All Canadians are required to file their tax returns on time every year. Unless the government extends the deadline, as it had during the COVID pandemic, the deadline is April 30, and filing your taxes late, or not at all, can have severe consequences.
This blog will look at the legal requirements for filing your taxes, the consequences of not filing them and what you can do to rectify the situation.
Understanding Tax Filing in Canada
Overview of the Canadian Tax System
Every year, you must file a tax return to report how much money you have earned, ensure that you have paid all income tax you were supposed to, and access benefits and tax credits.
Key Terms and Concepts
Taxable Income
The amount of money you make in a year determines the income tax you must pay. Certain expenses and tax credits may allow you to reduce the tax you must pay.
Generally, your employer will automatically subtract income tax from your pay and send it directly to the CRA. If you are self-employed, you must keep track of the amounts owed and forward them to the CRA.
Tax Deductions and Credits
You may qualify for specific tax deductions and credits depending on your situation. These include:
- RRSP deductions
- child care expenses
- disability support deductions
- moving expenses
- certain medical expenses
You can check the deductions, credits, and expenses page of the Government of Canada for a complete list.
Legal Requirements for Filing Taxes
Who Needs to File Taxes in Canada
Filing obligations may differ depending on your status, so you must understand your obligations to avoid issues. The Government of Canada has a section on their website detailing the different obligations based on whether you live in Canada, leave permanently or temporarily, and more.
Different Tax Filing Deadlines
There are different filing dates for your taxes. While the dates may vary per year (for example, if the date falls on a weekend or public holiday), generally, they are as follows:
- March 1 is the deadline to contribute to an RRSP, a PRPP or an SPP.
- April 30 is the deadline to file your taxes.
- June 15 is the deadline to file your taxes if you, your spouse, or your common-law partner is self-employed.
Penalties for Late Filing
The Canada Revenue Agency will impose penalties on late tax returns. It will add 5% of the balance owing, plus an additional 1% interest on the balance owing for every month you are late, up to 12 months.
Additionally, suppose you have been subject to a late-filing penalty within the last three tax years. In that case, you will be charged an additional penalty of 10% of the balance owing, plus 2% interest for every late month until you pay, up to 20 months.
Consequences of Not Filing Taxes
Risk of an Audit or Investigation
If you fail to file your taxes, the CRA has the right to order an audit or investigation of your taxes. During an audit, the CRA will closely examine your financial documents and records to confirm whether you are fulfilling your tax obligations, following tax laws correctly, and receiving the benefits and refunds to which they are entitled.
Accruing Interest and Penalties
If you have not submitted your tax return by April 30, the CRA will apply a 5% late-filing penalty, plus an additional 1% interest for every additional month until you pay, up to 12 months.
Additionally, suppose you have incurred a late-filing penalty within any of the three previous years and received a formal demand for a return from the CRA. In that case, the late-filing penalty will be 10% of your balance owing, plus an additional 2% for every month past the due date, up to 20 months.
If you have outstanding tax debt and have not paid the balance by the due date, the CRA will charge you monthly interest on the current or previous balances. The interest rate may change every three months, according to the prescribed interest rates by the CRA.
If you have made arrangements for tax instalments with the CRA, they may impose a tax instalment penalty if you cannot make the payments or make them late. This penalty will only be applied if the instalment interest charges exceed $1,000.
You may request the CRA to cancel or waive penalties or interest if you can’t meet your tax obligations due to circumstances beyond your control. In this case, the CRA may grant relief within 10 years of your request date.
Impact on Government Benefits
One of the most significant impacts not filing your taxes has on government benefits and assistance programs. Failure to file your taxes on time may lead to a disqualification from, among others, the Canada child benefit (CCB), the GST/HST credit, or the Guaranteed Income Supplement (GIS).
Negative Impact on Credit Score
Due to the CRA’s privacy rules, it can’t share your tax information with Canadian credit bureaus. So generally, late tax returns and payments and incurring penalties will not affect your credit score.
Possibility of Legal Action
If you have not filed your taxes and have outstanding tax debt, the CRA may garnish your wages or bank account, seize and sell your assets, or use any other means under the laws that apply to collect the amount you owe.
Before they can do so, however, they have to do the following:
- Make 3 attempts to give a verbal legal warning by phone
- Send 1 written legal warning letter.
If you have not filed your taxes for an extended period, the CRA may issue an arbitrary Notice of Assessment. Typically, these types of assessments will require you to pay more tax than you would have paid had you filed a return.
There also are penalties for tax evasion, which can be harsh. As per Section 238 of the Income Tax Act, failing to file your tax return can result in a $1,000 to $25,000 fine. Additionally, you may also face up to one year in prison.
Canada Revenue Agency (CRA) Procedures
How Does the CRA Identify Non-Filers?
The CRA searches financial records, real estate records, social media and any other information they can gather looking for unreported income.
The CRA employs a wide range of tactics to check if you may be making more money than you let on (or if you make any money if you don’t file your taxes at all).
The CRA may monitor your social media accounts for suspicious activity, such as posting pictures of an expensive purchase.
They also can data-mine pages such as Etsy, Kijiji or eBay to determine if you’re only selling random belongings or running a small business and don’t declare the profits.
The CRA can request financial information from all Canadian financial institutions if they suspect undeclared taxable interest or other financial gains.
The CRA’s Approach to Non-Compliance
In the case of non-compliance, the CRA may take action beyond charging interest or penalties, such as garnishing your income or bank account, seizing and selling your assets, or use any other means under the laws that apply to collect the amount you owe.
Communication and Notifications from the CRA
Before they can take legal action, the CRA has to do the following:
- Make 3 attempts to give a verbal legal warning by phone
- Send 1 written legal warning letter.
Steps to Rectify Non-Filing
Options for Catching Up on Missed Filings
If you have missed the filing deadline, try to file any outstanding tax returns as soon as possible to reduce the financial impact. There are many ways how you can catch up on missed filings. It can be a daunting task depending on how many years behind you are, but it can become less challenging if you follow these steps.
Gather your Paperwork
First, get as much of your paperwork as possible sorted by year. Among the documents you should look for are:
- Tax slips (T4, T4A, T5 etc)
- RRSP contribution receipts
- Charitable donation receipts
- Medical receipts
- Business expense receipts
If you are missing paperwork, don’t get too nervous; for example, you can get most of your tax slips from the CRA, and if you are missing receipts for tax deductions, they are not essential to filing your taxes. If you find any receipts later, you can request to change an already filed tax return.
Prepare the Returns
Once you have all documents, start preparing the returns, one year at a time. If you have trouble finding tax software for previous years, you can file them on paper (the CRA website has forms available) or hire a tax preparation company.
Where to Start?
The most straightforward way to work off your tax returns is chronological, giving you two options: Oldest to newest or starting with the most recent one and working backwards.
They both have their benefits and drawbacks. While starting with the oldest can give you continuity and figures you can carry forward, filing your most recent year first can give you the confidence to continue, as you are more likely to have all the necessary documents and remember all relevant details.
Voluntary Disclosure Program (VDP)
The CRA offers the Voluntary Disclosure Program (VDP) to grant relief on a case-by-case basis to taxpayers and registrants voluntarily coming forward to fix omissions and errors in their tax filings before the CRA knows or contacts them about it.
Seeking Professional Assistance
Catching up on your tax returns can be a daunting experience, especially if your financial situation is not straightforward and may have exceptions or conditions. A professional tax preparation company might be a good choice in cases like these as they have the expertise and experience to deal with any situation.
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Frequently Asked Questions (FAQs)
What Happens if I Miss the Tax Filing Deadline?
If you have missed the tax filing deadline, try to file the missed return as soon as possible. While you cannot avoid the late-filing penalty, you can reduce the impact of the interest charged on the balance.
Will the CRA Automatically Assess Penalties for Late Filing?
Yes. Suppose you file your tax return late and have a balance owed. In that case, the CRA will automatically assess a 5% late-filing penalty and 1% of the balance owing for each month the return is late, to a maximum of 12 months.
Can I Avoid Penalties if I Didn’t Owe Any Taxes?
You will not be assessed penalties if you don’t owe taxes. However, it can have other consequences, such as a disqualification from certain government benefits and tax credits, such as the child tax credit or GST/HST credit.
How Does Non-Filing Affect My Government Benefits?
You must file your taxes to ensure you receive government benefits such as the child tax credit, the Guaranteed Income Supplement (GIS) or the GST/HST credit.
Can I Go to Jail for Not Filing Taxes?
If the CRA assesses that you have engaged in tax evasion, you can face severe financial penalties and, depending on the severity of the offence, up to two years in prison.
What are the Advantages of Using the Voluntary Disclosure Program?
The most significant advantage of the Voluntary Disclosures Program is that the CRA may grant relief case-by-case to taxpayers and registrants voluntarily coming forward to fix omissions and errors in their tax filings before the CRA knows or contacts them about it.
Summary
Filing your taxes late can result in penalties, additional interest and disqualification from government benefits and tax credits. So keeping track of the filing deadlines is vital to avoid penalties and additional financial burden. If you have fallen behind in filing your taxes and paying your CRA tax debt, there are solutions for you.
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