Every year, millions of individuals, approximately 3.5% to 4.8%, do not submit their tax returns to the CRA in time. For those that filed late in one year, about 35% delayed filing their subsequent years’ returns as well. Submitting taxes on time can be a struggle for many. Sometimes life gets in the way, and tax deadlines are the last thing you’re thinking about.
Don’t worry, we understand.
There are many reasons for not filing your taxes on time:
- You know you will owe and don’t have enough funds to pay it
- Lost track of financial records and don’t have the necessary information to estimate the required amounts
- Had a major life event (medical issues, marriage, divorce, unemployment) and were unable to file
- Get overwhelmed with the idea of filing your taxes that you avoid doing it
- Or maybe you simply forgot!
Whatever the reason, a late tax problem can come back to bite you if not addressed as soon as possible.
In this article, we will cover
- What to expect from the CRA when you don’t file
- Easy methods for getting filed up and fixing your tax problem
- Common misconceptions about late taxes
According to the CRA, approximately 3.5% to 4.8% of individuals do not submit their tax returns on time. Late tax filing is most prevalent amongst young tax filers, residents of Ontario, Alberta, and British Columbia, non-residents, and low-income earners. The CRA also notes that late tax filing is often a repeat behaviour, and found that among those that delayed filing their 2005 returns, 34.4% delayed filing the next year's returns, and 21.3% delayed the year after that.
But what really happens if you don’t file your taxes on time?
First, you will get charged fines and penalties.
Individual income tax filers (including sole proprietors and partners), who file their tax late and have a balance owing to the Canada Revenue Agency (CRA) will be subject to a late filing penalty, which is:
- 5% of your balance owing, plus
- 1% of your balance owing for each month the return is late, up to a maximum of 12 months
If you have already been charged the late-filing penalty in any of the three previous tax years, the penalty increases to:
- 10% of your balance owing, plus
- 2% of your balance owing for each month the return is late, up to a maximum of 20 months
You may also lose your benefits, as for many federal and provincial benefit programs you must file a return to get benefits based on reported income.
You may lose benefits for:
- Canada Child Benefit
- Canada Workers Benefit (formerly WITB)
- Guaranteed Income Supplement
- GST/HST Benefit
- Provincial & Territorial Credits such as Ontario Trillium Benefit or Solidarity Tax Credit for Quebec Residents
Depending on your case, if you do not file your taxes for an extended period of time, the Canada Revenue Agency may investigate and demand payment in full for your taxes. If you have not filed they will look at your records and estimate how much your income and expenses are, and (often incorrectly) assess you for a certain tax amount. When you receive this notice of assessment, you have a 90 day grace period to respond and pay before they can take collections actions.
After 90 days, the CRA has a whole host of powers in order to collect on the amount owing. They can:
- Seize assets or property- The CRA can seize property that you own, such as your car and residence. The CRA can then have these assets sold by a court enforcement officer and use the revenue to pay off your debt.
- Garnish wages- The CRA can garnish up to 50% of your employment income (and 100% of other income) if you do not pay your tax debt. If you do freelance or contract work, you could potentially lose 100% of your income. If you lose a large portion of your income this can make affording living expenses very difficult.
- Seize Accounts Receivables- If you are self-employed and own a business, the CRA can seize your accounts receivables - this can be very dangerous for cash flow for a small business and can make it difficult for a small business owner to pay the rent, pay their employees, and afford their product supply.
- Place liens on properties- A tax lien is a claim on your property for unpaid tax debts. It has the same effects as a mortgage. It is a charge registered against your house, and if you ever tried to sell your home, the CRA would have to be paid first.
- Freeze bank accounts- CRA can freeze your bank account without going to court and without notifying you ahead of time. The process begins with a Requirement to Pay which is sent to you and to your bank. This tells the bank that you owe money to the Canada Revenue Agency and directs the bank to freeze the account and then forward any money in the account directly to the CRA.
So how do you avoid this?
There are many options for getting filed up with the CRA to minimize consequences. Namely,
- The Voluntary Disclosure Program (VDP)
- Taxpayer relief
- Payment Plans
One of the best options, if you qualify, is the Voluntary Disclosure Program (VDP) which gives you a second chance to file tax returns that you should’ve previously filed, without having to pay penalties or face legal action. This option is only available to those who have not yet received a notice of assessment from the CRA - if they have already contacted you about your missing returns, you no longer qualify for the program.
The Voluntary Disclosure program is a good option for those who have not filed for a number of years and would like to get caught up before the CRA catches them and get charged penalties. Hiring a professional is highly recommended however because the VDP program has very specific eligibility requirements, and you can only apply once - if you incorrectly submit your VDP application you will not be able to apply again.
Another option for those who do not qualify for the Voluntary Disclosure program is applying for taxpayer relief. If you were faced with exceptional circumstances that affected your ability to file, you may qualify for relief from penalties and interest. In this case, you must fill in and submit Form RC4288 “Request for Taxpayer Relief - Cancel or Waive Penalties or Interest” available on the CRA website. Examples of exceptional circumstances include:
- You have suffered a serious illness or accident
- You are undergoing emotional distress from a divorce or death of a family member
- You have suffered a disaster such as a fire, flood, or earthquake
- If you are communicating by mail, disruption via a postal strike
You may also avoid penalties and interest if the delay is a result of actions by the CRA, including:
- Processing errors by the CRA
- Incomplete or incorrect information on the return, resulting in corrections or requests for additional information by the CRA
- Delays in processing resulting in a late assessment of amounts owing
- Delays resulting from reviews, audits, objections, or appeals
The CRA may also waive penalties and interest if the inability to pay is due to financial hardship. This includes unemployment, loss of business income, significant medical or other bills, etc.
If neither of these options are available to you, another common option is setting up a payment plan. If you cannot pay your taxes in full, you may sign up for a payment plan with the CRA to pay off a certain amount every month until your balance reaches zero. Hiring a tax professional will ensure you can negotiate a favourable payment plan based on your financial situation - otherwise, you may still set up a payment plan directly with a CRA officer, but bargaining for a certain payment amount will be difficult.
Having a late tax problem can be a scary experience, and the taboo around tax problems means that Canadians are often misinformed about what can happen when you have a late tax problem. One major misconception we hear at the Tax Mechanic is that clients are afraid they will go to jail for having a late tax problem. Many clients come to us who haven’t filed for years, feeling like a criminal hiding from the law. Many have admitted they avoided getting caught up out of fear of getting in serious legal trouble from it.
If that’s you - don’t worry. The CRA is not like the IRS, they will not pursue a charge against you unless you’ve been committing serious tax fraud or millions worth of tax evasion. The average Canadian that has simply failed to file for a few years doesn’t have to worry about anything past perhaps some fines and penalties - and even that can often be avoided if you have a professional to file for you that knows what they’re doing.
But that’s not to say you won’t face any consequences. On the opposite end of the spectrum, many clients come to us distressed with CRA threats of enforcement actions, and steep penalties and fines because of a late tax problem - many thinking that the CRA would never catch them if they did not pay.
The CRA spends millions of dollars a year on enforcing tax compliance. Statistically speaking, it is very likely that the CRA will find you eventually and leave you with prosecution or penalties for avoiding taxes, so simply hoping your tax problem will go away is not a viable option.
Take the easy route out - hire the Tax Mechanic and fix your tax problem easily and affordably.