Beware tax penalties from the CRA

We like to think of Canada as a gentle, compassionate nation. Think again.

When it comes to collecting taxes the Canada Revenue Agency has the full force of the law at its disposal.

If the CRA owes you money this tax season, relax. It’s in no hurry to pay you. But if you owe on income generated during the 2012 calendar year - even if you are self employed - the deadline to pay up is April 30.

If you miss the deadline, the clock is ticking and the costs could be mounting.

Late filing penalty

Starting May 1st any amount owing is subject to a late-filing penalty of 5 per cent compounded daily, plus 1 per cent for each full month that the return is late, to a maximum of 12 months.

After a year it’s no more Mr. Nice Guy. The CRA reserves the right to boost the late-filing penalty to 10 per cent of the balance owing plus 2 per cent for each full month you're late, up to 20 months.

Those penalties don’t include any amount over what you think you owe. In other words, if you miscalculate taxes owning in your favour and they find out you actually owe more, the late-filing penalty applies to their assessment.

The penalties also apply to overdue Canada/Quebec Pension Plan contributions and Employment Insurance premiums.

The CRA will keep you informed of your status through the mail.

Tell no lies

If you make a false statement, and the CRA believes you knowingly falsified your tax return, the penalty is $100 or 50 per cent of the falsified amount, whichever is higher.

Any omissions that the CRA believes were made intentionally are subject to the same penalty.

The taxman isn’t void of forgiveness though. The penalty could be waived under the Voluntary Disclosures Program if you ‘fess up before your false statement or omission is discovered.

The CRA’s double standard

You might notice the interest rates charged by the CRA on taxes owing are much higher than the rates paid on comparative government bonds, which are mostly below 2 per cent.

To make matter worse, the rate the CRA charges is subject to change every three months and it will likely rise as interest rates climb in the broader economy.

Don’t expect the same generous rates if the CRA owes you money. The CRA pays no interest on regular payroll deductions throughout the year to the time you receive a refund in the spring.

Individuals who are owed money due to an overpayment are given 3 per cent and money owed to corporations generates a 1-per-cent return.

One interesting side note that could help explain the CRA’s double standard is the reported propensity for clever corporate accountants to intentionally over pay. A risk-free pay back rate of 5 per cent handily beats any return from the bond market. Nice try, though.

Compassion

On a serious note, many livelihoods have been left in shambles by life-long entanglements between individuals and the CRA. It normally begins with simply neglecting to file in any given year and compounds to the point where the individual is drowning in taxes-owing statements and legal threats.

Individuals live and die but the CRA trudges on as an institution with the backing of a legal system that can impose liens on property, and even incarceration.

The CRA’s ultimate goal is to get its money and is not entirely without compassion. Taxpayer relief provisions are provided for individuals who are victims of circumstances beyond their control.

Tax professionals can help broker a satisfactory arrangement but it’s important to get qualified advice before things spin out of control.