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There's gold in old tax returns

by Evelyn Jacks

When it comes to taxes, knowledge is cumulative and best acquired with purpose. So when you learn something new about your available tax preferences, it’s often possible to adjust returns filed for previous tax years.

A couple of years ago, for example, I was answering questions on an open line radio show, when a young woman called in to say that she had just lost her father to cancer and that she was worried about her mother’s meagre finances. We discussed the help available for the disabled and caregivers through the tax system and whether the Disability Tax Credit had been claimed when her father became ill three years ago. If not, I suggested that those prior years’ tax returns could be amended to make the claim, if her father’s doctor verified that his condition had met eligibility standards. This required the doctor to fill out Form T2201 to indicate that the father’s disability had been severe, prolonged and markedly restrictive of daily living activities.

Several months later, I received a wonderful thank-you note from the grateful widow. Her daughter had followed through and made the adjustments to the prior-filed returns, and she received thousands of dollars in tax refunds resulting from the missed Disability Tax Credit. All that had been required was a simple Request for Tax Adjustment and submission of the T2201 form.

In the most difficult times, the tax system can come to the rescue. Under the Canada Revenue Agency’s (CRA) Fairness Package, it has been possible for taxpayers to request adjustments to their tax returns to recover overpaid taxes due to errors and omissions, back to tax year 1985.

However, the March 2004 federal budget proposed to shorten that window of recovery time. Starting in the year 2005, taxpayers may only adjust their returns for a period encompassing the 10 preceding tax years.

Therefore, if you missed common tax deductions and credits on prior-filed returns as far back as 1985, now is the time to request an adjustment on your own return, that of immediate family members, or to mention this new deadline within your circle of influence – especially to seniors and others who may have missed safety deposit box claims, medical expenses, disability credits, transfers of credits between spouses, and other tax preferences over that period. This can be a very lucrative exercise. Here’s how to do it:

  1. Review tax returns of at least the previous three years, matching life-cycle circumstances with the common error checklist, which appears on the next page.

  2. If you think something was missed on a
    prior-filed return, call your tax practitioner to make an adjustment or do it yourself using form T1-ADJ, available on CRA’s website (http://www.cra-arc.gc.ca).

  3. Have supporting documentation available in case of audit.

Speaking of audits, your ability to adjust tax returns extends to a guilty conscience as well. The Statute of Limitations under the Income Tax Act limits the time CRA may audit or reassess personal tax returns to three years – the current year and two years back, unless fraud is suspected. However, the taxpayer can avoid gross negligence or tax evasion penalties by voluntarily complying with the law to correct errors or omissions that resulted in the overstatement of deductions or understatement of income, or other errors that are not in the taxpayer’s favour. This should be done at least for the normal reassessment period, using the same process: file Form T1-ADJ and request that your error or omission be corrected.

If taxes are owing, those amounts plus interest and late filing penalties will be payable, unless one can plead hardship such as an illness, death of a family member or other factor beyond your control. Under the Fairness Package, it is possible for a Fairness Committee to assess each individual hardship case and decide whether interest and penalties can be waived. It pays to have been a “model taxpayer” when situations like this arise.

It’s also important to use the Fairness Package provisions to file tax returns back to 1991 to maximize unused RRSP contribution room due to missing returns or to record unclaimed capital losses back to 1985. Speak to your tax and financial advisors about this opportunity as well. But remember, any time you request an adjustment, an opportunity for an audit arises, so make sure your documentation is in order.

Remember, never file a second tax return, and when you get your Notice of Reassessment, always double-check the new unused RRSP contribution room that may result from the adjustment, and all your carryover balances for future use.

One of the best ways to leverage your “gold” from prior years’ returns is to invest wisely to reduce the taxes you pay on your next income return with, for example, an increased RRSP contribution.

The moral: If you want to be good at understanding your family’s taxes, tax-efficient investment strategies and at saving the most tax dollars now and over the long term, make it a point to be in the know by seeking out tax news with a purpose – that is, when life-cycle changes happen. Then, be an advocate for those who need to know, and recover overpaid taxes.

Evelyn Jacks is the author of 30 best-selling books on the subject of personal income taxation, and the President of Knowledge Bureau, Inc., Canada’s leading professional education publisher in the tax and financial services industry, specializing in delivering courseware and information services to knowledge-based practices. For more information call toll free 1-866-953-4769 or visit www.knowledgebureau.com.

This article is written to be of a general nature and neither the author, her company, employees, subcontractors or others associated with The Knowledge Bureau can take responsibility for any results, positive or negative, taken by any persons. While the author received a fee to write this article, she is not in the business of providing advice on investment products and is not registered and licensed to do so, nor does the author have any compensatory relationship, or beneficial ownership regarding the sale of investment products discussed herein


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