Social media latest CRA tool to catch tax cheats

Public information is fair game, says David J. Rotfleisch.

Privacy and confidentiality rights can’t be claimed over social-media accounts.

Living in a $2-million house, putting in an indoor pool and posting the pool construction photos to Facebook? Taking your fifth trip to Europe this year, with the kids, and posting photos to Instagram of the entire family eating gelato along Rome’s Spanish Steps?

Posting photos and write-ups of a luxury lifestyle to social media can get you into hot water with the Canada Revenue Agency (CRA) if you have been reporting for years that you have low income — or not reporting all your income. Your neighbours have been wondering how you can afford those twin Bentleys on a teacher’s salary; the CRA has been wondering, too.

Increasingly, the CRA is using business intelligence, big data and publicly available information to crack down on wealthy tax cheats.

These days, the CRA is monitoring the socialmedia accounts of suspected tax cheats. The CRA now also uses “text analytics” to help detect new tax-avoidance schemes. So what Canadians post on Facebook, Twitter or other social media can and will be used by the CRA to help them determine if a Canadian taxpayer is reporting all their income.

Whereas real-life stalking is illegal, “cyberstalking” isn’t. The CRA can look at socialmedia postings of any Canadian because you posted the information yourself. Privacy and confidentiality rights can’t be claimed over social-media accounts. You can check your privacy settings on Facebook, however.

In the 2016-17 report on planning and priorities, former CRA commissioner Andrew Treusch stated “data analysis and business intelligence are providing us with better insight into taxpayer behaviours, allowing us to spend less time and effort on lower-risk groups of taxpayers and focus our resources on dealing with deliberate non-compliance.”

In fact, the 2016 federal budget allotted $444.4 million over five years to help the CRA catch wealthy tax cheats who don’t report all their income. The program is expected to dig up $2.6 billion in extra tax revenue over that period.

The CRA classifies taxpayers based on the likelihood they may be evading taxes or under-reporting their income, with higher-risk Canadians being more likely to be audited. For example, wealthy individuals who do offshore banking or individuals working in cash-based industries are more of a target than T4 employees with no other sources of income.

If the individual is audited and their lifestyle, expenses and assets aren’t in line with their reported income and the person can’t explain the reason for the discrepancy, the CRA can and will assess additional income to the individual and will likely levy penalties. The CRA may even prosecute for tax evasion.

The CRA has various methods of indirectly calculating an individual’s income and then assesses applicable taxes, penalties and interest. One example is the net-worth audit. Essentially, the CRA will analyze an individual’s bank-account records for a period of time and calculate the expenses of the individual, as well as the change in net worth of the individual between the start and end date.

Presumptively, the increase in net worth and the expenses of the individual minus the increase in liabilities/debt the individual incurred over that period is the amount of income they earned. That figure is then compared with what the individual reported on their returns. The difference is assumed to be unreported income.

While this is an accepted method, it can be imprecise and the figure the auditor may arrive at can often be substantially different than an individual’s actual taxable income. This is especially so when the individual has received money from non-taxable sources, such as inheritance.

You can use the CRA’s voluntary disclosure program to report income you haven’t declared previously, but you have to initiate the disclosure before receiving an audit notice or notice of investigation.

If you’re being audited, the wise course of action is to call an experienced tax firm. It isn’t advisable to deal with tax issues yourself once the problem is serious and you have the CRA breathing down your neck.