Be aware of penalties and interest

The concept of increased penalties for repeat offenders is now firmly entrenched in the Income Tax Act.

The penalty for filing a return late is 5% of the unpaid taxes plus an additional 1% for each complete month the return is late, up to a maximum of 12 months—a maximum penalty of 17%.

Additionally, if you’ve been assessed this penalty for any of the three previous years and the CRA issues a demand to file the current year’s return, the penalty for a repeat offence will be 10% of the unpaid taxes plus an additional 2% per month for a period up to 20 months—a maximum penalty of 50%. Similarly, if you fail to report an amount for a given year and then fail to report another amount in any of the three subsequent years, a special penalty will apply which is equal to 10% of the amount you failed to report for the second time.

And don’t forget the interest that can be assessed for failing to remit the appropriate amount of income tax instalments (see topic 169).

There is also a penalty for late filing information returns even though no taxes are owing. The amount of the daily penalty (to a maximum of 100 days) is based on the number of slips of a particular type that are late-filed.

To reduce the amount of late filing penalties when the number of slips of a certain type that are filed late are 10 or less, the CRA has introduced an administrative policy for certain types of information returns (T4, T4A, T4E, T5, NR4).

For example, there is a $100 flat penalty when one to five slips of a certain type are filed late by a taxpayer. When six to 10 slips are filed late, the penalty is $5 per day, subject to a $100 minimum and a $500 maximum. But when more than 10 slips are filed late by a taxpayer, the penalty is equal to the legislated amount of $10 per day, subject to a $100 minimum and $1,000 maximum, increasing to $75 per day where over 10,000 slips are late filed. Information returns subject to the legislated penalties (i.e., not subject to the administrative relief) include foreign reporting forms (T106, T1134, T1141, T1142 and T1135) and non-profit organization returns (T1044). Generally, the CRA’s administrative policy is to charge the penalty in all cases, even for first-time late filers.

There are also penalties for failing to provide your SIN (social insurance number) or your BN (business number) or for failing to include the SIN or BN on an information slip you have prepared. Partnerships and tax shelters are also subject to penalties for failure to file the required information returns.

Even bigger penalties

If you knowingly, or in circumstances amounting to gross negligence, make false statements or omit information from a return, a penalty may be imposed that is equal to whichever is the greater of $100 or 50% of the tax avoided or benefit improperly claimed. And if the CRA finds that a false statement or omission amounts to tax evasion, a fine of 50% to 200% of the tax evaded may be imposed.

The interest rate charged on amounts owing to the CRA is 2% higher than the rate the CRA pays on refunds to non-corporate taxpayers (4% higher than the rate for corporate tax refunds). The increased rate applies to all amounts owing to the CRA, including unpaid taxes, instalments and source deductions.

Voluntary disclosures

It is the CRA’s policy not to impose penalties when a voluntary disclosure is made. If a taxpayer has never filed tax returns and the returns are then voluntarily filed, the taxpayer will be required to pay only the tax owing—with interest—on the reported incomes. If a taxpayer has given incomplete information in a return and subsequently submits the missing information, the taxpayer will be required to pay only the tax owing on the adjusted income, with interest.

To make a voluntary disclosure, you have to initiate the process. A disclosure is not considered voluntary if it arises when the CRA has begun an audit or a request for information has been issued. Contact your tax adviser regarding initial contact with the tax department and the information to be provided.

Ministerial discretion to waive interest and penalties

In some cases, interest and penalties may have arisen through no fault of your own. To deal with such inequities, there are rules that give the minister the discretion to waive or cancel interest or penalties (see topic 166).

Tax preparer penalty

For returns of income for the 2012 and subsequent taxation years that are filed after 2012, a “tax preparer” is required to file T1 and T2 returns electronically. For this purpose, a “tax preparer” is defined as a person or partnership who, in the year, is paid to prepare more than 10 T2s or more than 10 T1s. A tax preparer who fails to file in the appropriate manner will be subject to a penalty equal to $25 for each failure to file a T1 in electronic format and $100 for each failure to file a T2 in electronic format.

This requirement is subject to the following exceptions:

  • A tax preparer may file in a calendar year by other means up to 10 T2s and 10 T1s;
  • A tax preparer will not have to file electronically if the application to file electronically has been denied or revoked for the year;
  • The CRA may specify that certain returns cannot be filed electronically; and
  • Certain types of corporate returns are not required to be filed electronically.

Civil penalties for misrepresentation by third parties

It’s not only taxpayers who have to deal with the prospect of penalties—tax preparers and other third parties can be subject to two different penalties: one for advising or participating in a false filing (preparer penalty) and the other for participation in a tax shelter or other tax-planning arrangement that includes a false statement or omission that may be used for tax purposes by another person (planner penalty).

Reporting requirements for certain tax avoidance transactions

As if all of the above isn’t enough,  taxpayers and their advisers or promoters are required to report certain tax avoidance transactions to the CRA. If the required information return is not filed as and when required, each person who is required to file will be liable to pay a penalty and the CRA will deny the tax benefit resulting from the transaction. If the taxpayer still wants to claim the tax benefit, the taxpayer is required to file the required information return with the CRA, as well as pay the late-filing penalty.

The reporting requirement applies to certain avoidance transactions entered into after 2010, as well as avoidance transactions that are part of a series of transactions commenced before 2011 and completed after 2010. Where applicable, an information return, Form RC312 “Reportable Transaction Information Return,” is due on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction.