We could almost liken it to a disease: the tax snowball effect.
You miss one year of income tax filing (busy with income generating work, flood in the office, procrastination…and lots of other reasons CRA will not really care about). Then the next year you are worried that you do not have the money to pay the previous year, so you miss another year and so on. It just gets bigger and bigger.
Some people procrastinate, others are worried they will not be able to pay the tax, while still others just do not have good records or receipts and feel like they simply do not have what they need to get filed. Some feel they cannot afford an accountant and are overwhelmed by the complexity of taxes and small business. Payroll taxes, GST/HST, income taxes – different reporting periods for each and forms, forms, forms. All of these things can contribute to late or missed filing.
One of the easiest of these problems to fix is not letting a lack of proper records be the reason you do not file. From your bank and credit card statements the financial information can be rebuilt. In a case where there are no statements (some businesses are all cash income and expenses with no records) you can have an indirect determination of income performed to estimate your income and expenses. Fancy words used by accountants and CRA for a formal method of estimating your taxable income by making assumptions based on lifestyle and business volume. There are always options – and these far outweigh the negatives that will accompany the choice to continue failing to file.
The worst thing that you can do is keep repeating the error of avoiding the responsibility. That will create even larger financial problems!! Ignoring it will not make it go away!
Here is what CRA states regarding penalties:
“Late-filing penalty: If you owe tax for 2013 and do not file your return for 2013 on time, we will charge you a late-filing penalty. The penalty is 5% of your 2013 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.
If we charged a late-filing penalty on your return for 2010, 2011, or 2012 your late-filing penalty for 2013 may be 10% of your 2013 balance owing, plus 2% of your 2013 balance owing for each full month your return is late, to a maximum of 20 months.”
Most of the late filers are unfortunately in the category of multiple years. Assume the taxes owing for 2013 were $20,000 and the filing was 3 years late. The penalties would be 10% of the taxes ($2,000) PLUS 2% ($440 because you owe the 2% on top of the 10%) for 20 months maximum. Total is $9,000 in penalties.
Here is what CRA states regarding interest:
“If you have a balance owing for 2013, we charge compound daily interest starting May 1, 2014, on any unpaid amounts owing for 2013. This includes any balance owing if we reassess your return. In addition, we will charge you interest on the penalties starting the day after your return is due. The rate of interest we charge can change every three months.
If you have amounts owing from previous years, we will continue to charge compound daily interest on those amounts. Payments you make are first applied to amounts owing from previous years.
Interest on unpaid taxes may be waived or cancelled under certain circumstances. See Taxpayer relief provisions.”
Putting our example back into dollar terms this will compound your total bill to $33,693.09.
So by waiting 3 years to deal with the tax issues you turned a $20,000 debt into a $33,693.09 debt. Almost 70% more to pay with interest and penalties. But please read on – we do offer you some real relief options later on – but first it unfortunately gets worse.
There were over 100 prosecutions for 2014 alone – and many of these included not only heavy fines but also jail time. Check out the CRA Prosecution website for more examples: http://www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html.
Do not get caught in an avalanche. See a tax consultancy firm that specializes in reducing interest and penalties – sometimes close to zero can be achieved based on your facts – and who knows how far CRA can be made to go in getting reasonable repayment terms. Before you contact CRA or file your late returns you need advice on how to file late returns so that you can qualify for a reduction in interest and penalties. This is not part of the tax return – these are special CRA programs that are set up to encourage people who have made mistakes to get on track with the tax system.
For more tax help please contact Tax Solutions Canada today at 1.888.868.1400.