Tax time has come again, and hopefully, you are one of the vast majority of Canadians who managed to receive a tax refund. About 19 million Canadians receive tax refunds each year.
However, the CRA estimates about 29 million tax returns will be filed for 2021, and many are still behind. If you haven’t gotten around to filing your tax return for 2020, you should be aware that you may owe interest on taxes you still owe in addition to late fees – or you may not.
This article will help you understand possible interest and penalties after the deadline to file your tax return is passed.
Tax Return Filing Deadline
The tax return filing deadline has historically been right in the middle of April each year. For 2020, the April 15 deadline was pushed all the way to May 17 due to the Covid-19 pandemic and all of the headaches it caused. Since the lockdowns are still present, there was a slight extension for this tax year to Apr 30, 2021.
If you haven’t filed your individual tax return yet, you may owe penalties, interest, etc. that we’ll get into shortly. However, in the event that you owed taxes and filed before Apr 30, 2021, the CRA announced that they would allow a one-year pause on interest charged on any taxes you might owe. This means that you have until April 30, 2022, to pay any owed taxes without interest.
CRA Penalties and Interest For Late Filing
This can get a little sad, but let’s start with a lighter note. If you do not owe any taxes or are owed a tax refund, there are no late filing penalties or interest. However, if you’re owed money, it’s obviously to your advantage to obtain your refund as soon as you can.
If you do owe taxes, then the late filing penalty starts at 5% of the balance owed, with an additional 1% of the balance added for each full month you are late to file, up to 12 months. The maximum late penalty for a single year is 17% of your taxes owed.
However, if you were charged a late filing penalty for any of the previous three years, the penalties are DOUBLED to 10% base and 2% per full month after the deadline. Needless to say, if you owe taxes, don’t file your tax return late.
If you owe taxes, the expectation is that you will settle your balance prior to the filing deadline. If you do not, the CRA charges interest that compounds daily on your balance. The interest rate changes every quarter, but the current rate in place until Jun 30, 2021, is 6% of your balance.
Just to give some background on what daily compounding means, let’s say you owe $1,000 to the CRA. Your balance accrues 6% on May 1, 2020, and on May 2, your interest would be $60 divided by 365 days in a year, or about $0.16.
Your balance on May 2 would then be $1,000.16. However, the 6% is then charged for the following day on this new higher balance, and this occurs every day until you pay your balance. This can get messy the higher your balance gets.
What If I Can’t Afford To Pay The Taxes I Owe?
If your tax bill is steeper than you were expecting and you are unable to pay your balance, the CRA still recommends you at least file on time to avoid the potentially disastrous late filing penalties.
You can submit a request to cancel or waive penalties or interest as well. There should be a good reason associated with this, but you can fill out Form RC4288 to submit a request. Bear in mind that this request can only be submitted once every ten years.
Conclusion
Don’t file your taxes late. It’s a complicated mess sometimes and can be a great burden. However, the penalties are steep for a reason. If you definitely owe taxes and are simply avoiding the inevitable, it’s always better to rip the band-aid off and carry on.
If you happen to owe more taxes than you can afford, the interest rate is a bit steep but still less than a credit card payment. Just be sure you are aware of the daily compounding and try to come up with a payment scheme for yourself.
