CRA Penalties and Interest: An Update
Many taxpayers are surprised to learn that the Canada Revenue Agency (“CRA”) can and does charge interest and penalties on the outstanding tax liabilities of Canadian taxpayers. Penalties and interest are often applied in concert and can quickly escalate what was originally a minor tax debt into a serious problem for the taxpayer. This post updates our first blog post about CRA penalties and interest. For that post please click here.
If you owe funds to the CRA, your interest will start on the date that your tax filing was due. This results in taxpayers often receiving assessments or reassessments months or even years after the initial filing date with interest applied from the day that the taxpayer originally filed. For example, if a taxpayer filed a tax return on April 30th, 2018 and was reassessed on June 1st, 2020, compounding interest will be charges from the initial filing date (April 30th, 2018).
CRA compounds interest daily. The rate is available online here with it changing every three months. The current rate is 5%.If all of this interest wasn’t bad enough, the CRA even charges interest on any and all penalties that are assessed to a taxpayer.
Late Filing Penalties
Late filing penalties are charged by the CRA exactly when you expect they would be, when a taxpayer files a tax return past the prescribed filing deadline. If a taxpayer files a late return, CRA will charge an additional 5% on top of the balance owing. Additionally, they will charge 1% of the balance owing for each month late but only to a maximum of twelve months.
For this reason, even if a taxpayer cannot pay the anticipated taxes payable, it is still wise to file one’s return on time to avoid this penalty and subsequently pursue alternative measures of repayment for the outstanding tax liability.
If you know you have missed your filing deadline, you may be eligible for the CRA’s Voluntary Disclosure Program. Click Here for more information about RKTL’s Voluntary Disclosure Program Service.
If you repeatedly make mistakes or file your tax returns late, the CRA can and will assess you for repeated penalties.
If you repeatedly file your tax returns late, the penalty mentioned above will increase up to 10% of the balance owing. Additionally, for each month you are late filing your taxes, the CRA will assess another 2% of the balance owing to a maximum of 20 months.
A “Failure to Report Income” penalty occurs where a taxpayer fails to declare income on a tax return, and also failed to report income in any of the previous three years’ returns. If a taxpayer did not report an amount of income of $500 or more for a taxation year, it will be considered by the CRA to be a failure to report income.
The federal and provincial or territorial penalties are each equal to the lesser of:
- 10% of the amount you failed to report on your return for 2019; or
- 50% of the difference between the understated tax (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report.
A “Failure to Deduct” penalty relates to Canada Pension Plan, Employment Insurance or income tax remittances. Those who are required to remit these amounts to the CRA, but fail to, will be liable for a 10% penalty on the amount that you did not deduct. The repeated failure to deduct penalty increases this amount to 20%. This occurs where the penalty is charged to someone twice in the same year, or if gross negligence was involved.
Gross Negligence Penalties
The Income Tax Act allows the CRA to charge a penalty of 50% on tax amounts owing, where they believe the taxpayer committed gross negligence. The definition of gross negligence varies but basically, it is where a taxpayer purposefully hides income or over-inflates expenses to pay less taxes.
Trust Fund Penalties
The failure to properly remit penalty occurs where taxpayers do not remit the funds required or make remittance payments on time from the GST/HST and Payroll accounts of incorporated entities (corporations). The CRA views these funds as being held in trust for the CRA. Consequently, failure to remit the funds on time can create serious issues for the taxpayer. Penalties begin to accumulate after a period of just three days past the prescribed remittance date.
This is particularly complicated with respect to GST/HST accounts, due to the complexities of the GST/HST Self-Assessment Rules.
How to Tackle Penalties and Interest
In a perfect world all taxpayers would file their taxes correctly and on time and the CRA would never impose a penalty. However, the complexity of the Canadian taxation regime and the realities of modern life means that this ideal standard that is frequently breached.
The CRA has no remorse for taxpayers who did not receive their correspondences due to a change in address or phone number as the CRA views these changes as essential to report to their offices. Taxpayers can rack up significant debts, be completely unaware of any problem and be ineligible for any relief from the interest and penalties they have accrued. However, there are instances where taxpayers are granted relief from the penalties and interest accumulated by their outstanding tax liability.
One method of seeking relief from existing penalties and interest is to file a Taxpayer Relief Application with the CRA. While every taxpayer has the right to request taxpayer relief, the CRA’s decision to grant the relief is discretionary. Therefore, it is crucial to submit a strong argument that clearly states the reasons why one should be granted relief from the penalties and interest accumulated by one’s alleged failure to meet the CRA’s reporting requirements. For more information on the CRA’s Taxpayer Relief program, check out our blog post.
If you are drowning in debt with CRA, contact a tax lawyer at Rosen Kirshen Tax Law today! We can help deal with any of the above penalties and interest and more!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
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