Filing taxes is a legal obligation for every Canadian citizen and business, and not doing so can result in severe consequences. If you haven’t filed a return for a tax year, or you’re curious about the repercussions of not filing, this post provides an overview of how not reporting your income and paying your tax obligation can affect you and how you may be able to avoid the more serious consequences of filing late returns.
This information can provide some guidance; however, if you have unfiled tax returns, it’s best to speak with a Toronto tax accountant to ensure your protection, as every situation is unique.
What are Unfiled Tax Returns in Canada?
An unfiled tax return has not been submitted to the CRA by the due date. Due dates for filing tax returns in Canada vary depending on the type of taxpayer and whether you are filing electronically or mailing a paper return.
Individual taxpayers’ due date for filing tax returns is April 30th of each year. For self-employed individuals, the due date is June 15th, but any balance owing must be paid by April 30th to avoid interest charges.
Corporations have a due date for filing tax returns six months after the end of the fiscal year.
Common Reasons Why Individuals and Businesses Fail to File Their Tax Returns
There could be numerous reasons why individuals and businesses may fail to file their tax returns on time. For individuals, some common causes include not knowing the filing requirements, lack of organization or records or financial difficulties. With businesses, common reasons include a lack of knowledge about corporate tax laws, economic challenges or a lack of personnel resources.
For businesses, unfiled tax returns can affect other types of taxes they must pay, including personal income tax, payroll taxes and sales taxes such as GST/HST.
Potential Consequences of Unfiled Tax Returns
Unfiled tax returns can lead to various adverse outcomes, including penalties, interest, late payment fees and wage garnishment.
The CRA may take enforcement action to collect taxes and penalties owed. Below is a closer look at some of the potential consequences of unfiled tax returns in Canada.
Interest and Late Payment Fees
One of the most immediate consequences of unfiled tax returns is penalties. The CRA charges a penalty of 5% of the balance owing, plus an additional 1% per month for up to 12 months for each month that a return is late. In addition, if the CRA has sent a demand to file a return and it is not filed, the penalty can be as high as 10% of the balance owing, plus an additional 2% per month for up to 20 months. For repeat offenders, the penalties can be even higher.
The interest is compounded daily and is currently set at 5% per year. Late payment fees may also apply if the balance owing is not paid by the due date.
If taxes remain unpaid, the CRA may take enforcement action to collect the taxes owed. This can include wage garnishment, where the CRA will order an individual’s employer to withhold a portion of their wages to pay their tax obligation.
If the CRA is unable to collect the taxes owed, they may take legal action against the taxpayer, including seizing assets or taking legal action, i.e., a civil lawsuit, to enforce payment.
Suspension of Corporate Charter
For businesses, unfiled tax returns can result in the suspension of their corporate charter. This can have serious consequences, including legal liability for the corporation’s directors and difficulty obtaining financing or doing business.
Other Potential Consequences of Unfiled Canadian Tax Returns
Other possible consequences of not filing your tax return on time can also include having the CRA file a claim on your behalf. They often do this by estimating the amounts they feel you should be reporting based on your source(s) of income and other data they store regarding different demographic and income groups.
Having unfiled returns may also increase the likelihood of your getting flagged for further review by way of an audit by the CRA. If you are ever notified that you will be audited, you will absolutely need the help of tax audit experts. CRA audits can be similar to the tax equivalent of a police interrogation. Statements you make to an auditor can be used against you to increase your tax obligation or even lead to further penalties. Having a tax expert on your side is vital for protecting your financial interests during the audit process.
Options for Dealing with Unfiled Tax Returns in Canada
If you have unfiled tax returns, you must gather all the paperwork you have and file all outstanding returns as quickly as possible. If necessary, this may mean filing several years’ worth of returns simultaneously to reduce late filing penalties and interest.
The following are some of a taxpayer’s options if they need to file late returns.
The Voluntary Disclosure Program
If you have unfiled tax returns and are worried about the potential consequences, the CRA’s Voluntary Disclosure Program (VDP) may be an option. This program is designed for taxpayers who want to correct inaccurate or incomplete information, disclose unreported income, or disclose previously unfiled tax returns. The VDP allows taxpayers to come forward voluntarily and fix their tax affairs without fear of penalties or prosecution. They are still required to pay their taxes and will likely have to pay at least some interest.
Seeking Professional Help
Because of the long-term impacts the above penalties can have on individuals and businesses, it is crucial to seek help from a tax accountant if you have unfiled returns. A certified tax accountant can advise you on the best course of action and provide you with specific recommendations to help reduce the costs of any penalties you may be facing and the amount of taxes you owe.
Getting representation from a tax professional is also highly recommended if you wish to exercise another possible option for dealing with unfiled returns: negotiating with the CRA.
Negotiating with the CRA
Negotiating with the CRA is also a potential solution if you owe taxes due to unfiled tax returns. The CRA may be willing to negotiate a payment plan or reduce penalties in certain circumstances. However, it is always advisable to consult a tax professional before negotiating or making any agreements with the CRA.