If you file your tax return late, or make required tax payments late (either the final balance owing or instalment payments), Canada Revenue Agency (CRA) will charge you interest. The penalties and interest are charged in accordance with the provisions of the Income Tax Act.
Penalties
The penalty for late filing a personal tax return is 5% of the unpaid taxes plus an additional 1% for each complete month the return is late, up to a maximum of 12 months. The maximum penalty is, therefore, 17% if the return is filed over a year late. There is no penalty for late filing if you do not owe money.
If you are a repeat offender this penalty can be increased. Where you have been assessed a late filing penalty for one or more of the three previous years and the CRA issues a demand to file the current years return, you will be subject to the repeat offender penalty. This late filing penalty is equal to 10% of the unpaid taxes plus an additional 2% per month for a period of up to 20 months. The maximum penalty is, therefore, 50% if the return is filed more than 20 months late.
There is also a repeat offender penalty if you fail to report income. The first time you fail to report an amount of income, CRA will issue a reassessment and will charge you the increased taxes and interest. If you fail to report an amount of income again in one of the three following years, a special penalty equal to 10% of the amount that you failed to report the second time will be charged. Note that this penalty is calculated based on the amount of income you failed to report, not on the additional amount of taxes due.
There can also be a penalty charged where instalment payments are late or less than the required amount. This penalty only applies if the instalment interest charges are more than $1,000. The penalty is calculated as 50% of the amount by which the instalment interest is more than the higher of: $1,000 or 25% of the instalment interest that would have had to have been paid if no instalment payments were made for the year.
There are also significant penalties for knowingly, or in circumstances amounting to gross negligence, making false statements or omitting information from a tax return.
If the taxpayer makes a voluntary disclosure, penalties may be waived. If a taxpayer has never filed a tax return, and the return is then voluntarily filed, or if income has been omitted from a return in error and is subsequently disclosed, the taxpayer may only be required to pay the tax and interest owing. This is achieved by contacting the voluntary disclosures group at CRA to disclose the missing information and to arrange to make the appropriate payment. This disclosure must occur prior to any contact from CRA concerning the missing return or information.
Interest
Interest is charged on all late payments of income tax. Interest is charged on late or insufficient instalments as well as on the balance of tax owing where it is not paid by April 30 of the following year. Interest is also charged on penalties. Note that although the deadline for filing personal tax returns for self-employed persons and their spouses is June 15, any tax owing is due on or before April 30. The interest is charged at the prescribed rate, which is calculated on a quarterly basis. Interest charged by CRA is never deductible for tax purposes (although interest paid by CRA is taxable income).
The instalment interest is calculated on each instalment that should have been paid using the payment option that calculates the least amount of interest. The interest is then calculated on each instalment that was actually paid. The difference between the two amounts is the interest that is charged, provided that it is more than $25. By using this method to calculate the instalment interest, the calculation takes into account early payments (which can offset late payments) and overpayments of instalments (which can offset underpayments).
In certain situations, where the taxpayer has been unable to meet his/her tax commitments due to circumstances beyond his/her control, it is possible to request a cancellation or waiver of penalties and interest. (There are also similar provisions to allow the acceptance of late, amended or revoked elections as well as to allow the issuance of refunds beyond the normal three year period.) Interest and penalties may be waived in situations such as serious illness or accident, serious emotional or mental distress (e.g. death in the immediate family), natural disaster, disruption in services, or erroneous information from CRA in the form of incorrect written answers or error in published information. If you wish to request a waiver of penalties and/or interest in a situation such as those described, it is necessary to send a written request to the Fairness Committee at either your local district taxation office or at your taxation center.