Millions of Canadians file their tax returns late—and if you’re one of them, you may figure that with so many others in the same boat, surely the transgression can’t be too terrible.… Right? Well, no.
Assuming you have a refund coming, it’s not a great financial plan to let Canada Revenue Agency (CRA) hold onto your money, interest-free. But if you owe money to the CRA along with your delinquent paperwork, things get bad, fast: You could face hundreds, even thousands of dollars in penalties and interest.
What are the potential penalties if you don’t file a tax return?
To understand the depth and breadth of the financial trouble you could get into by ignoring your tax filing obligations, consider the following penalties. (Note this does not represent an exhaustive list.)
- Failure to file a tax return. If you owe money to the CRA, you will endure a late filing penalty of 5% of your unpaid taxes, plus 1% a month for 12 months from the filing due date. That’s just for the first strike. If you fail to file on time again within a three-year period, that penalty goes up to 10% of unpaid taxes plus 2% per month for a maximum of 20 months.
- Gross negligence, false statements or omissions on your return. Turning a blind eye to your obligations attracts a penalty of 50% of the tax owing. Add interest to that if you don’t pay promptly.
- Tax evasion. This is a criminal offence that involves intentionally understating income or overstating expenses, or hiding assets in Canada or abroad. It attracts a penalty of up to 200% of the taxes evaded and, potentially, jail time of up to five years. Tax evaders are fingerprinted and have a criminal record. This can put a big damper on your travel plans, employment and business ventures.
What are the chances of getting caught?
Pretty good. The CRA recently received more than $1-billion in funding to crack down on intentional tax evasion, and the effort is paying off, according to a media briefing looking at 2017–2018. Average jail sentences increased by 40% over the prior year, and CRA won higher overall conviction rates in evasion cases—95% compared to 89% in the year before. Further, revenue generation from audit activities exceeded the CRA’s expectations for that year, as half a billion dollars more in taxes owing was uncovered.
It’s important, however, to underscore that under our system of self-assessment, taxpayers have the right to arrange their affairs within the framework of the law to pay the least amount of taxes possible. Tax evasion is illegal, but tax avoidance under these circumstances is your legal right.
What if you genuinely made a mistake?
It is possible to come forward voluntarily to tell CRA about errors or omissions you may have made in reporting your taxes. Here are the two categories that qualify:
- The income tax stream. You can correct income that was under-reported, expenses that were over-reported or not eligible, missed source deductions for the Canada Pension Plan (CPP/QPP), or a missed form T1135 Foreign Income Verification Statement.
- The GST/HST stream. This stream is for errors or omissions regarding the GST/HST, excise taxes and duties, softwood lumber products and Air Travellers Security Charge, including underreported tax liabilities missed in a previous reporting period, as well as errors in claiming input tax credits (such as GST/HST paid on business expenses), refunds or rebates.
The entire process of reporting errors or omissions can take place electronically using Form RC199, the Voluntary Disclosures Program (VDP) Application, but it is a good idea to get some professional help with this. By filing the form, you agree that CRA has the right to audit any information you provide, whether or not you are granted relief from penalties and interest. CRA also has the right to transfer the information you have disclosed to other departments. But, importantly, you will be giving up your rights to file an objection or appeal under the Income Tax Act or the Excise Tax Act to dispute a decision by the VDP. You will have the right to apply to the Federal Court, however, for a judicial review.
At the outset, if you have been a model tax-filing citizen looking to correct an occasional mistake, you will be treated differently than those who have intentionally avoided paying their income taxes. You’ll also suffer a worse consequence if CRA has received leaked information that you are involved in an offside or offshore transaction. In the latter case, you’ll be automatically subject to the “limited program,” under which you will not be granted penalty or interest relief. However, you will stop any further criminal prosecution, and you will not be subject to gross negligence penalties if your disclosure is accepted.
For everyone else, the “general program” ensures you will not be charged penalties. It’s possible to receive relief on interest you owe for the most recent three years, but interest relief is limited for any years prior. For that reason, it’s a very bad idea to be more than three years behind on filing your tax returns.
If the VDP turns down your request for interest relief, it is still possible to apply for other Taxpayer Relief Provisions, which allow CRA to waive penalties and interest, or grant extensions of certain filing due dates. This is all done on Form RC4288 Request for Taxpayer Relief—Cancel or Waive Penalties or Interest.
There are five circumstances under which you can apply for this relief:
- CRA delay or error. If CRA provided you with incorrect information or takes an unusual amount of time to resolve a tax dispute in an audit or objection, all the while charging you interest on taxes owing and penalties, it is possible to ask for relief from penalties or interest. You’ll have to describe the details and timelines, so it is always a good idea to keep meticulous records of all interactions with the CRA, printed, in a folder. Do not rely on electronic transmissions only to keep records of your interactions. It’s easy to lose a critical email or fail to keep a copy of a cloud-based transaction. If it’s important, print it and keep it in a retrievable file folder.
- Financial hardship or inability to pay. If this describes your financial situation, you can apply for penalty or interest relief, but a statement of income, expenses, assets and liabilities must be filed. For this, you can use Form RC376. Be prepared to include the net income or your spouse or common-law partner, as well as a host of back up documents like mortgage payments, property tax and utilities bills, lease and condo fee statements, the most recent three months of bank statements, investment and credit card statements, and insurance statements.
- Death or serious illness, mental distress. If you have suffered cancer, depression, stroke, an accident or the death of a significant other, you may also be granted relief from interest or penalties. Justify the claim with doctor’s certificates, records of hospital stays and explanations of why your condition affected your tax filing patterns.
- Natural or human-made disaster. If you suffered flood, fire or other natural disasters, provide fire/police reports and insurance claim statements.
- Civil disturbances. As the vast majority of tax returns are now filed electronically, there are few occasions to use this circumstance.
Most law-abiding taxpayers can preserve access to missed refunds beyond the normal three-year audit limitations, generally up to 10 years. Your year-end tax planning activities, therefore, should include a review of prior years’ returns for lucrative deductions and credits you may have missed; for the 2019 tax year, that includes returns dating back to the 2009 tax year.
Filing a tax return is your ticket to receiving a tax refund of overpaid taxes as well as lucrative tax federal tax credits like the Canada Child Benefit, the Canada Workers Benefit and the GST/HST Credit, and full or partial access to the Old Age Security benefits. For some, provincial tax credits are possible too.
On the flip side, your obligations to pay the CRA are serious ones that can upset the most carefully constructed portfolio, if you fall offside. For these reasons, your financial literacy must include tax literacy.
Given all these potential financial consequences, your tax return is truly the most important financial transaction of the year. Be sure you spend an adequate amount of time to get it right, which is a good first step towards managing tax risk. Remember, what matters is what you keep.