CRA Taxes – Late Filing Penalties – Reader Question

by Mike Holman

Last week I received an email from a reader (Michael) which was quite unusual for 2 reasons – 1) we rarely get emails from readers and 2) it was a good question.  :)

A friend of my girlfriend hasn’t filed his taxes in 4 years, and we were just wondering what the repercussions will be when he either starts to pay or gets caught not filing them?

This is interesting – I have one friend who didn’t file taxes for over 10 years. He eventually hired an accountant and got caught up but I’m not sure if he had any penalties or not. I was only late with my taxes once which is how I was able to learn about the penalties and interest charges.

If you thinking about buying tax preparation software then consider software programs such as TurboTax or TurboTax Canada (formerly QuickTax).

Late filing penalty

According to the CRA website, the basic penalty for late filing is 5% of any taxes owing plus 1% for each additional month you are late up to 12 months.

The penalty is 5% of your 2008 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. If we charged a late-filing penalty on your return for 2005, 2006, or 2007 your late-filing penalty for 2008 will be 10% of your 2008 balance owing, plus 2% of your 2008 balance owing for each full month that your return is late, to a maximum of 20 months.

This may not seem like a lot if you are only a month or 2 late but if you were 7 months late like I was then the penalty ends up being 12%.  The time I was late I think I owed something like $600 so the late filing penalty was $72.  As you can see from the description, the penalties are even more severe if you have previous late charges.

Interest charges

As if the penalties aren’t enough – the government also charges interest.  The rate is usually about 5% annually.  $600 owing on a 2008 return filed 7 months late would be about $17.50 which isn’t too bad.

Add it up

My total penalty for the $600 owing – 7 months late would be $89.50 or 15% of the amount owing.   I remember being quite surprised at how much the penalty was since I didn’t realize it got higher by the month.  I had thought that once you are late, it didn’t matter how late you were.  If nothing else – I never filed late again. :)

Penalties are only charged on taxes owing

One key thing to remember is that if you don’t owe anything then there will be no penalty for filing late.  Hopefully the reader’s friend is in this situation.  There is recourse for getting taxpayer relief but after skimming the article it doesn’t look like “not getting around to it” is included in the list of circumstances where the penalties and interest might be waived.

Get it done

My suggestions:

  • Make every effort to file your taxes every year on time.
  • If you are late then get it done as quickly as possible since the penalty and interest charges increase every month.
  • If you have a situation where you are way behind in 1 or more tax returns then make it a priority and get it done.  Hire an accountant or tax preparer if you have to.
  • Hire a good tax attorney if you are really in trouble.

Getting caught?

One part of the reader email I didn’t address was about “getting caught”.  I don’t know if the CRA will send you a letter or arrest you or what.  I would assume they already have some idea if you owe money and if it is a high amount they might be giving you a call.  Does anyone have any experience with that sort of thing?

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{ 31 comments… read them below or add one }

1 Commander Trent

I just wanted to say that the person could probably file all 4 years as a part of a voluntary disclosure request. If you disclose ALL of your outstanding tax obligations that you are behind on, the CRA will not charge you criminally and will waive any penalties that may apply. In addition the CRA MAY waive a portion of the interest owing on the debt (their policy on interest is not clear). However, the CRA will not waive any portion of the taxes owing.

If your friend wants to fess up then they should take a quick look at their situation. If they would have received all refunds then they do not need to use the Voluntary Disclosure request (but they defiantly should file the tax return for the refund). If there are penalties owing in any year then your friend should consider the voluntary disclosure request.

2 Mike

Commander T – are you sure the voluntary disclosure can be used for people who haven’t bothered doing their taxes? I thought it was for tax evasion (ie offshore accts)?

3 as * financial tactics

“If nothing else I never filed late again. :)”

Did you mean to write, “If nothing else I never filed again. :)”?

4 Four Pillars

I looked up the voluntary disclosure page on the CRA website.

http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html

It says:

If the CRA accepts the disclosure, the taxpayer will have to pay the taxes or charges owing, plus interest. However, the taxpayer will not be subject to penalty or prosecution for those amounts accepted as a valid disclosure.

I think that means for someone who is several years overdue they will still have to pay the normal penalties and interest unless they can work out a deal. But this is good info because at least they won’t have to worry about any other punishments (like jail). :)

as financial tactics – haha.

5 Mr. Cheap

Very interesting post. I’ve been “late” with my GST filing (I didn’t do any business, but still apparently have to file the forms saying I didn’t – they told me I either need to dissolve the business or file a form each year saying I didn’t do any business). All that happened is they called me, threatened to do “something” if I didn’t submit the forms within a month and I submitted them (not fees or penalties).

6 John DeFlumeri Jr

Get a grip on those taxes or it will feel like dogs are chasing your meat forever!

7 Commander Trent

Mike,

I am reasonably certain that your friend would be able to use a voluntary disclosure request. However I have summarized the conditions that must be met for the CRA to consider the request.

As long as there actually would be a penalty for not filing the most common reason for not being able to do a voluntary disclosure would be that you are already under investigation. See IC00-1r2 at http://www.cra-arc.gc.ca/E/pub/tp/ic00-1r2/ic00-1r2-e.html for more info.

As a quick summary, the disclosure should be allowed if all 4 of the following is present:

1) The disclosure must truly be voluntary. If you are under investigation in tax matters relating to what you are disclosing then the relief will not be available

2) the disclosure must be complete. All material details must be revealed. As long as the person is careful they should be able to meet this requirement.

3) The disclosure must involve a penalty of some kind. Really there is no point in a voluntary disclosure if there would be no penalty applied.

4) The disclosure must include information that is at least one year past due. Note that you can still submit a year that is less then one year late, but it must be accompanied by returns that are older then a year late.

If your friend does decide to go this route they really should read that Circular that I linked, as it has a lot more details.

8 jeremy

does the cra pay you interest when they owe you money

9 Four Pillars

Jeremy – no.

10 Commander Trent

Jeremy and Four Pillars,

The CRA does indeed pay interest when they owe you money. However, they just have more generous terms then when you owe them money.

The following information is from http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rfnds/pply-eng.html

We will pay you compound daily interest on your tax refund for 2008. The calculation will start on whichever of the following three dates is latest:

* May 31, 2009;
* the 31st day after you file your return; or
* the day after you overpaid your taxes.

Also another thing to note is that CRA will pay you interest at a rate that is 4% lower then the rate that you would have to pay on an overdue balance.

11 Mike

Trent – thanks for the info – I stand corrected.

I was thinking of the situation where you overpay your taxes and then file and get a refund (I guess within 31 days). In that case there is no interest paid.

12 joe ford

ive got a question and hopefully someone can provide some advice..here goes.. im on a payment plan with the irs and i owe somewhere around 4k. they take out $100 each month until i can pay in full. anyway i havent filed taxes for 2008 because of a divorce and i think i might owe a little bit for ’08. my question is how do i file and should i go ahead and do so because ive not got my divorce final yet. (my return is dependant upon who claims my child and she hasnt claimed him either)what should i do?any help would be appreciated thanks.

13 Mike

Joe, for a specific question like that you should really talk to an accountant.

14 Diamond

CRA doesn’t pay interest on refunds if you are a few years late filing your return

15 Shevy

Actually, Diamond, they do. They don’t pay you for all the years prior to your filing, but they pay interest from the day they receive your tax forms until they mail the refund. If you send your late filings in at a time when they’re busy, it might be a few months before you get your cheque and it will, indeed, include the interest for those months. What you lose out on is all those years when you could have had the refund on time and stuck it in your ING account to earn interest….

And yes, I’ve filed late a number of times. The worst they’ve ever done is send me a letter requiring me to file for that specific year. It helps, of course, that I always get a small refund. Frankly, they could care less if you *never* filed if they owe you money.

My Hubby OTOH has had a running problem several years in a row where the company he works for somehow didn’t deduct enough income tax, leaving him owing an average of $700 or $800 per year. This was money he often couldn’t afford to come up with immediately and then he’d have to set up payments. One thing to be aware of in this circumstance is that they may pressure you to pay more monthly than you can afford. Don’t agree to something you can’t do.

Say, “I’d love to pay you $250/mo but I can’t. What I can do is send $50/mo.” When they tell you that’s unacceptable, repeat as often as necessary, “That’s what I can afford”. Then send it. Regularly. Really, the only thing that ticks them off is when you don’t pay at all. If you still owe for a previous year the next time around they’ll just roll the amounts together. Really, they’re happy enough that a) you’re paying and b) they’re earning more interest off you.

Oh, yes. Now that his company has a new accountant the problem with underpaying seems to have been solved. He got a nice refund this year.

16 Tax Dude

Please be advised that even though there are no ‘late-filing penalties’ if the balance is NIL, repeated requests by CRA to file the returns could end the taxpayer in court if the requests go unheeded. There the taxpayer will be fined a penalty of $1000 per year for those years that returns were not filed, even though there is a NIL balance owing.

17 marinni

I have a long problem with the CRA, it ended up with them giving me a very high penalty, because I sold my house in my country which is Italy, now I cannot ever pay that fine because it is HUGE, my question is , what is the worst that they can do to me, can they cancel my imigrant status?? or what is the worst can they do to me?? the absolute worse.. because there is no way I can afford to pay them what they are asking me, it is just impossible..

18 jonb

Is it possible to get away from that situation by renouncing citizenship and never going back to Canada again?
I think Canada taxes people by residency, so I’m not sure what they would do with your case

19 Joe

@Marinni

The only way CRA would know you sold the house in Italy is if you disclosed the sale. I thought Canadians can choose NOT to file income outside Canada. Better to talk to a qualified tax attorney

20 ALICE

I havent paid taxes for 4 years and my yearly income in canada is approx 2,000.00. i live in the usa.
taxes have been taken out of my oil n gas checks, will i have a big penalty?

21 Arin

hi all, i haven’t filed taxes for the last 5 yrs coz i have had power of sale etc and deaths in the family and been living very hard… if i wanted to leave Canada and go to my home country, will i be stopped by CRA?

22 Adam

Question,

Just got a letter from CRA procession review center. RE Income tax benefit return 2010.

My employer did pay for educational courses totaling 1300 and textbooks of 420 that I claimed on my tax form. They have asked me to provide a simple statement of did my employer pay for the course/books. If so how much did you record.

If I say no will they review for a small amount or is this just a macro in the CRA system sending review notices? What if I respond saying no what is the worst case I can get into?

23 Mike Holman

@Adam – you should talk to a tax accountant.

24 Shane W

What do you folks thing of this situation.

I recently caught up on filing from 2007. (I won’t get into reasons)
All forms filed at the same time.

In 2007 my taxes worked on to a $727 refund. No penalty, no problem.
2008 I owed $796.
2009 and 2010 were small refunds.

CRA penalized me 17% + interest on the full $796 and ONLY THEN applied the $700 credit from 2007. Despite only owing $69 cumualtively for both years and essentially having a substantial credit balance going into the second year they assessed an additional $260.

In my view the their ethics here are in line with MoneyMart…

Any comments/advice?

25 Dave

You asked….. What do you folks thing (think) of this situation.

I think, pay attention to your obligations by filing your taxes on time and you won’t have penalties, period. I’m glad you didn’t get into the reasons you didn’t file, because there is no excuse.

26 KelsoV

I filed my taxes 11 months late for 2010. I owe $212.00. I understand the 5% penalty and the 1 percent per month, but I don’t know how to calculate the compound interest on $212.00 for 11 months at 5 %…can you tell me what that will be? Help!

27 Dave

If the penalty is 5%, plus 1% compounded per month.

$212 + 5% (10.6) = $222.60
Month 1). 222.60 + 1% (2.226) = 224.826
Month 2). 224.826 + 1% (2.248) = 227.074
Month 3) etc………….
Month 4). etc…………

Total penalty and compound interest after 11 months = $248.35

28 John

I was a contractor for 4 years and got behind on filing my taxes for a variety of reasons. When I finally got ahold of an accountant and had returns prepared for 2008-2011, they told me I owed about $110k, which is what I expected, as I had been saving the money in the bank and had $130k on hand to pay; but then they reported that the CRA would most likely be looking for about $85k in penalties and interest, which to be honest, sounds absolutely insane. Sigh, here’s hoping for an appeal.

29 Brandi

We went through so many situations…house flooded in 2005…50K worth pf damage from a toilet which broke inside the tank. We were in a hotel for over 15 weeks…and it cost us so much to be displaced…food, extra gas…cause the hotel was 7 miles one way. By 2008, but didn’t have money for anyone to do them, business too..then the Iowa flood of 2008 hit..and lost everything…even the records that I thought was safe in the office…theft, tresspassing…malicious destruction of property….I had a melt down, and now climbing back up the emotional hill. We lost over 120k, plus stuff we stored their from the house. My guess is we won’t own anything..we lost half of our income too…..do they take the emotional thing in factor…pstd?

30 antemoe

So what happens to a man that has a company and doesnt pay corporate tax for 8 years or file gst or hst ? then disolves that company , opens another one and still doesnt file or pay on that one for 2 years ? he hides and has bogus addresses for his company …will he go to tax court ?

31 Eric

I do my own taxes. I will be out of town from late March to mid-May. I have done my taxes as far as possible, but I still have a couple of laggard T-slips that I know are coming, but the issuers are holding out until the end of March to issue. In order to avoid penalties, I think my best option is to send the CRA an overpayment of my estimated taxes and file when I return. As long as the taxes due are less than what I sent in, I assume there will be no penalty. I don’t want to file and pay for what I now have as they will reassess and if this happens more than once, I know I will be penalized for that. What is the best way to proceed?

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