By Rob Cosman, Partner, Jones & Cosman Chartered Professional Accountants
The Canada Revenue Agency has penalties in place for taxpayers who fail to report income, and if you repeatedly fail to report income, the penalties can be even more severe. As of tax year 2016, however, the CRA has a new formula for calculating penalties for repeated failure to report income. This formula is a bit more forgiving and may be able to help you avoid unwieldy fees.
What Is Repeated Failure to Report Income?
If you fail to report income more than once in a four-year period, this is considered a repeated failure to report income. For example, if you overlooked reporting some of your income on your 2016 return but had never forgotten to report income before, you will not face this penalty. In contrast, if you also failed to report income in 2013, you will face the penalty, as the issue happened twice. Conversely, if your failures to report income occurred in 2016 and 2011, you won’t face this penalty because the instances are not within four years of each other.
Additionally, to trigger this penalty, the unreported income amounts must be $500 or more. If you forget to report $300 in income one year and $10,000 the following year, you won’t face this penalty as the first instance does not count. However, you may face other penalties, late fees, and interest.
What Is the Penalty for Repeated Failure to Report Income?
The penalty for this offense is 20% of the unreported income. This represents a 10% federal penalty and a 10% provincial penalty. To illustrate, imagine you forgot to report $10,000 of income in 2012. Three years later when filling out your 2015 return, you fail to include $3,000 in income. The second occurrence triggers the penalty for repeated failure to report income, and the CRA assesses a $600 penalty. That is a $300 federal penalty and a $300 provincial penalty.
Conversely, if you failed to report $3,000 in 2012 and $10,000 in 2015, your penalty would be $2,000, or 20% of $10,000. The penalty is always assessed on the most current instance of unreported income.
However, in many cases, these penalties are simply too severe, and to alleviate that issue, the CRA is implementing an alternative penalty for tax years 2016 and forward. If you face a penalty for repeated failure to report income, the penalty is the lesser of the 20% penalty or the result of the alternative calculation.
What Is the Alternative Penalty for Repeated Failure to Report Income?
To calculate the alternative penalty, start with the amount of tax owed on the unreported income. Then, subtract any taxes that were withheld when you received the income. Finally, multiply the difference by 50%.
For example, if you forgot to report $10,000 in income and your income tax rate is 22 percent, the tax owed is $2,200. However, the payer withheld $1,000 in income tax when it issued the cheque to you, and the difference between the tax owed and the tax already paid is $1,200. When you multiply this amount by 50%, the result is $600. In contrast, $10,000 times 20% is $2,000. In this case, the CRA assesses the alternative penalty as it is smaller than the traditional penalty.
What Is the Gross Negligence Penalty?
The gross negligence penalty is for taxpayers who have knowingly omitted income from their tax returns. Also known as the false statement or omission penalty, this penalty is calculated the same way as the alternative method for calculating the repeated failure to report income penalty. However, if the result of that calculation is less than $100, the penalty is $100. It cannot be lower than that amount.
To illustrate, imagine you intentionally did not report income on your tax return. When the CRA finds out, the agency can assess the gross negligence penalty. However, if you accidentally forgot to report the income or were truly confused about your obligations, the CRA cannot levy this penalty.
Can the CRA Waive Penalties?
If you cannot pay your taxes or penalties due to situations beyond your control, the CRA may be willing to waive some penalties. However, the CRA can only waive penalties for tax years within 10 years of the current year. For example, if you request to have a penalty waived in 2017, it must be related to tax years ending in 2007 or later.
You may also be able to avoid penalties if you take advantage of the voluntary disclosure program. This means you contact the CRA and let it know about the mistakes you made on your return. Unfortunately, however, you may not be able to use this program repeatedly. If you use the voluntary disclosure program one year, the CRA expects you to file your taxes correctly the following years.
About Rob Cosman
Rob Cosman, is a Chartered Professional Accountant who runs his own accounting and tax practice with his wife in Toronto, Ontario. Beginning in 2000, Rob’s career spanned over Halifax, Cayman Islands and Toronto. Rob held senior industry positions including CFO roles in public and private industries ranging from telecommunications, retail sales, and consumer packaged goods.
Rob has over 10 years of tax experience and is the author of numerous articles. He has the ability to take complex tax situations, explain them in common sense terms and guide clients to make the best decisions based on their individual situations.