Let’s talk about unreported income.
The tax system relies heavily on a trust system. The CRA expects you, as a Canadian Resident, to report all your worldwide income and pay tax on it. Yes, that rental property you have in Florida would also be subject to this.
But if you’re receiving those US funds in a US bank account, you might think that the CRA won’t see this and you might get away with not declaring the rental income. Although I am definitely a proponent for using the tax code to your advantage, once you understand how the CRA may catch you, you’ll realize there are some risks not worth taking.
One way that the CRA is watching you is through social media.
Imagine you just bought that brand new Audi you’ve been dreaming of your entire life. You decide to show it off on your public profile on Instagram and Facebook. The CRA agent reviewing your tax return searches you up on the internet and easily finds this, but sees that you’ve only reported $40,000 in income, and you claimed rent you paid of around $20,000.
Some simple math reveals that there is no way you’d be able to afford the payments on this car with the income you are declaring and boom, an audit has been triggered.
As a result, the CRA requests your bank statements (or gets them from your bank) and sees various large deposits. You might think that you can just tell them they were gifts. GOOD LUCK! With the CRA, you’re guilty until proven innocent. It will be up to you to prove that these were gifts.
The CRA will deem this as income and you will owe the unpaid tax, and lots of interest and penalties.
Definitely not a good situation to find yourself in.
If you are worried that you might have fallen into this trap, there is some good news. The CRA has a voluntary disclosure program. If you come forward first, they will be more lenient and you may just owe the unpaid tax.