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.
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.
Also read: How to File Taxes Without a T4>
The High Costs Of Cheating
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 Canada Revenue Agency to prosecute you.
First off, if you owe tax for 2014 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 looking at a six per cent hit if you end up filing in early June.
Your late-filing penalty could even be higher if you’ve already been charged a late-filing penalty on a return for any of the three previous years. In this instance, you’re looking at 10 per cent plus two per cent per month, to a maximum of 20 months.
Procrastinating Only Makes Things Worse
Here’s another date to remember. While the returns for self-employed individuals aren’t actually due until June 15, you’re still expected to settle up by April 30 if you owe taxes and want to avoid interest charges.
But what if you simply haven’t been keeping up with things? 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.
Bad idea. This type of procrastination hurts as well since the CRA will monitor your financial behaviour over time, using identifiers like your SIN, your date of birth to access data from your bank accounts or your credit card transactions, warns Ottawa lawyer Paul DioGuardi, author of The Taxman Is Watching: What Every Canadian Taxpayer Needs to Know and Fear.
And waiting until you’re caught, or until an investigation on your return has begun, means your bargaining power is reduced. Better to fess up instead, suggests DioGuardi, adding that asking for a reprieve is a delicate situation that requires legal advice.
Apply For Tax Amnesty
CRA’s policy is to encourage tax laggards to come clean through a voluntary disclosures program sometimes called a tax amnesty or tax pardon. 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.
The whole thing must be voluntary though. Your plea won’t be accepted if the goal is just to avoid late filing or installment penalties, or if the CRA has already initiated an enforcement action, including sending out an audit letter.