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Forgot to File Your Taxes Last Year? What You Need to Know

April 27, 2021
5 mins
A woman holds up her coffee mug and stares out the window as she works on her laptop

If filing your taxes before the deadline went over your head last year, procrastinating can make things worse.

Unlike sales tax, which you pay on the spot, Canada’s income tax system is based on self-assessment. Make your money, plan your affairs as best you can and then, pay up.

Not everybody does this, though. So, if the tax filing deadline sneaked up and passed you, here are a few things to keep in mind.

Better to file late than never

Some people may neglect to file one year and then freeze when it comes to the following year’s tax return because of prior mistakes.

If you owe the government money, this type of procrastination can hurt you financially. The Canada Revenue Agency (CRA) will monitor your financial behaviour over time, using identifiers like your SIN and your date of birth to access data from your bank accounts or credit card transactions. When the CRA notices your absent tax return, you may end up owing penalties and interest.

If you notice your mistake before they do, it’s best to contact the CRA to find out any penalties you may have incurred, as well as the best way to file and pay off your outstanding balance. In some cases, the CRA will waive the penalties if the taxpayer comes forward and submits an application through the Voluntary Disclosures Program (VDP). This form gives taxpayers a second chance to make corrections or file returns that were missed.

The penalties for filing late

As a result of the COVID-19 pandemic, taxpayers were granted an extension for their 2019 taxes. However, the deadline to file 2020 personal income tax returns remains on course for the end of April:

  • Return filing deadline:
    • April 30, 2021, for individuals
    • June 15, 2021, if you or your spouse or common-law partner are self-employed
  • Income tax amounts owing: April 30, 2021

If you have a balance owing on your tax return, you must pay the amounts by April 30, 2021, to avoid penalties and interest charges. However, some taxpayers may qualify for interest relief if they received COVID-19 benefits and meet the initiative’s criteria. Still, taxpayers must file their returns by the deadline.

The CRA charges compound daily interest on any unpaid balances (tax amounts owing) after the due date. If you have a balance owing from previous years, compound daily interest will continue to be charged on those sums. Additionally, the CRA charges interest on your penalties as well.

The interest rates the CRA charges can change every three months. For now, the CRA charges 5% on overdue taxes — down 1% from the year before.

If you owe taxes and don’t file your return by the deadline, the CRA will also charge you a late-filing penalty. The penalty is 5% of your 2020 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months.

If, for example, you file your taxes six months late and have a $2,500 balance owing, you would incur a 5% penalty, plus another 6% (1% for each full month overdue). Your late-filing penalty would be 11% of your balance owing, which, based on the balance above, would add $275 to your total tax bill.

However, you would also be charged interest compounded daily for overdue taxes and this rate changes every three months.

Your penalty could be higher if you were charged a late-filing penalty on a return in the past three years (2017, 2018, 2019). Under these circumstances, your penalty would be 10% of your 2020 balance owing, plus an additional 2% per month, to a maximum of 20 months.

To avoid a late-filing penalty, the CRA suggests filing your return on time, even if you can’t pay your entire balance owing by the deadline.

The repercussions of cheating

Many otherwise honest people fail to report all their income, either inadvertently thanks to the complexities of the tax rules or because they’re actually trying to hide something.

For those who get caught fiddling with their books, the penalties can be severe. Cheating on taxes is a criminal offence punishable by fines equal to several times the amount of tax owing, plus the tax, plus the interest, and possibly even prison time.

And, contrary to popular belief, there’s no time limit for the CRA to prosecute you for cheating or filing late. It’s never too late to be brought up on tax charges from years ago.

Furthermore, waiting until you’re caught, or until an investigation on your return has begun, means your bargaining power is reduced. If you’ve made a mistake, finance professionals advise that it’s better to fess up as soon as possible and then look into the possibility of amnesty or reprieve.

Applying for tax amnesty or pardon

The CRA’s policy is to encourage tax laggards to come clean through tax amnesty. The VDP is designed to encourage both individuals and corporations to come forward and disclose material they didn’t previously report, possibly avoiding penalties or prosecution.

The application must be voluntary, and the CRA must not have initiated an enforcement action, including sending out an audit letter. This criterion makes it harder for those who intentionally avoid paying their taxes to benefit from the program.

Taxpayers with extraordinary circumstances, like financial hardships, may have further options for relief from their tax obligations.

This post was updated on April 27, 2021.

Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

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