When taxpayers owe money to the Canada Revenue Agency (“CRA”), the amounts can quickly rise because the CRA charges interest on top of the amount owing. Additionally, if you file late, the CRA will hit you with penalties, and they even charge interest on those penalties. Before you know it the amount you owe could be insurmountable.
Interest Charges
Whether you have filed your taxes or not, interest starts accruing based on the time you should have owed the funds. For most taxpayers, tax returns are due April 30 of each year. That means whether you file or not, if you owe money, or will owe money, interest starts on May 1.
CRA also compounds the interest daily. The rate of interest charged changes every quarter, and those rates may be found here.
Late Filing or Failure to File Penalties
When taxes are not filed on time, CRA adds a late filing penalty to the balance once the return is submitted and processed. The penalty is 5% of the amount owing upon filing, plus 1% per month that the return is late, up to a maximum of 12 months. This is known as the failure to file penalties.
Where taxpayers are repeatedly late in filing their returns, the penalty jumps to 10% of the amount owing. Instead of an additional 1%, for each month late, the taxpayer is assessed a 2% penalty each month up to a maximum of 20 months.
Failing to File Information Return Penalties
In certain circumstances, taxpayers are required to file information returns. These returns do not result in any taxes owing, but are required to inform the CRA of certain, normally offshore assets, of a taxpayer.
The penalty for failing to file these information returns is $25 per day. The maximum penalty in most circumstances is $2,500 but can rise to $24,000, or it can even be based on 5% of the value of the foreign asset that was not disclosed.
For a table of these penalties please see here.
Non- Resident Penalties
Where taxpayers are required to pay withholding tax, which is normal when payments are being made to non-residents of Canada for tax purposes, there are large penalties that the CRA will assess based on any failure to withhold.
CRA will assess a 10% penalty on the amount failed to be deducted. When you have already been hit with this penalty, the next assessment would be 20% of the amount failed to be deducted.
If the withholding is made, but late, the penalty depends on the number of days missed. The penalty starts at 3% for a few days missed, and rises to 10% if the withholding is more than one week late.
Gross Negligence Penalties
Gross Negligence Penalties are the harshest penalties available to the CRA. This penalty adds 50% more to the balance owing before interest is even calculated. The imposition of gross negligence penalties is normally restricted to circumstances where taxpayers have purposefully hidden their income.
It is one of the only areas in Canadian tax law where the CRA is the one that must prove the penalties are justified. For this reason, it is also an area that can be argued and successfully defeated at the audit, objection, or Tax Court stage.
Voluntary Disclosure Program
If you have not filed your taxes, and the CRA has not taking any actions against you, you may be eligible for the Voluntary Disclosure Program. All of the penalties discussed above may be removed with the filing of a successful voluntary disclosure.
There are strict rules regarding how to prepare and file a Voluntary Disclosure. Be sure you consult an expert if you have not filed, and the CRA has not yet caught on.
Taxpayer Relief Request
There is a committee inside of the CRA which reviews applications for the removal of penalties and interest. Applications must be made based on a number of factors and must fully detail and explain why you were hit with the penalties, and interest, and why they are unjustified.
Taxpayers are allowed one application, followed by a second level review. If these are not successful the next step would be judicial review application which is a complicated, and expensive process.
If you’re thinking about filing a taxpayer relief request, or you need to file a second level review, be sure to consult an expert so you can put your best foot forward.
Conclusion
CRA penalties and interest can take a reasonable amount owing, and turn it into something impossible to deal with. If you are facing a large amount of penalties, and interest, call us today. Our free consultation will explain what can be done, and how we can help.
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/bog. If you have legal questions, please consult a lawyer.