One thing the Canadian government seems to love to do, is to wave that enchanted wand and sprinkle little magical flakes of interest dust over all the naughty Canadian taxpayers. Unfortunately for us, penalties also exist in this fantasy land, and those penalties can come in various sizes depending on the offending crime.
Our mis-demeaner, also known as late filing penalties, work based on a percentage of the balance due. Hence the reason if no balance is owing, late filing penalties do not exist. If a taxpayer files after the April 30th deadline, the penalty will be assessed at 5% of the balance owing, plus 1% of the balance owing for every month the return has been late, up to twelve months. If a taxpayer files later than twelve months after the deadline, the fee can increase to 10% of the balance owing, plus 2% of the balance for every month up to twelve months.
Another little hidden gem many taxpayers are not aware exists, is the penalty for repeat failure to disclose income. This is basically charging the taxpayer a fee, if the taxpayer has repeatedly failed to include income on the last three years of filing their personal income taxes and proceeds to miss claiming income for the fourth time in a row. The way this is calculated is the taxpayer would be assessed the lessor of 10% of their current year’s balance owing, or 50% of the difference in the changes the ‘forgotten’ income creates.
The CRA holds the right to penalize any taxpayer who has knowingly made false statements/disclosures on their income taxes. This penalty is assessed based on the greater of $100, or 50% of the difference in the changes due to the false statements or omissions.
Interest is compounded at a rate of 6% currently, as the rate is assessed on a quarterly basis. This covers balances due to income taxes, Canada Pension and Employment Insurance. If your late filing results in a refund, the CRA will give you interest at a rate of 4% on the balance owed to you; however, you will have to claim this as interest income in the tax year the payment was rendered.
Canadian taxpayers do have a “fairy godmother” whom, on occasion, can grant relief from interest and penalty if approved. Two methods of possible relief can occur from the voluntary disclosure program and the taxpayer relief program.
The voluntary disclosure program was developed to assist both the taxpayer and the Canadian government. The programs’ back bone consist of correcting a past return, to include left out information, and the CRA will possibly (possibly being the key working here) avoid assessing penalties and avoiding legal action if applicable. The taxpayer would still be responsible for paying the balance owing and the interest.
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The taxpayer relief program was set up in order to assist taxpayers with various methods of relief, due to things such as hardship. This type of program is broken into three parts;
1. Cancelling or waving interest and penalties
2. Late, amended, or revoked elections
3. Refund or reduce amount payable beyond three-year period
The nature of the situation, will direct with which section above you need to follow.
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As you can see, the best method in avoidance of unnecessary taxes, interest and fees is to file your return correctly and on time! Better yet, have someone in your corner, such as our wonderful staff, to assist with tax planning year-round. That way when the deadline arrives, your tax liability is minimized and the funds are in the bank to take care of the bill!