Interest & Penalties

In all cases, where tax returns are filed after the due date, interest will be applied from the date the amount was initially due.  And it is important to remember that the interest accrues on a daily basis – even on penalty amounts.

The interest rate fluctuates on a regular basis, and after a short number of years taxpayers find that the interest on top of the tax and the penalties, becomes impossible to manage.  Filing on time will help avoid the penalties, but paying as much as possible as soon as possible after the payment deadline will help avoid the interest.

In the case of late filing, there will always be a penalty applied.  The penalty will depend on whether the late filing is because of an audit, or if it was just a case of late filing, or it it was a case of a voluntary disclosure.

Late Filing Penalties

Late filing penalties depend on whether a taxpayer has had previous offenses before in regard to late filing. If it is the first-time offense the penalty for income tax is 5% of the balance plus 1% of the balance they owe for every month it is late up to a maximum of one year.  This brings the total to 17%.  However, if a taxpayer has repeat offences, the penalty can double to 10% plus 2% per month for up to 20 months.

GST/HST Penalties

Late filing penalties also apply to GST/HST, source deductions, and Quebec Sales Tax. These penalties are quite different in Quebec from the rest of the country. In Quebec, the penalties for late filing of source deductions and sales tax are assessed at a penalty of 7 percent if the filing is late by 7 days or less, 11 percent if the filing is more than 7 days and less than 15 days late, and 15 percent when the filing is late by 15 or more days.

The CRA has a different penalty system for GST/HST returns. For GST/ HST, penalties for late filing is calculated according to the following formula A + (B x C). A is 1 percent of the amount owing; B is 25 percent of A, and C is the number of months overdue to a maximum of 12.

For example, a taxpayer who is late in filing their GST or HST return by 12 months, owes $10,000, the CRA’s formula looks like this:

$100 + (25 x 12) = $400, a 4 percent penalty.

In Quebec, since the filing would have been more than 14 days late, this penalty would have been 15 percent or $1,500.

Source Deductions Penalties

For source deductions, the CRA assesses penalties for late remittances (payments) of 3 percent if the amount is one to three days late, 5 percent if it is four to five days late, 7 percent if it is six to seven days late, and 10 percent if it is more than seven days late or if no amount was remitted. In cases where the taxpayer has been penalized once in a calendar year, all subsequent late filings may be assessed a penalty of 20 percent if such filings were made knowingly or negligently.

If a taxpayer owes $10,000 and is 30 days late, they would be subject to a penalty of 10 percent or $1,000, which would increase to $2,000 on a subsequent failure.

In Quebec, a penalty of 15 percent or $1,500 would apply.

For further information on penalty amounts for GST or HST returns when the CRA has issued a demand to file, and where a taxpayer was required to file electronically but did not, or where the taxpayer failed to accurately report information, please refer to the CRA’s web page entitled “Penalties and Interest” in the business section.

Gross negligence penalties

The most severe penalties assessed by the CRA are the gross negligence penalty under subsection 163(2) of the Act. This penalty may be assessed when the taxpayer “knowingly or under circumstances amounting to gross negligence, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a tax return.”

The penalty of 50% of the underreported tax (or 25% in the case of HST) is designed to ensure that taxpayers complete their returns correctly and resist the temptation to play games.

One of the big problems is that these penalties are often applied by auditors when they are not justified.  And whether justified or not, a taxpayer is best served by always challenge the gross negligence penalty.  Like a speeding ticket, if there is a defect in the “penalty recommendation report,” or of the report is absent, the penalty can be dismissed. Always ask to see the penalty recommendation report when you challenge a gross negligence penalty.

According to Canadian courts, gross negligence penalties should be applied cautiously and only where truly warranted.  They have been seen as akin to a criminal type of penalty because of their severity.  That is why the burden of proof is reversed in court with respect to the penalties: The CRA must prove that the penalty was justified.  In all other matters the burden of proof rests upon the taxpayer.

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