Average people fall behind filing their tax returns. In
fact, these regular Canadians make up a significant part of our practice as
tax-distress solution professionals.
Some people are in this situation because they are afraid of
the financial consequences once the tax debt, penalties and interest have been
assessed. That is, they fear they will not be able to pay and have heard all
sorts of horror stories about criminal prosecution, huge penalties and
heavy-handed CRA collection action.
Under our self-reporting system, CRA has been given huge
powers to ensure compliance and punish the non-compliant.
Those fears, unfortunately for taxpayers with unfiled tax
returns, are not complete urban myths.
However, the bad news is not the whole story. What many are not aware of
is that there are processes that can be leveraged to mitigate the financial
penalties associated with late filing.
Sometimes, CRA does not wait for a taxpayer to come forward.
CRA gets the taxpayer’s attention by raising an assessment (called a Notional
Assessment) based on income CRA projects you may have had (while ignoring any
reasonable deductions you would claim).
If you do not file your Notice of Objection in time (and follow up with
other relevant filings and payments) you will incur the wrath of CRA
collections enforcement on this notional tax bill (which is usually hugely
inflated).
Lesson Number One: you gain nothing by failing to file your
tax returns. You can end up with not only penalties and interest but also
criminal prosecution for tax evasion.
As mentioned above, the primary reason for non-filing for
many is the fear that money will be owed that simply is not there.
Lesson Number Two: While it is uncomfortable to owe money to
CRA, it is not illegal.
- If you have not filed and CRA has not contacted you about your late filing, an application under the Voluntary Disclosure Program can enable you to avoid penalties and interest.
- If CRA has contacted you about late filing it is important to get late returns prepared. Even if you do not have all of your receipts, there are legitimate ways to estimate income and expenses to get tax compliant.
If you have been notionally assessed by CRA you have to get
your returns re-filed voluntarily. You may not owe as much as CRA has
estimated. If you are self-employed and collecting HST – timing is even more
important because you will not be able to claim input tax credits 4 years after
the tax year in question.
Once your returns are filed CRA will assess penalties and
interest if you did not make an application under the Voluntary Disclosure
Program.
Now, even though you have filed admitting to income, you
should consider filing an Objection to the penalties assessed on your return.
While your Objection is under review, CRA will not take enforcement action -
BUT if the Objection does not go in your favour you will be subject to further
interest that was accumulated on your tax debt and penalties during the period
during which your
Objection was under review.
If you have suffered some extraordinary circumstance that
led to your late filing or inability to pay, such as a medical problem, a death
in your immediate family, extreme financial hardship, a disaster has occurred
or some other extraordinary circumstance that you can prove, you may qualify
for Taxpayer Relief – a program where CRA may agree to grant relief of
penalties and interest. If filing an Objection, your relief application can be
filed concurrently so that once a decision is made they can immediately begin
to look at your relief application.
If your Objection rights have been completely exhausted and
you do not want to incur the costs of an appeal to the tax court, CRA will
continue to collect from you while your relief application is under review.
These processes, when leveraged properly, can work in your
favour, but they are complicated and the right applications have to be made at
the right time.
If you have a tax problem and need help, or want more information
about VDP or Taxpayer Relief, please contact Tax Solutions Canada today by
calling 1.888.868.1400.
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