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 all 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. Interest begins to accumulate as of the balance-due day. The balance-due day is generally two months after the fiscal year-end of the corporation. The balance-due day is extended to three months after the fiscal year-end for Canadian-controlled private corporations that claimed the small business deduction in either the current or prior year, if the taxable income of the corporation plus all associated corporations did not exceed the business limit (currently $500,000) in the previous year.
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 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. The due date for corporation income tax returns is six months after the fiscal year-end. If a return is late-filed, then the corporation will be subject to a late-filing penalty calculated as 5% of the balance owing as of the filing deadline plus 1% of the unpaid tax for each complete month that the return is late up to a maximum of 12 months (maximum penalty of 17% of the balance owing). This means that a late-filing penalty generally will not be assessed if the return is filed on time, or if the return is late-filed but the balance owing is paid prior to the filing deadline. While we always advise to do both, it is critical that at a minimum you either file or pay on time.
Large corporations may be subject to a late-filing penalty even if there is no unpaid tax as of the balance-due date. A corporation is a large corporation if the total taxable capital employed in Canada at the end of the tax year by it and its related corporations is over $10 million. A large corporation will be subject to a penalty of 0.0005% of the corporation’s taxable capital for each complete month that the return is late-filed up to a maximum of 40 months. The calculation of taxable capital has many variables so please contact us if you believe this may apply to you.
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.
Corporations are required to electronically file their corporation income tax return if gross annual revenues exceed $1,000,000. The penalty for non-compliance is $1,000.
Penalties may also be assessed on other late-filed informational returns that are due with your tax return, such as T1134 Information Return Relating To Controlled and Non-Controlled Foreign Affiliates or Form T1135 Foreign Income Verification Statement. Form T1134 is due no later than 12 months after the fiscal year-end and Form T1135 is due no later than six months after the fiscal year-end. The penalty on these forms 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 individual income tax account, GST/HST account, payroll 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