Proving The Source of Your Funds – The Importance of Documentation
There are two facets to successful financial transactions. The first is doing only what the law allows you to do. The second is being able to prove what it is that you in fact did. Many people think of the first and end up getting hurt by the second. When challenged by the Canada Revenue Agency, it doesn’t matter whether what you did and how you reported what you did were correct. Because the CRA can make assumptions and then require a taxpayer to disprove those assumptions, you must also be able to provide proof of what you did. Failing this, penalties, interest, and additional taxes apply.
Let us consider the example case of Mr Bourmand (see the summary Here). The taxpayer’s family member died (a non-Canadian resident relative) and Mr. Bourmand received an inheritance. We all know that inheritances, in Canada, are received free of income tax (income tax and other taxes may apply to the estate of the person who died, for example, Ontario’s EAT). Mr. Bourmand, knowing this and being on the right side of the law, did not report the amount he received from a foreign nation as income because these amounts were his inheritance payments. The CRA challenged him and, after conducting a net-worth audit assessment, assumed that all the amounts were income from a foreign business. This meant that all of receipts were taxable income; not tax free.
This case, at the expense of this and many other taxpayers, highlights the importance of being able to provide proof that is acceptable in court. Without the right documentation, the Court has no choice but to rule in favour of the Canada Revenue Agency. The CRA had assumed that over $3.6M was income and, by not getting all the necessary documents in order, Mr. Bourmand ended up having to pay hundreds of thousands of dollars in taxes, penalties, and interest. Lack of documentation, not just for the transfer for but for many other aspects of financial dealings, were what lost Mr. Bourmand his case.
When dealing with significant amounts of money, especially when you or the money is coming from outside of Canada, make sure to consult with a tax expert. This way you know what kinds of documents you need to prove your position. An ounce of prevention will save you and your family money and stress. Faris CPA has experts who can advise you on the types of documents you need to obtain and keep so as not to get yourself into tax trouble.
NOTE:Articles are for general information only and do not constitute tax advice nor can they be relied upon.