It is normal to forget certain things, such as reporting some income especially if it is an insignificant amount. If such an error is genuine with no intention to elude taxes, the Canada Revenue Agency (CRA) may even forgive the taxpayer. However, if it is a recurrent error, any tax authority, including CRA will not be so forgiving, and may impose severe penalties.
These frequent failure penalties are not only applicable in the case of unreported income but also repeated delay in filing returns, and other such tax situations. Frequent tax failure can result in significant penalties and interest on unpaid taxes.
The following is an overview on CRA’s penalty policy in respect of frequent delay in tax filing, unreported income and other such tax situations.
CRA Canada Tax Penalties on Certain Situations
Penalty in case of Late Filed Returns
Most Canadian taxpayers are required to file their Canadian tax returns by April 30. In case of self-employed individuals, the tax returns must be filed by June 15 , however, any balance owing should be made by April 30. When the due date falls on a Saturday, a Sunday, or a public holiday recognized by the CRA, the return is considered on time if it is postmarked on the next business day.
If taxpayers fail to file within the deadline period and owe any taxes, the CRA begins to charge a penalty of 5% on the unpaid amount plus an additional 1% for each month the return is late, for a maximum of 12 months.
Furthermore, if this failure is a repeated failure within a three year period, the applicable penalty is doubled to 10% of the tax balance due, with an additional 2% charge per month for a maximum of 20 months.
To avoid these penalties, an individual should file the return on time even if he/she cannot pay the full balance owing on or before the deadline.
If taxpayers do not file returns on time, the goods and services tax/harmonized sales tax (including any related provincial credits), Canada child benefit payments (including related provincial or territorial payments), and old age security benefit payments may be delayed or stopped.
Learn more about Canadian Tax Benefits
Penalty in case of Unreported Income
Failure to report income leads to penalties and daily interest. The CRA may also subject the individual to gross negligence penalties or prison time if he/she fails to produce the amount owing. In some drastic situations, the CRA may garnish wages; ruin one’s credit score; and similar measures. Do not forget to report any foreign income, even if it is not a significant source of income. (Learn more about Canada Tax Reporting of Foreign Income)
Repeated Failure to Report Income Penalty
If a person fails to report an income above $500 for the second time in a four-year period, it is considered as ‘repeated failure’.
This ‘repeated failure’ could lead to a penalty amounting to the lessor of:
- 10% of the unreported income in the taxation year, or
- 50% of the difference between the understated tax (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report.
This could lead to penalties higher than the usual penalty amount calculated as 10% of the tax due on the unreported income. This would mean that the penalty applies regardless of any available deductions or tax credits, if taxes were withheld or the income was/is non-taxable.
Furthermore, the province will apply a separate penalty on that unreported income equal to the Federal amount, so the individual is actually subject to a total 20% penalty on the unreported income or the 100% of the difference (as mentioned above), whichever is lower.
Computing the Penalty in case of Repeated Failure to Report Income
For example, a Canadian resident taxpayer had a tax preparer prepare his tax return for the year 2014. He misplaced one of the T5 slips, and thereby failed to report an insignificant amount of investment income of $1,000.
In the 2016 tax year, he received a net lump sum benefit of $100,000 with tax withholding of $25,000. Since it was not a regular source of income, he failed to provide his tax return preparer details of this income.
The CRA assessed the filed tax return for 2016 and noticed unreported income of $100,000. This causes the CRA to further review the previous tax returns to confirm if it is a regular behavior, leading to the CRA noticing the failed reporting of $1,000 in 2014.
Even though the amount for 2014 is insignificant and the taxes for the 2016’s unreported income were actually already paid, the CRA will still assess a penalty. If the additional tax to the taxpayer amounts to $36,000, each of the Federal and Provincial penalties will be calculated as the lessor of:
- 10% of the under-reported income ($10,000)
- 50% of the difference between the tax liability and the tax withheld ($36,000 less $25,000 x 50% or $5,500)
The lessor of the two calculation is $5,500, Based on this calculation, the taxpayer is subject to a penalty equal to $11,000. ($5,500 Federal penalty and $5,500 provincial penalty).
Penalty in case of Failure to Complete Information (Gross Negligence Penalty)
The CRA also charges a penalty in case of incomplete or incorrect information on the filed tax return otherwise known as the ‘Gross Negligence Penalty’. If an individual knowingly or under circumstances amounting to gross negligence, made a false statement or omission on their return for the year, he/she could be subject to a penalty equal to the greater of:
- 100; or
- 50% of the understated tax and/or the overstated credits related to the false statement or omission.
Additionally, this penalty applies every item of missing information.
Note that, the CRA will not apply any penalty if the reason was genuine, such as inability to collect information from the third party.
Interest in case of Unpaid Tax
The annual taxes need to be paid in installments throughout the year as ‘tax withholding’, or as an ‘estimated advance tax amount’ on the due dates. If the taxpayer fails to make the payments, all late payments will be charged an interest set on quarterly 90-day Treasury bill compounded daily.
Taxpayers should note that this penalty does not apply if the inability to pay taxes was due to financial hardships (unable to provide for basic needs), or certain life changing events, such as: severe, life-threatening diseases or health conditions, or due to CRA’s delay or errors.
Cancel or Waive Penalties or Interest
The CRA administers legislation, commonly called the taxpayer relief provisions, that gives the CRA discretion to cancel or waive penalties or interest when taxpayers are unable to meet their tax obligations due to circumstances beyond their control.
The CRA’s discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made.
Alternatively, the taxpayer may want to file an amended return using the voluntary disclosures program. The Voluntary Disclosures Program gives the taxpayer a second chance to change a tax return previously filed or to file a return that should have been filed and apply to the Canada Revenue Agency (CRA) for relief of prosecution and penalties.
In summary, it is highly recommended to reach out to your tax practitioner in case a notice is received from the CRA. The tax practitioner will review the situation and consider possible ways to minimize the tax penalty burden, such as filing an amended tax return, requesting taxpayer relief or filing a voluntary disclosure.
AG TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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