us how they make selections until now, until this particular program. Once again, the three things that they are looking at specifically – we can actually send you a copy of the letter because they send them to all sorts of different accounting firms. This is known as [inaudible 17:08] business losses. You got a side business and you’re working a T4 job. Your side business never gets money. It’s always losing money. It’s [inaudible 17:18] T4 income and you’re getting an income tax refund because of that. That’s 100% going to be scrutinized. Landlords claim consecutive rental losses. Just like everybody in here knows, real estate needs* money. Nobody is in the real estate game to lose money.
John Paul: Anybody? Show of hands.
Fabio: Everybody here is ready to lose money. Over the long run, even the simplest landlord-tenant relationship, if you buy a property, you lease it out, nobody is going to lose money every single year. It’s very, very unlikely. So people who are constantly claiming rental losses are going to get scrutinized by the CRA, especially if those rental losses are being carried against another source of income, triggering a tax refund. They’re going to be looking at things like repairs and maintenance. They’re going to be looking at things like low rents. For example, if you have your cousin in there and you’re paying under market rent. Those are the types of things they’re looking at. The third one is employees claiming employment expenses. Like I said before, you get a T2200 from your work. It says you can write off a little bit of car, a little bit of this, a little bit of that. If you’re getting too aggressive off that and you’re not documenting that well, they’re looking at that as well.
John Paul: This one is actually an interesting topic because we rely on our employers a lot. Who in here [inaudible 18:48] get a T2200? Okay, so we have a fair amount of people. You put a lot of reliance – your employers fill this out. This has to be correct. We’re seeing that they’re actually not – there’s a [inaudible 19:03] last year that asked us to fill theirs out?
John Paul: Because they didn’t know – their HR department actually didn’t know how to fill them out. So review the document. Talk to your accountant about what expenses you’re actually incurring and make sure it adds up. Because we had one guy last year, the whole company got audited. CRA now knows the companies don’t know how to fill out the 2200s and they’re auditing the companies, and then they’re going after the employees. So you don’t want five – they were disallowed five years of expenses that they’d taken, and now they owe 20, 30 grand for back taxes. So again, review what you’re getting from your employer and just kind of make sure it makes sense.
Fabio: Once again, the big thing here in this room is going to be the landlords who claim consecutive rental losses. So if you do have – if you have been taking extremely [inaudible 19:58] positions on your rental properties year over year over year, and you’ve been claiming rental losses year over year over year, you may have received one of these letters. Once again, if you’ve received this letter…
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