Net Worth Assessments
Canada has a self-assessment tax system. Each taxpayer is expected to complete an accurate tax return, declare his or her income, claim allowable expenses and pay tax on the taxable income.
There are times when the CRA goes behind the returns that have been filed, or when a taxpayer has failed to file returns, and a net worth assessment is often the result. This might be due to a number of factors such as:
Books and records are inadequate, inaccurate or unreliable
The Taxpayer is involved in a Cash-based business
Third-party information indicates unreported revenue. This might be a result of an audit of someone you do business with that discloses payments that you didn’t report, or an anonymous call from a disgruntled neighbour, partner or former spouse
CRA uses a two-step process to create a net worth assessment. First, CRA looks at a taxpayer’s assets and liabilities at the beginning and end of the tax year, and determines the increase or decrease in the taxpayer’s net worth. Second, CRA determines the taxpayer’s expenditures for the tax year through an analysis that utilizes Statistics Canada data on the average expenditures of a comparatively-sized household and information provided by the taxpayer. CRA then determines that the taxpayer’s income for the tax year is equal to the increase in the taxpayer’s net worth plus the taxpayer’s expenditures for the year. If a taxpayer’s net worth increased by $100,000 and the taxpayer only reported $50,000 of income, the taxpayer would be assessed or re-assessed for the outstanding amount of tax, interest, and possibly penalties for that increase in net worth.
Like any notice of assessment, a taxpayer has a right to appeal the assessment or reassessment by filing a notice of objection. Often there are errors in the manner in which the calculations in a net worth assessment are done – sometimes obvious errors, but more often errors that are only obvious to those who know what to look for. Sometimes there are increases in net worth that are not the result of unreported income.
We can review the net worth assessment, put together proper computations of income and help you explain the increases in net worth to help you avoid taxes, interest and penalties.