CRA Tax Penalties, Interest & Prosecution
The CRA’s tax regime is predicated on the voluntary disclosure of income and earnings through the filing of tax returns that are complete, transparent and on time. However, all too often, individuals fail to file a return or file a return past the deadline. Other instances might include failing to report all of one’s income or claiming deductions that are not applicable. Whether by accident, ignorance, or willful deception, a taxpayer or corporation is likely to suffer consequences imposed by the CRA in the form of interest, penalties, and even prosecution.
Below is a list of the types of penalties imposed by the CRA.
Interest and Penalties on Taxes Owing
If the CRA assesses your return and has determined that you owe taxes, you will be changed compound daily interest. Interest charges will begin on May 1 in the year following the last tax year (the day after the April 30 filing deadline) on what you owe in taxes and any applicable penalties.
For example, if you owe taxes for the 2019 year, then interest will begin to accrue on May 1, 2020. If you have amounts owing from previous years, the CRA will charge compound daily interest for those amounts as well, applying your payments first to what you owe from previous years.
The following example shows how interest and penalties are calculated for taxes owing:
(click to enlarge)
Late Filing Penalty
If you owe tax for 2018 and you file your return for 2018 after the due date, the CRA will charge you a late-filing penalty. The penalty is 5% of your 2018 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.
If the CRA charged a late-filing penalty on your return for 2015, 2016, or 2017 your late-filing penalty for 2018 may be 10% of your 2018 balance owing, plus 2% of your 2018 balance owing for each full month your return is late, to a maximum of 20 months.
Even if you cannot pay your full balance owing on or before April 30, 2019, you can avoid the late-filing penalty by filing your return on time.
Penalties for Repeated Late Filings
If you have failed to report income for multiple years in an amount exceeding $500 for a tax year, then you will have to pay a repeated failure to report income penalty.
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 2018
• 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
False Statements and Omissions Penalty
You may have to pay a penalty if you, knowingly or negligently made a false statement or omission on your return.
The penalty is equal to the greater of:
• 50% of the understated tax and/or the overstated credits related to the false statement or omission
However, if you voluntarily tell the CRA about an amount you failed to report and/or credits you overstated, the CRA may waive this or other penalties.
Cancel or Waive Penalties or Interest
The CRA can administer taxpayer relief provisions, which will enable them to cancel or waive penalties or interest when taxpayers are unable to meet their tax obligations due to circumstances beyond their control.
The CRA’s discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made. For example, if you are seeking relief from penalties and/or interest in 2019, then it must be for penalties or interest accruing for tax years ending in 2009 or later.
If you find yourself with a ballooning tax debt or worse, it is imperative that you stop the bleeding, halt the application of interest and penalties, and avoid any prosecution. Get back on the good side of the CRA by contacting a tax professional at Kalfa Law.
– James Alvarez, Tax Counsel
© Kalfa Law 2019