CRA has added clarity on when and how interest and penalties apply to personal taxes, and has lessened the pain for the taxpayer in some situations - with emphasis on “some” situations.
That’s right, CRA is also raising the pain … on April 1st no less. No joking on the timing!
Any personal tax return filed after the deadline that has tax due is immediately assessed a penalty calculated on the tax owing. This has been 5% for years, but April 1st it’s 6%. The monthly interest on the balance was 1%, but April 1st it’s 2%, that’s an effective rate of about 27% annually.
And if a taxpayer files late twice with tax payable within a four year period, those penalties double.
This situation must not be confused with those taxpayers who file on time, have taxes payable but don’t pay them on time. As much as there is a balance due, because the taxpayer filed on time, CRA only charges a respectable 5% annual interest rate.
The take away here is to file your T1 tax return on time, regardless of the ability, or inability, to pay the taxes due.
Now it’s true some penalties have been softened, albeit as an attempt by CRA to reduce the quantity of taxpayer Notices of Objection and requests for Tax Payer Relief, not to mention the pressure created from successful taxpayer cases in the Tax Court of Canada.
Most notably, the changes that are levied on the “under filer” have been lowered. This is the taxpayer who does file, but repeatedly files incomplete returns in regards to income. CRA uses the little known penalty referred to as the “failure to report income” penalty to get that taxpayer’s attention.
If a taxpayer fails to report on their tax return a source of income greater than $500 twice in a four year period, CRA assesses the lesser of 10% of the income not reported and 50% of the shortfall of the taxes that should have been paid, less what, if any, was paid. The penalty is calculated using the last revenue that was not reported.
This is a far gentler penalty regime than what it was before when the penalty CRA could have assessed was as much as 100% of the revenue not reported, not 10% as the new rule stands. For example, a missed T5 reporting $5,000 of income could have resulted in a $5,000 penalty even though the tax on it would have been between $0 and $2,000, depending on the taxpayer’s tax bracket.
Besides the obvious take away here of filing complete returns, if after filing it’s discovered that something has been missed, self-identify the omission by filing a T1 adjustment. CRA will not assess the penalty if the taxpayer corrects the situation voluntarily.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.