I attended a workshop recently where part of the discussion was about how the Canada Revenue Agency penalizes those who do not file and/or pay their taxes on time. It got me to thinking that most people do not truly understand the importance of filing those tax returns by the deadlines set out by CRA.
In slower economic times, like the recession we are in today, business owners get nervous about filing their tax returns- personal, corporate, GST etc. Some even choose not to file because they do not want to see the tax bill, nor do they think they can afford to pay their taxes.
It is important to understand a few terms before we go into an example of what it can cost to be a late filer. First, the term FILE means to report. That is what happens when a GST return or personal (T1) and corporate (T2) tax returns are submitted to CRA. They are filed. This is where the biggest penalty lies – failure to file.
The second term is REMIT. Remit simply means to send payment. Interest is charged on amounts that the taxpayer does not remit by the deadline. I find it difficult at times to help our clients understand the difference between those two and the importance of the filing deadline.
The Canada Revenue Agency imposes a penalty on those who file (report) late as well as interest on any overdue remittances (payments). The following excerpts from the CRA website explain how they calculate those penalties and interest:
Late filing penalty for personal/corporate tax returns:
“First offence – If you owe tax for 2015 and do not file your return for 2015 on time, we will charge you a late-filing penalty. The penalty is 5% of your 2015 balance owing, plus 1% of your balance owing for each full month your return is late, to a maximum of 12 months.
Second offence – If we charged a late-filing penalty on your return for 2012, 2013, or 2014 your late-filing penalty for 2015 may be 10% of your 2015 balance owing, plus 2% of your 2015 balance owing for each full month your return is late, to a maximum of 20 months.”
Interest charged on late personal/corporate taxes owing:
“If you have a balance owing for 2015, we charge compound daily interest starting May 1, 2016, on any unpaid amounts owing for 2015. This includes any balance owing if we reassess your return. In addition, we will charge you interest on the penalties starting the day after your return is due. The rate of interest we charge can change every three months. See Prescribed interest rates.
If you have amounts owing from previous years, we will continue to charge compound daily interest on those amounts. Payments you make are first applied to amounts owing from previous years.”
OK- lets use the example given at our workshop to break this down for easier understanding
Based on Susie’s income for 2015 she has personal taxes owing of $35,000. She has not made any remittances (payments) throughout the year. Now she is nervous about filing her tax return because she doesn’t want CRA to find out how much her income was or how much she owes in tax. She saves up what she believes will be enough to pay what she owes by Sept 30, 2016 and files her 2015 tax return on that day (5 months past the Apr 30 deadline).
Instead of owing $35,000, Susie now owes:
$35,000 tax owing for 2015 + $3500 penalty for late filing (5% of $ owing + 1% for each late month) + $1951 interest compounded on late payment = $40,451.00!!
Although nobody wants to pay interest, it is obvious from this example that Susie would have been far better off to accept that she would be late making her remittance (payment) and gone ahead and filed her return on time. She could have saved herself $3500! The interest alone added to the tax owing would have been more manageable than the total cost after the late filing penalty was added.
****It is important to note here that penalties for failing to file (report) GST returns are slightly different and can be found on the CRA website, but the effect is the same – failure to file is extremely punitive!!
If I could give one piece of advice to our clients, it would be:
DO NOT avoid paying your taxes by choosing not to file your returns on time. DO NOT procrastinate with your bookkeeping so that your GST/Tax filing is late. Meet those deadlines and get those returns filed on time!
Can you afford not to??