Understanding Tax Debt Interest and Penalties

It’s an accepted part of life in Canada that if you live in this vast country you pay taxes, either as a business or as an individual. As Benjamin Franklin wrote, nothing is certain in life, except death and taxes. For the taxes we pay, Canadians enjoy education, a good healthcare system, transportation and infrastructure, and a large range of public services.

However, not everyone who should pay taxes or pay the amount they should. No one really knows how many Canadians are evading taxes, but the CBC reported last year that Canada Revenue Agency’s (CRA) tax evasion snitch line received more than 32,000 leads in 2017. (https://www.cbc.ca/news/politics/cra-snitch-line-focus-group-1.4798220). That number doesn’t sound too high, but of course, it doesn’t reveal how much those individuals owe the government in both income tax and GST.

Avoidance of your tax debt in Canada isn’t a good idea as generally the longer you avoid tax debt the worse it gets and the more difficult it is to get out of without assistance. In fact, owing the government tax dollars can bring on a whole new level of stress! The penalties and interest on tax debt—be it income tax, GST, or other taxes—can add up quickly. Interest charged by the CRA is compounded daily which can make it grow quickly.

What Are The Penalties For Tax Debt?

If you fail to file your income tax return on time, don’t make GST payments, or fail to make payments for tax debt to the CRA, the penalties are eye-watering! For a start, an unpaid balance is charged compound daily interest. Those in tax debt are also charged interest on the penalties charged. The interest rates charged by the CRA can change every three months, so we’re not going to quote the figures here. However, you can find them via this Government of Canada webpage.

However, here are some of the fees to which late taxpayers can be subject. If you do not file your income tax return on time and are owed money, don’t worry. There is no fee. But if you owe money to the Government of Canada, you will be charged a late-filing penalty. At the time of writing this post, the fee is 5% of your tax balance owed to the CRA. In addition, you will have to pay an additional one percent of the balance you owe for every month your return is late. This can run on for 12 months if you do not pay in that time, meaning that you could owe the government 17 percent on top of your tax owed!

Canadians who file late over and over again are classed as repeat late filers, and there is an additional penalty for such individuals. The late-filing fee can increase by up to 10 percent of your owed balance, with an extra two percent of your balance for each month your tax return is late. This can run on to a maximum of 20 months. So you can see how easy it is for tax debt, even for a regular tax payer with good intentions, to quickly get out of control. Often people will try and use money the need for the following year’s taxes to pay their current taxes owing with then puts them in a perpetual CRA debt with growing interest.

Tax Debt: What if I have Made False Statements or Omissions?

Every Canadian is required to provide truthful information to the CRA. The information you provide must be accurate and there can be no omissions. If the CRA discovers or comes to believe that you have knowingly made a false statement, have omitted information on your income tax return, or that you have been negligent, you could be charged a penalty of $100; or 50 percent of the non-reported tax, and/or the overstated credits related to the false statement. The CRA can apply different rates and these may depend on what you have not reported.

Tax Debt Penalties For Repeated Late Filers

If the CRA classes you as a repeated late filer and you fail to report an amount on your income tax return (either by mistake or deliberately) and you also failed to report an amount in any of the previous three years’ returns, you may have to pay a provincial/territorial and federal penalty to both jurisdictions of 10 percent of the amount that you failed to report on your most recent return.

Tax Debt Penalties For GST/HST Returns

If you own a business and are GST registered, you must file a GST/HST returns. If the return is late or there are overdue balances, the CRA can charge interest on an overdue balance owing on a return, insufficient installment payments, and any overdue GST/HST amounts that you are required to submit. You may face a penalty if you do not file your GST/HST return when it has a balance owing, failing to file after the CRA has issued you a ‘Demand to File’ notice, failing to file electronically, or not filing accurate information.

What Kind of Power Does the CRA Have?

The CRA has a broad range of power it can use to investigate individuals and businesses suspected of cheating the tax system. The agency can review bank records, access business and payroll records, and examine land registries and other electronic data to see what assets an individual or business has in order to identify irregularities. The CRA can request any document that it deems necessary for an audit. In this age of electronic payments and transfer of information, it is difficult to hide information from the CRA, and not worth trying.

In addition to hefty fees in penalties and interest, the Canadian government can aggressively pursue tax dollars it is owed and will do so unless you make arrangements to pay your taxes or enter into a process such as a bankruptcy to relieve unpayable tax debt. You be pursued for the back tax money you owe both via your assets as well as your bank accounts, and also directly from your employer. Additionally, f you don’t make arrangements to pay or try to resolve your tax issues, you could, although it is rare, potentially face time in prison at a future date. A conviction for tax evasion can mean expensive fines and up to five years in prison. If you have committed fraud by either hiding income or making false claims, you could be facing a maximum of 14 years in prison under the Canadian Criminal Code. Prosecution under the Tax Act or the Excise Tax Act isn’t a pretty picture and one that most people want to avoid!

Tax Debt Solutions

If you’ve read this far and feel more anxious than ever, it’s important to know that in some circumstances the CRA will consider reducing penalties and fees if you are willing to work with them and/or develop a payment plan. However, if you think your tax issues may be beyond that point, at Kevin Thatcher & Associates, we offer free consultations where we equip you with the information you need to deal with this serious and pressing problem before it causes additional financial hardship. Reach out to us today on 1-888-329-5198 and we will help you address your back tax problems.