Did you file your taxes late? Here’s what you need to know about interest and penalties.
19 août 2022
Here’s the situation: you owe income taxes, but you didn’t file by the April 30th deadline. You put it off for a few months and then go to file. You’re surprised to hear that not only do you owe the aforementioned taxes, but now you also owe late-filing penalties – and they’re not nothin’.
Here’s what you need to know about interest payments and penalties that come with failing to file your income taxes on time.
The late-filing penalty.
If you owe taxes and don’t file by the return deadline, you’re going to have to pay 5% of the balance you owe from your taxes, as well as 1% of your balance owing for each full month that the return is late, to a maximum of 12 months.
So, let’s say you owed $3,000 in taxes this year. Instead of filing by the deadline, you file your taxes on September 4th. That means you’ll owe the $3,000, plus 5% of that balance, which is $150, and then the 4 months late at 1% which is $120. Now, you’ll owe the CRA $3,270.
What if you have some back losses from a previous year that you can typically carry over to cover taxes owed? You might be able to use that to offset your original $3,000 owed, but you can’t reduce your late-filing penalties with those funds.
What if this is a common occurrence with you?
If you’ve filed your taxes late for any of the 3 preceding years, you might be required to pay a heavier penalty. This usually happens if the CRA sends you a demand to file a return, and the increased penalty will be cited in your demand letter. In this case, you’ll owe 10% of the balance owing plus 2% of the balance owing for a maximum of 20 months. So, in the scenario above, the total owing would be $3,540.
Will you still pay penalties if you don’t owe taxes?
If you don’t owe taxes, then you won’t be subject to paying late-filing penalties. But, if you don’t file, you won’t be able to receive benefits like the Climate Action Incentive Payment, the GST/HST payment or other benefits that are only paid once taxes have been filed.
Is there a penalty if you incorrectly report your income?
You bet there is!
If you repeatedly fail to report your income, which means you failed to include an amount of income on your tax return this year or for the 3 preceding years, the penalty will be on either 10% of the income you failed to report, or 50% of the difference between the understated tax and the amount of tax withheld, whichever is lower. This second method of calculation was introduced in 2014 because some people were being penalized in the thousands of dollars range when the difference in tax payable was barely anything, after taking into consideration that taxes could have been withheld from the slip their issuer or employer gave them. Also, they aren’t going to penalize you if the amount is less than $500.
But, it’s important to know that this is just the math for federal taxes. You will also be subject to a corresponding provincial penalty.
The two words you don’t want to hear from the CRA: Gross Negligence.
If information seems to be purposefully left out, then the CRA isn’t going to wait around for repeat offenses like in the above section. If the CRA thinks you knowingly submitted a false statement, or omitted some income on your tax return in order to pay less taxes in one year, the penalty will be either $100 or 50% of the tax that you actively tried to avoid paying – whichever is the greater amount. They could also hit you with the criminal charge of tax evasion, which comes with its own fine of 50-200% of the taxes that were evaded and up to 5 years in prison.
What if it’s my tax preparer who made the mistake?
Experts could get things wrong, and those mistakes come with a penalty as well. If your tax preparer, including accountants and other third parties, make a mistake, their penalty will be $1,000 or 50% of the amount you as the client would be avoiding paying – whichever amount is greater.
The maximum penalty is $100,000 plus the person’s gross compensation.
The CRA is going to evaluate each of these cases individually, and assess if they think this was intentional – does the tax preparer seem to just not care, or did they act reckless? Now, things get complicated, but the tax preparer could also show a “reliance in good faith” meaning they thought the client gave them all the information they needed to prepare the taxes accurately. But if the client didn’t give them all the information, there’s a chance the CRA won’t pursue penalties.
Any other late filing penalties to worry about?
Form T1135, otherwise known as the Foreign Income Verification Statement, is the form you must file if during the year you owned foreign property with a total cost amount of $100,000. If you fail to file this form on time, the penalty for filing it late is $25 per day for a maximum of 100 days – making it a whopping maximum penalty of $2,500. It’s important to note that the deadline for filing this form is the same as the deadline for filing the tax return, and you will be assessed this penalty even if you did not have a balance owing on your tax return.
H&R Block has many tools to help you navigate situations with the CRA, including Peace of Mind filing, Audit Representation, and even a Free Second Look. If you need help with filing your taxes, H&R Block Tax Experts are here to help, and you can choose from one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.