If filing your taxes over the next few weeks isn’t on your calendar, it certainly should be. Tempting as it may be, this is one area where procrastinating can only make things worse.
Unlike sales tax, which is a pay-at-the-pump proposition, Canada’s income tax system is based on self-assessment. Make your money, plan your affairs as best you can and then, pay up.
Not everybody does though. So before the April 30 deadline sneaks up and passes you, here are a few things to keep in mind.
Better to file late than never
Simply forgot to file last year?
Some people may neglect to file one year and then freeze when it comes to the next year’s tax return because of the old unfiled return.
This type of procrastination hurts since the Canada Revenue Agency will monitor your financial behaviour over time, using identifiers like your SIN and your date of birth to access data from your bank accounts or credit card transactions.
At this point, it’s best to contact the CRA to find out any penalties you may have incurred, as well as the best way to file and pay off your outstanding balance immediately.
The penalties for filing late
If you owe tax and don’t file your return by the deadline (it has to be postmarked as being mailed on or before April 30), the CRA will charge you a late-filing penalty.
The penalty is five per cent of your balance owing, plus one per cent of your balance owing for each full month that your return is late, to a maximum of 12 months. In other words, you’re already looking at an additional six per cent hit if you end up filing in early June.
Your late-filing penalty could also become higher if you were charged a late-filing penalty on a return in the past three years. In this instance, you’re looking at 10 per cent of the balance owing plus an additional two per cent per month, to a maximum of 20 months.
The repercussions of cheating
Many otherwise honest people fail to report all the income they should, either inadvertently thanks to the tax rules’ complexities or because they’re actually trying to get away with something.
For those who get caught fiddling the books, the penalties can be severe. Cheating on taxes is a criminal offence punishable by fines equal to several times the amount of tax owing, plus the tax, plus the interest, and possibly even criminal prosecution.
And, contrary to popular belief, there’s no time limit for the CRA to prosecute you for cheating or filing late. It’s never too late to be brought up on tax misdemeanors from years ago.
Furthermore, waiting until you’re caught, or until an investigation on your return has begun, means your bargaining power is reduced. Finance professionals advise that it’s better to fess up as soon as possible, and then look into the possibility of amnesty or reprieve.
Applying for tax amnesty or pardon
CRA’s policy is to encourage tax laggards to come clean through tax amnesty or pardon – a voluntary disclosures program. It’s designed to encourage both individuals and corporations to come forward and disclose material they didn’t previously report, possibly avoiding penalties or prosecution.
The program is open-ended in nature, meaning there’s really no specific deadline after which you’re simply out of luck. In fact, those who voluntarily file uncompleted returns may only be required to pay the tax owing on the reported income, with interest and no other penalty.
The whole thing must be voluntary though. Your plea won’t be accepted if the CRA has already initiated an enforcement action, including sending out an audit letter.
For more information on filing your income tax return, on time or late, check out the CRA website.
[This article has been updated since being first published in March 2015]