Tax department audit key factors

What does tax authorities know about you ?
… Here are the available tools and data bases available to Quebec tax department

Well known on the wealth key factors, the main tool of the tax department is the increase of your net working value and your declared income. Here are the steps followed by the tax auditor of Revenu Quebec.

The first step done by the tax department is the valuation of your wealth. For this particular purpose here are the data bases available to them. These data bases are split in two categories :

First, internal informations, what ever is available on your tax return :

Income “relevé” (T4, T5, …), bank statements from Canadian banks, investments statements, etc …

Second, external information :

Once a year Revenu Quebec make a request into its audit program to upload different data bases from other government departments. Revenu Quebec gets the following information:

Real estate : 
City valuation roles
Electrical accounts
Registre foncier
Cities construction permits

The Quebec registre foncier contains the list of all the properties and mortgages of the province. This registry is updated per each transaction signed at a notary office. The publication of these transactions is an obligation of Civil Code of Quebec.

Automobiles, skidoo, motocycles, boat, planes…
Société d’Assurances Automobiles du Québec files and registry
Federal registry on boat and airplane

Business (Corporations and Society)
Registraire des entreprises files on shareholders and board members.

The second step done by Revenu Quebec tax auditor consist on the validation of the following mathematical calculation :

Available income
=
Personal net working value

In more specific terms:

Your declared income

+

Your non taxable income
(Life insurance, Non taxable income insurance
Alimony)

+

Your other incoming money
(Loan, inheritance, donations, lottery)

=

Personal net value increase

It means your assets
(house, rental properties Chalet
Cars, motocycles, etc.…)

+

Consuming expenses
(Grocery, clothing, electrical,
rent or mortgage payments,
spare-time activities)

+

personal net working value 

And then, at the third step,

if this mathematical equation does not come in equilibrium, the auditor will mail a questionnaire named « financial situation statement and declaration ». this form is basically asking you to explain the difference between what came in and what came out of your pocket.

If ever you receive this letter, please consult an accountant or a tax lawyer.

Please do not ever try to tell me that this particular method is not legal.

Here are some judgments from tax court:

1) In default of having keeping proper accounting books, this method is accepted

2) In terms of tax right, the burden of the proof is on the taxpayer side.

That is means to say : you are guilty until you prove that you are not, in opposite of the criminal and civil rights in which the proof is the burden of the requesting party.

For the example: the proof that the government statistics does not apply to your way of consuming is
yours as well as the non taxable income.

 3) This method is called the last request one.

Once again, if you ever receive this letter, before answering or opening your books to the tax department : consult an accountant .

With the tax season coming up, you better be safe than sorry : so before mailing your tax return do this little exercise with your accountant help and review.

Believe me, it is worth it ….