The most commonly assessed Tax Penalties are:
- Late-filing penalty
- Repeated failure to report income penalty
- False statements or omissions penalty
If you owe tax and do not file your return for the first year on time, the Canada Revenue Agency will assess you a late-filing penalty. The penalty will be 5% of the first year balance owing, plus 1% of your balance owing for each month that your return is late, to a maximum of 12 months. Or a maximum of 17% of tax owing for the first time offender on late filing.
If you file late a second time within three years of the prior, your late filing penalties increase to a maximum of 50% of the tax owing. For example, if charged a late-filing penalty on your return for any of 2007, 2008, or 2009 your late-filing penalty for 2010 may be 10% of your 2010 balance owing, plus 2% of your 2010 balance owing for each month that your return is late, to a maximum of 20 months.
Repeated failure to report income penalty
If you forget to report an income amount on your return for one year and you also fail to report an amount on your return for any of the three following years you may be assessed a federal and provincial/territorial repeated failure to report income penalty.
The federal and provincial/territorial penalties are each 10% (or a combined 20%)of the amount that you failed to report on your return.
False statements or omissions penalty
You may be assessed this penalty if you knowingly or under circumstances amounting to gross negligence have made a false statement or omission on your tax return.
The penalty could be as much as 50% of the understatement of tax and/or the overstatement of credits related to the false statement or omission.
If you have a balance owing for a tax year as of April 30th, the CRA charges compound daily interest starting May 1st on any unpaid amounts. This includes any balance owing if the CRA reassesses your return. In addition the CRA will charge you interest on the penalties starting the day after your return is due. The rate of interest CRA charges can change every three months.
If you have amounts owing from previous years, the CRA will continue to charge compound daily interest on those amounts. Payments are always applied to the oldest outstanding portion of the debt.
Avoiding or ignoring tax liability issues is not the right strategy as the CRA has a very long memory. The interest rate the Canada Revenue Agency charges will be up to three times higher than bank rates. Many individuals are surprised that much of their tax liability is interest charged on outstanding tax, this is one reason why it is better to deal with a tax debt immediately.
Some tax debtors must take drastic financial action, perhaps bankruptcy even, because their arrears have gotten out of hand.
Let National Tax Service assist you when filing your tax returns or when negotiating a repayment arrangement.