Canada has a self-reporting tax system. This means that it is each taxable entity that is required to report their income to the government by filing the appropriate tax return. These returns include a T1 General for individual taxpayers, a T2 Return for corporate taxpayers, and a T3 return for trusts. There are many other types of returns that apply to particular circumstances. Talk to your tax expert to see what your return filing obligations are.
For individuals, the tax year is the calendar year (January 1 to December 31). Individuals have to file a tax return (T1 Return), for the preceding tax year, either on or before April 30th, if they are employees, or on or before June 15th if you or your spouse earned business income. If the individual taxpayer doesn’t have any Part I tax payable for the preceding year. Most people interpret this exemption as no balance being due (for example, if your employer has withheld enough tax from your paycheques and you don’t owe any more or are entitled to a refund). However, the requirement is that you have file a return IF Part I tax is payable (whether paid or not). Therefore, individuals earning income above the basic exemption threshold have to file a tax return annually. There are special rules for deceased individuals in their year of death, as well as for their surviving spouses. These special rules can be complex and it would be best to get the help of a tax expert so you reduce the amount of tax payable.
Trusts are also required to file tax returns for each of their tax years (also the Calendar Year). Trustees are required to file a T3 return within 90 days from the end of the tax year. Corporations can have an off-calendar fiscal year, which also becomes their tax year. A corporation that is required to file a tax return has to file its T2 return within six months of the end of its fiscal year. It is important to remember that a return due date may be different from when the balance of taxes is due so as to avoid interest being charged on the balance outstanding.
Unfiled returns or incompletely files returns are a common problem for all types of taxpayers. If you do not file a return as required, the Canada Revenue Agency (CRA) can make a demand that you file your returns. Alternatively, the CRA can assess you arbitrarily – they will use some method to take a guess at your income, leaving you with the almost impossible task of having to prove them wrong. Unlike in most cases, when it comes to taxes, it is the taxpayer’s obligation to prove the CRA wrong, not for the CRA to prove that they are right. To avoid the burden that comes with unfiled returns and the CRAs often draconian actions in relation to them, take unfiled returns very seriously. It can be overwhelming dealing with returns for a number of years, but that is what a tax expert is here for – to lend you a hand and take on some of the burden of getting yourself current with your tax filing obligations.
If you fail to file your return on time, you will be subject to late filing penalties. The penalty is 5% of the balance owing PLUS 1% of the balance owning for each full calendar month your return is late (to a maximum of 12 months). If you’ve previously been charged late filing penalties in one of the past three tax years, the penalty doubles to 10% of the balance owing PLUS 2% of the balance owing for each full calendar month the return is late (up to a maximum of 20 months). In addition to the penalties, if you have a balance owing, you will also have to pay compound interest on the balance outstanding for as long as the balance has not been paid in full. Interest and penalties can quickly add up to exceed the amount of tax owing, sometimes resulting in people losing their possessions or having to file for bankruptcy. You can see how important it is to get help to quickly become current in your filings if you are delinquent.
There are many sources of information that the CRA has access to, allowing them to find people who are required to but have failed to file tax returns. If you have unfiled returns, or if you have filed returns but either not reported all income you were required to report or have misreported amounts, you may be eligible for the CRA’s Voluntary Disclosure Program (VDP). The VPD is a special program that provides taxpayers with an opportunity to come clean or become current with the incentive that, if you meet the criteria, you don’t need to pay penalties, get to cancel some of the interest, and won’t face criminal prosecution. The monetary savings can be huge. Time is of the essence when it comes to applying to the VDP because one of the criteria is that the disclosure is “Voluntary”. This means that you cannot have been approached by the CRA about the return or part of the return you need correct. There are other criteria that are more technical and complex, making a tax expert an invaluable resource.
Not only can you save significant amounts of money and avoid criminal prosecution by using the VPD, but becoming current or staying current with your tax filings is an important part of avoiding a tax audit by the CRA. Whether you are under audit, or you are trying to become current to avoid or prevent an audit, you should get the help of a Toronto Tax Accountant. The risks and cost of not getting your filings right or not making sure you meet the VDP requirements can be large and are often far outweighed by the cost of having an expert navigate the tax rules for you.
