Canada taxes special assessment, can you help me understand the letter?

Tax Topics
1

I’m not a tax professional, i’m just looking for help.

I got a special assessment from CRA. I’m going to take this to my accountant to help with, but he’s away right now so I can’t ask him any questions until probably after labour day.

CRA asked for the below
Professional income (loss) (line 13700 of the tax return) - 2021 tax year
Business income (loss) (line 13500 of the tax return) - 2022 tax year

Is professional income the income I made from my day job where I receive a T4?
And is business income just the amount i make from my small business? (registered as sole-proprietorship)

So do they just want information for my work income in 2021 and my business income in 2022?
I’m confused by the words professional income and business income.

Please help ! I’m stressed

2

Not t4 income just from your small business. income before and after deductions

4

Thanks, but can you explain what the distinction between professional and business income is?

5

business like accounting
profession like a plumber

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6

Perhaps being a business is better identified as being a registered, Provincial or federal entity, which could be a plumbing business. Yet a professional income is identified as income other than employment income T4. Say you are a employed plumber T4 and do side jobs without having a registered company.

7

@ronda.medina
Take a look at your copy of the last tax return. There will be a form T2125 to report your proprietorship income (it could be 5-10 pages). On that form, you (or your accountant) must choose whether to report the income in Part 3A (business) or in Part 3B (professional). You can’t report both. If Part 3A is filled out, it shows up on line 13500 of the T1. If Part 3B is filled out, it shows up on line 13700 of the T1.

CRA’s letter is a generic/form letter, and it lists both lines 13500 and 13700 so that they don’t have to use two different forms when requesting this information. The supporting documents they want you to send will be the same, no matter whether you reported your income in Part 3A or Part 3B.

(I might disagree with @David_R_Officer re: what is considered “business” vs “professional” but that is irrelevant to @ronda.medina 's question)

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9

Thank you Nezzer!

So my question now is, are they requesting information for both tax years?
Professional income (loss) (line 13700 of the tax return) - 2021 tax year
Business income (loss) (line 13500 of the tax return) - 2022 tax year

Or do i only report one? In my case, professional income is better suited, so do i only need to submit for the 2021 year? the asking for 2 separate years is what’s confusing me here

Thanks!

10

Based on your original post it sounds like they’re asking for self employed info for both years so I’d suggest enjoying the rest of your long weekend and connect with your accountant when they are back. (S)he will be able to explain exactly what is required (and may help you with your response, as many of us do).
You’ve got 30 days from the letter’s date + usually an extra 15 baked in so no need to panic unless that letter was dated quite a while ago…

11

The difference between professional and business income is explained in the T2125 guide.

Some professionals before 2017 that had to include work in progress could make an election not to included WIP:

  • an accountant
  • a dentist
  • a lawyer (including a notary in Quebec)
  • a medical doctor
  • a chiropractor
  • a veterinarian

This should give you an idea what CRA thinks a professional is.

My guess is that your accountant filed you income in one year as professional and the other year as business income. Maybe that even triggered the audit.

12

As @LMK noted:

And I agree with @Rein :