Short answer, file your taxes on time and pay any tax due on time.
That out of the way, here are a few things that can happen if you don’t follow that recommendation.
A late filed tax return with a tax balance owing, is charged a penalty of five per cent of the tax balance. Then one per cent is charged monthly, so 17 per cent after one year. Well, if you add in the effect of compounding, it’s a few more points than that, but that math is for another day.
If you have been issued a “Demand to File” notice from the Canada Revenue Agency (CRA), these rates double, so after a year the basic math on that one is a 34 per cent charge.
In fact, whether you are issued a demand to file notice or not, if you were charged any late filing penalties in any of the preceding three years, this same doubling of the interest rate applies.
A tax return filed on time with a tax balance owing, but the balance is not paid prior to the tax deadline is not subject to the late filing penalty and will be charged a prescribed interest rate adjusted quarterly.
Currently it is eight per cent annualized rate. So even if you cannot pay the tax balance, at least get your tax return filed on time. It will save you money.
A late filed tax return with no tax balance owing is not subject to any charge, but that is not the end of the requirement to file.
What if you just don’t file a tax return?
If a taxpayer doesn’t file, this may remain a non-issue with CRA for an arbitrary length of time. Arbitrary because if a taxpayer typically files and never has a tax balance, it could be years before they hear from CRA.
On the other hand, if a taxpayer typically files and always has a tax balance, especially if it is a sizable tax balance, CRA may very quickly issue a Demand to File notice.
To this point, once CRA has issued a Demand to File notice and if it is not acted upon by the taxpayer, CRA will, and usually more quickly for those who typically have a tax balance, issue a Notional Assessment with a larger than normal tax balance owing to get the taxpayer’s attention to file their tax return.
Continued taxpayer inaction in filing the tax return will lead to CRA sending a Formal Demand speaking to criminal prosecution. CRA could also obtain a compliance order from the court stating that not filing the tax return will be treated as a criminal offence for non-compliance with the court order.
When a tax return is filed, assessed and a tax balance remains outstanding, CRA collections steps in for delinquent payers.
Friendly reminders for payment are sent to the taxpayer, and if still unpaid after 90 days CRA collections may take legal action to seize the taxpayer’s bank account or register a garnishment against the taxpayer’s pay with the taxpayer’s employer.
Filing a Notice of Objection will interrupt the CRA collections process, although interest charges will still apply. If the Notice of Objection fails, it may be possible to address the Tax Court of Canada to argue the case opposing the assessment.
If the case is lost, the tax court has the authority to impose a 10 per cent penalty and award costs to CRA.
To the extreme, if the case is lost, the case may go to the Appeals Court of Canada and even all the way to the Supreme Court of Canada. But only a few cases make it all that way each year.
It may be a simpler life to file your return on time and pay your taxes on time.
Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.