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input tax creditsDoes this sound familiar?

  • You have a small business, you fail to file your GST/HST tax return one year.
  • The following year rolls around. Now you are worried about filing that return because you didn’t file the other one. You may or may not have all of your receipts and records – so you decide you will take care of it later. Business is tough. You are too busy staying in the game.
  • Year 3 rolls around. Now you are really, really worried. You have 3 years of tax returns that have not been filed and most certainly are going to have a huge tax debt and now penalties and interest too.

Sound familiar? Well don’t think that your situation is uncommon because it’s not. As a small business owner you have even more at risk by falling behind on your tax filings. In many businesses the ability to claim input tax credits (the GST / HST you paid on your supplies and business overheads) are an important credit. In the case of exporters or companies doing trucking for USA companies this is usually a big cheque back from Canada Revenue Agency.

After 4 years has passed you do not qualify to include input tax credits in your GST/HST returns.

That’s it. Your credit just went up in smoke.

Not to mention the following other consequences (in order of severity):

  1. CRA can notionally/arbitrarily assess you at any time. When this happens they basically guess what your income for a particular tax year may have been, assess you, add penalties and interest retroactively to the tax year in question.
  2. CRA can prosecute you for tax evasion. (To see more about tax evasion specifically, click here.

Time can be your friend. The faster you act the better.

If you are currently in this situation you need to get your late returns filed. It is not illegal to have a tax debt – tax evasion however is a serious crime.

  • If you are within the 4 years you can take advantage of input tax credits.
  • If CRA has not demanded that you file a return, you may be able to file your past due returns under the Voluntary Disclosure Program and avoid penalties and prosecution. However, this is not as easy as it first appears. We recommend that you engage a professional with significant experience in this area of VDP – you have only one shot to make this application the right way.
  • If CRA has demanded that you file your returns and the Voluntary Disclosure Program is not an option, you still have to get those late returns filed. You may be able to reduce the interest and penalties through the Relief Program – again this is not simple to get right. We suggest that you consult a professional.

Often it is the simple fact that good businesspeople are bad at bookkeeping. The fact that your records are in a mess – missing or disorganized does not have to be the reason you lose your credits or face prosecution, arbitrary assessments and unfair taxation. So if you have a records mess here are some tips:

  • Create a chart with columns for all of the business expenses that you incur. Sort and enter whatever expenses you can find from invoices, credit card statements and cheque stubs. Ask your major suppliers for copies of their records.
  • Request your bank statements from the bank for the tax years in question. You may have to pay a fee but this will give you a good starting point to estimate your business income and expenses. Most people can access these on-line at no fee.
  • It is never too late to get it straight. If you feel like you are in over your head hire a bookkeeper to help you organize your income and expenses.

Once your late returns are organized you will need a plan to deal with the tax debt that will follow. If you haven’t filed for many years it is a good idea to work with a professional who specializes in all of the programs under the tax laws and (most importantly) in negotiating with CRA. Once the returns are filed you will need representation to ensure that a payment plan is put in place that you can live with and that CRA will accept. Without a payment plan CRA will take heavy handed enforcement action.

For more information about what to do if you are behind filing your tax returns please  call 1-888-868-1400.