As the COVID pandemic gripped the globe the CRA announced that for the first time they would be provide sweeping (temporary) forgiveness on tax balances owing from the 2020 tax year. For large numbers of tax payers who had a balance owing for their 2020 tax return, they were advised that the balance would be interest free until April 2022, for a lot of tax payers this meant over 12 months of interest free debt with the CRA. Those days have now passed, and so have the days of low interest rates which is expected to lead to some unexpectedly high fees and penalties for those who fail to comply with CRA’s filing deadlines, and those who have outstanding debts owed to CRA.
What are CRA’s penalties?
There are a range of ways that CRA can penalize tax payers for failing to adhere to their filing requirements. For most individuals the tax filing deadline is April 30, failure to submit your tax return by this date can result in a late filing penalty, as well as additional interest charged on the outstanding balance owing to CRA. Interest is compounded daily!
Please note, if you do not have a balance owing to CRA resulting from your T1 tax filing, there is no late filing fee or interest charged as there is no balance owed to CRA resulting from your T1.
Late filing penalty
If you have a balance owing to CRA you will be required to file your tax return to CRA before a deadline to avoid a late filing penalty. For individuals who are self-employed (or have a spouse/common-law partner who is self-employed), the filing deadline for your T1 tax return is June 15. For all other individuals the filing deadline for their T1 is April 30.
If your tax return is submitted late to CRA, there is an automatic late filing penalty of 5% of the balance owing. For every month that the balance remains unpaid there is an additional 1% penalty of the outstanding balance which can be charged up to a maximum of 12 months. Partial payments can be made to lower the outstanding balance and to reduce the impact of the additional 1% charges on the outstanding balance.
If you have a balance owing to CRA there is compounding daily interest charged on the balance owing, starting on the date after the tax return was required to be filed. So, if you owe CRA $1,000 as a result of your 2021 tax return, there would be interest charged on that $1,000 as of May 1, 2022 (the day after April 30 filing deadline).
Interest is also charged on the late filing penalty balance owing. Interest is charged on any amount owing to CRA, including the tax owed to CRA and any late filing penalties owed to CRA.
Interest is charged based on a prescribed interest rate + 4%.
How do increases to interest rates impact CRA’s penalties / fees?
During the COVID pandemic interest rates were reduced to record lows by the bank of Canada in an attempt to keep the economy functioning, this was good news for individuals who owed money, either to lenders or to CRA. CRA’s prescribed rate was reduced to 1%, which meant that interest was being charged at the prescribed rate (1%) + 4% = 5%. Which is the lowest possible rate that could be charge on outstanding balances. As inflation started affecting the economy in 2022, the bank of Canada was required to increase interests rates to curb the increasing inflation. This increase in interest rates directly impacts the prescribed rate which is used by CRA, and accordingly CRA’s prescribed rate has increased since 2021. For individual’s who have balances owing to CRA the interest being charged is now increasing which will make it more difficult for individuals to settle their debts with CRA moving forward.
Seeking forgiveness from CRA?
For some individuals who have been met with extenuating circumstances in their lives there is an avenue to a form of debt forgiveness from CRA. In some circumstances CRA would agree to stop charging additional interest and penalties if an individual is able to meet a repayment plan, allowing the individual to settle their balance owing over a period of time without additional interest charges holding them back.
Unsure of your tax filing obligations?
If you are unsure of your tax filing obligations and are seeking assistance with your tax filing and meeting your tax obligations, please feel free to get in contact with the JTB team via email at firstname.lastname@example.org . At the time of posting we are not accepting walk in consultations at our Vancouver office, we are still handling tax filings as usual over email correspondence.