Whether you are an individual or a business in Canada, taxes are an inescapable part of your existence. All sources of income need to be calculated, tax returns needs to be filed and taxes owing must be paid. This is somewhat facilitated if you are an employee as your employer tends to take care of the majority of remittances. Self-employed individuals, sole proprietorships, partnerships and corporations on the other hand, must account for their income and expenses , determine taxes payable and remit the appropriate amounts. Additionally, businesses are also responsible for other filings including GST/HST and QST and payroll. A lack of knowledge, imperfect accounting systems and the business of running a business sometimes interfere with the timeliness of filings. The Canada Revenue Agency attempts to curb these tardy behaviours by imposing penalties and interest on late filings as follows:
Unincorporated (Personal) Tax Returns:
Self-employed, sole proprietors and partners are required to include their income from business on their personal tax returns. The CRA generously extended the deadline for business owners and their spouses from April 30th to June 15th. Note that this extension does not apply to those with rental property income.
Penalties are charged at 5% of the taxes due if you fail to file your return by June 15th. Additional penalties are charged at 1% for each full month that the return is not filed, up to a maximum of 12 months.
Interest is charged on any unpaid balances at the prescribed rates, established by the CRA ona quarterly basis. For the third calendar quarter of 2011, interest rates are 5%. Although your tax return is due on June 15th, any taxes payable are still due on April 30th. If these are not paid, interest is charged on amounts payable beginning May 1st.
Instalments are payable if your net tax exceeds $3,000 annually. (For Quebec business owners, this amount is $1,800.) Instalments payments are due March 15, June 15, September 15 and December 15 of the calendar year for which taxes are due. Interest for unpaid instalments is charged at the prescribed rate. Penalties apply as well, however interest due actually has to exceed $1,000. More details on CRA instalment and interest penalties
Waiving of Interest and Penalties is possible if you have a compelling reason for filing late. You will need to fill out form RC-4288; Request for Taxpayer Relief which actually details specific acceptable reasons for tardy filing.
Corporate Tax Returns:
Interest and penalty provisions are similar to unincorporated tax returns as detailed above.
Interest: Although corporations have 6 months after their year end to file their corporate tax returns, taxes payable are due after 3 months as long as they qualify for the small business deduction. If they do not qualify for the SBD, taxes are due within 2 months of the year end. Unpaid taxes are charged interest at the prescribed rate.
With respect to Quebec Corporate Taxes Payable (based on the CO-17), amounts payable are due within two months of the year end date.
Penalties can be more onerous for corporations, particularly when the CRA issues a demand to file, and is 10% of the unpaid tax plus 2% for each complete month that the return is late up to a maximum of 20 months.
Businesses can elect to file their GST/HST returns monthly, quarterly or annually subject to certain criteria. Late filings are subject to interest and penalties which are based on the amounts due. If the balance due is nil or if you are entitled to a refund then interest and penalties will not applyunless if you receive a notice and still fail to file at which point you will be chargeda flat fee of $250 plus interest until you file.
Penalties on balances due are charged at 1% of unpaid balances plus ¼ of the 1% X the number of months the return is late (up to a maximum of 12 months.). Eg. If the GST/HST payable is $1,000 and the return is three months late, you will owe $10+$2.5X3 = $17.50.
Additionally, businesses with taxable sales that exceed $1.5 million are required to file electronically. Failure to e-file results in an initial $100 penalty with every subsequent return being charged a penalty of $250.
Interest is charged on unpaid balances at the prescribed rate.
Instalments are based on previous year taxes paid. Any underpayments are charged interest at the prescribed rate.
Further details on GST/HST penalties and interest
Note that with respect to QST filings, penalties are charged immediately, even if the return is filed on time as follows:
- 7% of the amount to be paid or remitted, where the amount is no more than 7 days late
- 11% of the amount to be paid or remitted, where the amount is no more than 14 days late
- 15% in all other cases
In other words, if you do not make a payment within 15 days of the due date of your QST return, then you will be charged a penalty of 15% of the balance due.
CRA Payment Arrangements
It is always good to practice fiscal discipline and ensure that you set aside the funds to pay your tax obligations. Paying by instalments is one way of ensuring timeliness of payments. Having a separate bank account for taxes is another way to avoid succumbing to the temptation of what appears to be excess cash. There are times, however, when cash flow is tight and payment of a large amount of taxes can be too onerous. In this case, the CRA is usually receptive to payment arrangements. Supposedly 296,000 payment arrangements were made in with individual taxpayers in 2010. Information on who to contact can usually be found on the assessment itself.
Regardless of whether you are able to meet your tax obligations it is always a good idea to file your tax returns on time. This helps to avoid penalties , and although interest is charged (only on amounts due), interest rates, especially in the current environment, are fairly manageable. More importantly no one wants the CRA equivalent of a red flag on your business file as this can result in increased frequency of assessments and a greater level of scrutiny, which is never pleasant.
Revenue Quebec Penalties.
Note that penalties charged by Revenue Quebec can be quite onerous particularly with respect to QST Payable. Whereas most other penalties are based on late filing while interest is applied to late payments, in the case of QST payable, penalties can be up to 15% of the balance payable if payment is made more than 14 days late. More info on Revenue Quebec Penalties.
Similar to Revenue Canada, you can apply for cancellation of interest and penalties if you have sufficient cause eg. you are not financially able to repay your debt or filing was delayed due to exceptional situations.