Personal Finance

CRA Taxes – Late Filing Penalties – Reader Question

Last week I received an email from a reader (Michael) which was quite unusual for 2 reasons – 1) we rarely get emails from readers and 2) it was a good question.  🙂

A friend of my girlfriend hasn’t filed his taxes in 4 years, and we were just wondering what the repercussions will be when he either starts to pay or gets caught not filing them?

This is interesting – I have one friend who didn’t file taxes for over 10 years. He eventually hired an accountant and got caught up but I’m not sure if he had any penalties or not. I was only late with my taxes once which is how I was able to learn about the penalties and interest charges.

If you thinking about buying tax preparation software then consider software programs such as TurboTax or TurboTax Canada (formerly QuickTax).

Late filing penalty

According to the CRA website, the basic penalty for late filing is 5% of any taxes owing plus 1% for each additional month you are late up to 12 months.

The penalty is 5% of your 2008 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. If we charged a late-filing penalty on your return for 2005, 2006, or 2007 your late-filing penalty for 2008 will be 10% of your 2008 balance owing, plus 2% of your 2008 balance owing for each full month that your return is late, to a maximum of 20 months.

This may not seem like a lot if you are only a month or 2 late but if you were 7 months late like I was then the penalty ends up being 12%.  The time I was late I think I owed something like $600 so the late filing penalty was $72.  As you can see from the description, the penalties are even more severe if you have previous late charges.

Interest charges

As if the penalties aren’t enough – the government also charges interest.  The rate is usually about 5% annually.  $600 owing on a 2008 return filed 7 months late would be about $17.50 which isn’t too bad.

Add it up

My total penalty for the $600 owing – 7 months late would be $89.50 or 15% of the amount owing.   I remember being quite surprised at how much the penalty was since I didn’t realize it got higher by the month.  I had thought that once you are late, it didn’t matter how late you were.  If nothing else – I never filed late again. 🙂

Penalties are only charged on taxes owing

One key thing to remember is that if you don’t owe anything then there will be no penalty for filing late.  Hopefully the reader’s friend is in this situation.  There is recourse for getting taxpayer relief but after skimming the article it doesn’t look like “not getting around to it” is included in the list of circumstances where the penalties and interest might be waived.

Get it done

My suggestions:

  • Make every effort to file your taxes every year on time.
  • If you are late then get it done as quickly as possible since the penalty and interest charges increase every month.
  • If you have a situation where you are way behind in 1 or more tax returns then make it a priority and get it done.  Hire an accountant or tax preparer if you have to.
  • Hire a good tax attorney if you are really in trouble.

Getting caught?

One part of the reader email I didn’t address was about “getting caught”.  I don’t know if the CRA will send you a letter or arrest you or what.  I would assume they already have some idea if you owe money and if it is a high amount they might be giving you a call.  Does anyone have any experience with that sort of thing?