File Your Tax Return
Quite often I will get a call from someone saying that they haven’t filed their tax return for a number of years or they are behind in filing their taxes for their business. Even though the filing of tax returns is a legal requirement, there are a number of reasons people fall behind in their filings. Some of the more common reasons include:
- “I don’t think that I will owe anything.”
- “I don’t have the money to pay what I think I owe.”
- “Maybe the government will overlook my lack of tax filings.”
- “I don’t have all the records and/or receipts I need to file my taxes.”
- “It is too stressful. Maybe the situation will just resolve itself.”
The penalty for late filing your income tax return is 5% of the unpaid taxes, plus an additional 1% per additional month late. Therefore, if you are over 1 year late, the penalty is 17% of the unpaid taxes. In addition, interest at the Canada Revenue Agency’s (CRA) prescribed rate will be added to the penalty until the debt is paid. The CRA sets its prescribed interest rate every quarter. It currently stands at 6% for unpaid and overdue taxes. If you have a second occurrence of late filing within three years of your first late filing the penalty could reach as high as 50% of the unpaid taxes depending on how late you are. As noted above, many people don’t file their tax returns because they don’t have the money to pay, not realizing they are adding to their tax debt. If you file on time the CRA will charge you interest based on the time the taxes were due but you will avoid the penalty charges.
If you are late in filing your tax returns, you may be able to avoid the penalties through the CRA’s Voluntary Disclosure Program. A voluntary disclosure must be accurate and complete in order to be accepted. We can review your situation and advise you regarding this program and your eligibility. If CRA has already contacted you requesting that you file a tax return you will not be eligible to file a voluntary disclosure.
If you don’t file your tax returns, quite often you will receive one or two requests to file a return followed by a demand to file a tax return if you ignore the original requests. This correspondence is always in the form of a letter mailed to your home or place of business. The next step the CRA takes to gain your attention is an arbitrary tax assessment. Sometimes the CRA may decide to issue an arbitrary assessment without first sending a request to file a letter. An arbitrary assessment is usually double or more than the amount of taxes that you actually owe. It is designed to get your attention. It is then up to you to object to that assessment and prove what your true tax liability is. The situation can even get worse as the CRA could then seize bank accounts, issue garnishees, or put a lien on your property.
Not filing your individual tax return could also cause you to potentially miss out on some benefits, such as the Canada Child Benefit.
If you are a business owner you can make the situation worse by not submitting your GST, HST, or payroll taxes. Business owners will use these funds to pay other creditors or invest in their business. It can become a big snowball of tax debt and penalties that grow faster than you think. Even if your business is incorporated, the CRA may be able to hold you personally liable.
Many people think that the CRA can only go back for three or four years of unfiled tax returns. This is not true, they can go back as far as they want if a return has not been filed.
If you haven’t filed your tax returns for a number of years, you need to see a professional. We at DJB can help you and represent you with the CRA, even if you don’t have all of your records and receipts. We can prepare your tax filings and advise you with respect to CRA’s expectations concerning your tax debt. Then you will be on your way to a better night’s sleep.
About the Author
Don Knechtel
Don has over 25 years practicing in the area of taxation for both individual and corporate clients, including estate tax, corporate reorganizations, estate planning, and succession planning.
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