Updated: Mar 3
One of the most frequent questions accountants hear is “how do I pay less tax?”. Part of the answer to this question is to ensure your returns are filed and balances owing are paid by the deadlines each year. While they are not technically taxes, interest and penalties are an avoidable expense that increase your tax bill.
Canada Revenue Agency charges compound daily interest on all balances owing. Interest is charged at the prescribed rate which can change every three months; this rate is 5% as of the second quarter of 2021. The payment deadline for individual income tax returns is April 30th each year so interest begins to accrue on the balance owing as of May 1st . The balance owing includes unpaid taxes, penalties, and previously accrued interest charges.
You may be required to pay tax by instalments depending on various criteria that I would be happy to advise on separately. If you are required to pay tax by instalments and you receive an instalment reminder from CRA, but you do not make the payments, interest will be charged at the prescribed rate on all late or insufficient payments. An instalment penalty may also be assessed if the total instalment interest charges exceed $1,000. The penalty is calculated as: actual instalment interest charges for the year, less the higher of $1,000 or 25% of the instalment interest that would be charged if you had not made any instalment payments for the year, and then divide the difference by two.
Late-filed returns may be subject to a penalty as well. Individual income tax returns are due by April 30th each year or June 15th if you are self-employed. All individuals, including those that are self-employed, must pay their balance owing by April 30th . If a return is filed after April 30th or June 15th , then you will be subject to a late-filing penalty calculated as 5% of the balance owing as of the payment deadline plus 1% for each full month that your return was filed after the filing deadline up to a maximum of 12 months (maximum penalty of 17% of the balance owing). This means that you will not be assessed a late-filing penalty if your return is filed on time, or if you pay your balance owing by April 30th even though your return was late-filed. While we always advise to do both, it is critical that at a minimum you either file or pay on time.
Repeat offenders are subject to steeper penalties. If you were subject to a late-filing penalty in the current year and any of the prior three years, the current year penalty may be increased to 10% of your balance owing plus 2% of the balance owing for each full month that the return is filed after the payment deadline up to a maximum of 20 months (maximum penalty of 50% of the balance owing).
Repeated failure to report income penalties may also be assessed if you failed to report income of $500 or more in the current year and any of the prior three years. This penalty is the lesser of:
10% of the amount you failed to report on your return.
50% of the difference between the understated tax (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report.
A false statements or omissions penalty may be charged if you made a false statement on your return either knowingly or under circumstances amounting to gross negligence. This penalty is a minimum of $100, up to a maximum of 50% of the understated tax and/or the overstated credits related to the false statement or omission.
Penalties may also be assessed on other late-filed informational returns that are due with your tax return, such as Form T1135 Foreign Income Verification Statement. The penalty on this form is a minimum of $100 or $25 per day up to a maximum of 100 days ($2,500).
Occasionally we are unable to meet our tax obligations in a timely manner due to circumstances beyond our control. Taxpayer relief provisions are available to cancel or waive interest and penalties. You can submit a request to CRA outlining the facts and circumstances and request that they cancel or waive certain charges. Acceptance of these requests is at the discretion of CRA, and relief is limited to periods ending in the 10 calendar years prior to the year that the request is made.
You may also have additional tax obligations in respect of your corporation income tax account, GST/HST account, payroll account, non-resident tax account or more. We would be happy to advise on any of your additional filing and payment deadlines.
Very few of our clients look forward to tax time, but it is important to submit timely and accurate returns each year and pay all balances owing. This will ensure you keep your tax bill to a minimum and keep more money in your pocket.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA