If there is one thing I hate doing, it’s preparing my tax return. Figuring out deductions and finding receipts is just not my cup of tea. One year, I filed my taxes several months past the tax filing deadline and received a quick education on the CRA penalties for late filers who owe money.
I’ve managed to get myself organized and filed my tax return on time for the last several years.
Here are my suggestions to help get your taxes filed on time:
- Get organized. Set up a good filing system for your tax information and make it a priority to follow it. It’s so much easier to tackle your tax return, when you know where all the paperwork and receipts are.
- Print off all electronic receipts and file them. This one has been a problem for me. I’ll file an electronic (email) donation receipt somewhere and then I can’t find it come tax time. Print everything off and put it in the appropriate tax folder.
- Good tax software. This makes taxes almost fun. I’ve used TurboTax in the past and recommend it. It has an interview style where the software will ask you questions based on your entered information and will make recommendations about deductions and forms to fill out. Read this article which covers a number of different tax software programs.
Read my TurboTax review here.
- Hire an accountant. Most people can fill out a regular personal tax return without professional help. If you can’t seem to make the tax deadline each year however, hiring an accountant can help motivate you to get your taxes finished. Think of it as hiring a personal trainer for your taxes. A regular non-business tax return will cost about $100 with a certified accountant.
- Less late is better. If you have missed the tax-filing deadline, try to file your taxes as quickly as possible since the CRA penalty charges increase every month.
- File even if you are broke. If you owe money for your taxes and don’t have the funds to pay, file the tax return anyway and work out a payment program with the CRA.
- Stop owing taxes. Do you owe taxes every year? One way to avoid penalties for late filing is to not owe the money in the first place. Increase your payroll withholding tax by giving your employer a CRA TD1 form. Make an extra RRSP contribution in the first 60 days of the current year. Consider making some tax instalment payments to the CRA.
How much is the late-filing penalty?
Here are the rules to calculate the CRA penalties and interest charges if you owe money at tax time and miss the filing deadline. I used my own late-filing experience as an example.
As soon as you miss the filing deadline of April 30th, a 5% penalty on your balance owing is charged. After that, a 1% penalty on the balance is charged for every full month you are late, up to 12 months.
In my case, I owed $600 and didn’t pay the balance until early December of that year. My penalty was 5% ($30) plus 7% ($42) which was 1% for each month from May until November, for a total penalty of $72.
What about interest charges?
As if the penalties aren’t enough – the government also charges interest. The rate is currently 5% annually. The interest I had to pay on my 7 months late $600 tax bill was $17.50.
Add it up
My total penalty for the $600 taxes owing and 7 months late was $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 learned my lesson and never filed late again.
Are you a repeat offender?
If you paid a late-filing penalty in any of the three previous tax years, the penalty for the current tax filing year will be double. In that case the late penalty is 10% and the monthly penalty is 2% and it will accrue to a maximum of 20 months..
Penalties are only charged on taxes owing
One key thing to remember is that if you don’t owe any taxes, there will be no penalty for filing late. The penalties only apply to taxes owing.
Conclusion
Nobody likes paying taxes or filing their tax return, but I can tell you from personal experience that paying late-filing penalties is even worse. Even if you don’t owe any money at tax time, you should make every effort to meet the deadline. Delaying your tax filing will only make it harder.
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{ 8 comments… read them below or add one }
Point #3 is especially important: The penalties for late paying are much less severe than the penalties for late filing. So even if you can’t pay, file!
I agree that good tax software makes filing your taxes fun (well, almost fun). I always file my taxes fairly early, typically at the end of February. I suppose that if you owe taxes you wouldn’t be in such a hurry, but if you know you’re getting money back just go ahead and get it done.
@Potato – Yup.
@Echo – Even with lots of money owing, I still have trouble getting mine done. I’ve found having an accountant quite helpful in terms of motivation and making things easier.
Not attaching tax slips can be a downer. The second time within a 4 year period can result in a fine = 20% of amount .
http://blog.canadianbusiness.com/tax-tip-don%E2%80%99t-forget-your-tax-slips/
I’ve filed mine the first couple weeks of January haha, so reading these articles crack me up. I know, I’m totally out of the ordinary. Great advice Mike, file anyways, just get them done!
Good post and well written Mike.
I am a sole proprietor (part-time) and work full-time. I always get my tax software sent to me in January (automatically with TurboTax) as I always want to use the RRSP calculator therein before February. Then I can plan to top up my RRSP as needed. I would MUCH rather pay myself than to owe taxes to the government.
Good post.
I’d add that for the electronic records, two things have worked well for me.
The first is to consolidate the records onto two USB disk or SD cards. It is easy to find/update them. I also like being able to check previous forms, donations, tax returns etc. in one place. Note that the second disk is kept offsite and updated twice a year.
Secondly, I include a summary of notes in excel. This way I have one place to track tax strategies, mistakes from previous years, mistakes found/status of the “request for change” etc.
As for filing late – I used to be dis-organised and late. I’d do enough to make sure I didn’t owe anything but it was not a priority. For me the electronic records has made taxes a lot easier.
*But* … (you knew this was coming, right?)
It is my investments that make me late now. Why are the investment companies notifying the brokerage of the Return of Capital, Dividends etc. so late. I have yet to have all of the investment form before mid to late *April*? *sigh*
Once I start owing, I’ll probably be filing on time with estimates and then filing changes where the estimates are wrong. Right now, I can’t be bothered.
Cheers