Tax Law: Taxing on the Brain

There are two certainties in life: death and taxes.  Let’s talk taxes. 

Most people don’t understand our tax system and get very frustrated by it.

Our tax system is largely an honour system.  We have to file returns and are expected to report honestly.  The feds have little ability to cross-reference the information in our returns. 

Further, it is just not feasible for them to confirm every return.  It would be a monumental task, costing billions of dollars annually.

The flipside of an honour system is that there must be severe penalties for those who don’t have honour.  Otherwise, the system will fail.

Of course, we are all presumed to know the law.  That’s a fallacy, but that’s why there are accountants in this world.  The average taxpayer can’t know or understand the Income Tax Act.

The Act is the most complex law in Canada.  There are sentences three pages long!  One sentence, after rambling for half a page, says “but, for greater certainty” and rambles for another quarter page!  My English teacher called those “run-on sentences” and deducted marks.  Obviously, the drafters of the Act were not students of Tom Lawson.

If you really want to exercise your grey matter, read a section of the Act and try to figure out what it means.  There are exceptions to the exceptions to the exceptions to the rules.

One judge described a definition in the Act this way: “It is prolix in the extreme.  The persons who drafted that definition did not practise any economy of words.  One may well ask how many members of parliament understood the definition when it was made law by amendment to the Act.  It is so detailed; so particularized; so long and tedious and excessive in its use of language.”

I could quote an example, but I’d need my entire 500 word limit.

If your tax situation is more complex than typical T4 income, I recommend hiring a professional to help.  Here’s a few reasons.

If you get audited, the Act deems the assessment to be correct.  The onus is entirely on you to prove otherwise. 

It’s not enough to actually understand the sections of the Act.  For the few who can, there are also interpretation bulletins, regulations and case law to further interpret the Act.

If you owe money, you are charged interest, compounding daily, from the date the return should have been filed.  The kicker is that if they owe you, they pay simple interest at a lesser rate.

You may also be charged penalties.  If you’re really slippery, they may charge you criminally, where the fine is based on the amount of money that is owing as a result of the reassessment.  It’s not unusual to see a tax bill triple with the interest and penalties.

The bottom line: there’s nothing wrong with good tax planning.  However, pushing the envelope runs the risk of getting on the wrong side of the law, which will tax your pocketbook severely.