Written by Jamie Golombek, June 2005
A Companion Advisor article

With tax season now behind us, many of your clients have likely received their notices of assessment from CRA by now. And while you may not have been directly involved in their tax returns, you may be able to help your clients keep track of key tax-related information throughout the year to ensure that nothing is forgotten come next season's return.

A tax case decided last year, Gagnon v. The Queen [2004 TCC 530], emphasizes the importance of ensuring that all taxpayers, even those who use a third-party service or accountant to prepare their returns, take a personal interest in ensuring their filing is correct and fully reports all income.

Under the Income Tax Act, if you knowingly, or "under circumstances amounting to gross negligence," make a false statement or omission on your tax return, you are liable to penalty of 50% of the tax omitted. Paul Gagnon learned a hard lesson about carefully reviewing his return before signing it.

The CRA assessed Gagnon a gross negligence penalty for failing to include a dividend in the amount of $75,000 in his 2001 income. The CRA claimed that the dividend was a significant omission from his return as it represented over 30% of his total reportable income in 2001.

Furthermore, since Gagnon was the sole shareholder of the corporation that paid the dividend and was also one of the directors who declared the dividend to himself, the CRA felt he ought to have known about it and therefore reported it in his tax return. While Gagnon did not deny failing to report the dividend, he blamed the omission on the departure of the company's bookkeeper, who failed to prepare a T5 slip reporting the dividend to Gagnon before he left the company. Gagnon claimed he simply "overlooked" the dividend when he reviewed and signed his return.

The judge, however, admonished Gagnon, explaining that "a payor corporation may, for whatever reason, fail to issue a T5 form to a shareholder but the shareholder is still liable to report the amount of the dividend, for the taxation year he or she received the dividend."

While the judge was satisfied that Mr. Gagnon did not "knowingly" omit the dividend in his return, he felt that "the amount of the dividend ought to have struck a chord with Gagnon when he reviewed and signed his tax return."

He concluded that the dividend omission was due to Gagnon's gross negligence and therefore, the penalty was upheld.

As advisors, we can take a proactive role in ensuring clients have all the information they need to properly report all of the investment income and capital gains on their tax returns. While clients will automatically receive T5 and T3 information slips reporting interest income, dividends and mutual fund distributions, many clients often don't realize that they need to report the capital gain or loss from each disposition during the year.

This fact is most often lost on retirees who may have set up systematic withdrawal plans (SWPs) on their mutual fund investment accounts to provide a regular cash flow each month. Many of these clients are under the mistaken impression that any tax reporting associated with such SWPs is included on the T3 or T5 slip issued by the mutual fund company. As advisors, however, we know that these slips only report to the client the distributions received, even if reinvested, from the funds underlying the SWPs - and is only part of the tax reporting required.

Since each SWP payment is actually a redemption of fund units or shares, we should ensure that clients understand the need to report all capital gains annually from their SWPs, before the CRA nails them with a gross negligence penalty for underreporting their income - a penalty clients may ultimately hold you partially responsible for if you haven't properly educated them about the tax consequences associated with their investments.

This article originally appeared in Advisor's Edge Report. Jamie Golombek, CA, CPA, CFP, CLU, TEP, is vice-president, taxation and estate planning, at AIM Trimark Investments in Toronto. Jamie can be reached at Jamie.Golombek@aimtrimark.com.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this article are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

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