Besides the obvious, “it’s the law,” why should you file your personal taxes?
Well, if a refund is waiting, why not? It’s your money. As obvious as this may be, it’s amazing how often this is the justification for procrastination. And what if you qualify for refundable tax credits, such as the HST credit. Isn’t it nice to receive money?
Now if taxes are owed and if you haven’t at least filed the return, procrastinating beyond April 30 can cost severe money.
On May 1, the tax you owe has a 5 per cent penalty automatically tacked on, and an additional 1 per cent penalty for each month over due.
And if this isn’t punitive enough, that 5 per cent penalty can be raised to 50 per cent of taxes payable.
On top of the taxes and penalties owing, Canada Revenue Agency (CRA) charges interest at 5% compounded daily.
My recommendation: If you owe for 2011, file now and pay now!
Tax tip: If you are going to owe for 2012, file before April 30, 2013, even if information is incomplete. That’s because a T1 adjustment can be filed after the fact and, even though reporting late, the punishment will likely only be interest because the return was technically filed on time.
When it comes to errors and omissions with prior tax filings, it’s far better to self-identify this issue to CRA than have CRA find it. Computers match slips that were reported on a tax return, with copies of slips CRA receives from employers, banks and other income sources and if there is a discrepancy, they’ll track ya’ down. If an adjustment to report the error or omission hasn’t been initiated, a penalty could be assessed in addition to interest, whereas if voluntarily disclosed the mistake may result in interest charges only.
The same CRA actions hold true if inappropriate expenses or deductions have been claimed. In this case instead of mismatched slips, it may be a CRA red flag that picks the return out of the stack.
Some of the more typical CRA flags include items claimed/not claimed this year that were/were not in the past, a big difference in value of something reported this year over last, and medical or moving expenses and/or charitable donations – surprisingly at even small values.
For proprietors, there are industry “norms” that are typically claimed in the reporting of business revenue and expenses. Remaining within these norms usually avoids a red flag. That’s not to say that a business can’t be out of the normal range, but if it’s challenged by CRA, it’s best the proprietor has solid evidence to support what was reported.
Of course, filing late or not having filed for several years are sure ways of attracting CRA’s attention, as is ignoring a CRA request.
How best to keep CRA out of your life? File on time. File in compliance. And don’t let a CRA enquiry go unanswered, even if your initial answer has to be, “I’m working on it”.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services.
Tax Tips & Pits runs the first and third Mondays until April. Email him or see all previous columns at ron.clarke@JBSbiz.ca