Some people are in this situation because they are afraid of the financial consequences once the tax debt, penalties and interest have been assessed. That is, they fear they will not be able to pay and have heard all sorts of horror stories about criminal prosecution, huge penalties and heavy-handed CRA collection action.
Under our self-reporting system, CRA has been given huge powers to ensure compliance and punish the non-compliant.
Those fears, unfortunately for taxpayers with unfiled tax returns, are not complete urban myths. However, the bad news is not the whole story. What many are not aware of is that there are processes that can be leveraged to mitigate the financial penalties associated with late filing.
Sometimes, CRA does not wait for a taxpayer to come forward. CRA gets the taxpayer’s attention by raising an assessment (called a Notional Assessment) based on income CRA projects you may have had (while ignoring any reasonable deductions you would claim). If you do not file your Notice of Objection in time (and follow up with other relevant filings and payments) you will incur the wrath of CRA collections enforcement on this notional tax bill (which is usually hugely inflated).
Lesson Number One: you gain nothing by failing to file your tax returns. You can end up with not only penalties and interest but also criminal prosecution for tax evasion.
As mentioned above, the primary reason for non-filing for many is the fear that money will be owed that simply is not there.
Lesson Number Two: While it is uncomfortable to owe money to CRA, it is not illegal.
- If you have not filed and CRA has not contacted you about your late filing, an application under the Voluntary Disclosure Program can enable you to avoid penalties and interest.
- If CRA has contacted you about late filing it is important to get late returns prepared. Even if you do not have all of your receipts, there are legitimate ways to estimate income and expenses to get tax compliant.
If you have been notionally assessed by CRA you have to get your returns re-filed voluntarily. You may not owe as much as CRA has estimated. If you are self-employed and collecting HST – timing is even more important because you will not be able to claim input tax credits 4 years after the tax year in question.
Once your returns are filed CRA will assess penalties and interest if you did not make an application under the Voluntary Disclosure Program.
Now, even though you have filed admitting to income, you should consider filing an Objection to the penalties assessed on your return. While your Objection is under review, CRA will not take enforcement action – BUT if the Objection does not go in your favour you will be subject to further interest that was accumulated on your tax debt and penalties during the period during which your Objection was under review.
If you have suffered some extraordinary circumstance that led to your late filing or inability to pay, such as a medical problem, a death in your immediate family, extreme financial hardship, a disaster has occurred or some other extraordinary circumstance that you can prove, you may qualify for Taxpayer Relief – a program where CRA may agree to grant relief of penalties and interest. If filing an Objection, your relief application can be filed concurrently so that once a decision is made they can immediately begin to look at your relief application.
If your Objection rights have been completely exhausted and you do not want to incur the costs of an appeal to the tax court, CRA will continue to collect from you while your relief application is under review.
These processes, when leveraged properly, can work in your favour, but they are complicated and the right applications have to be made at the right time.
If you have a tax problem and need help, or want more information about VDP or Taxpayer Relief, please contact Tax Solutions Canada today by calling 1.888.868.1400.