Falling behind on filing income tax returns and paying taxes is more common than you think. However, as a Canadian taxpayer, it is your responsibility to calculate, submit, and pay your taxes by the deadlines. The deadline for filing 2021 taxes is April 30th, 2022, for individuals and June 15th, 2022, for those who are self-employed. While most Canadian taxpayers follow the rules, the Canada Revenue Agency reports that some do not submit or pay their taxes on time. For those who find themselves in the latter demographic, there are a variety of tax penalties that the Canada Revenue Agency (CRA) can apply to taxpayers who fail to meet their tax obligations. For instance, the Income Tax Act imposes a penalty for recurrent failing to file income tax returns.
Penalty Under Subsection 162(2) of the Income Tax Act
The recurring failing to file your income taxes may result in penalties outlined under subsection 162(2) of the Income Tax Act. Penalties may apply, if you fail to:
- "File a return of income for a taxation year as and when required by subsection 150(1)",
- "To whom a demand for a return for the year has been sent under subsection 150(2)", and
- "By whom, before the time of failure, a penalty was payable under this subsection or subsection (1) regarding a return of income for any of the 3 preceding taxation years."
Such a person is "liable to a penalty equal to the total of"
- "An amount equal to 10% of the person's tax payable …. For the unpaid year when the return was required to be filed", and
- "The product obtained when 2% of the tax payable …that was unpaid when the return was required to be filed…."
But in Hughes v. The Queen, the Tax Court looked closely at both the English and French versions of subsection 162(2) of the Income Tax Act. The court determined that the French language version "reflects the right understanding of the subsection" on a technical, observational, and purposeful level. A tax court has ruled that subsection 162(2) only applies when all four prerequisites are met which are:
- The person must fail to file a return of income as and when required by subsection 150(1).
- A demand for a return for the year must have been sent to the person under subsection 150(2).
- The person must have failed to file his return within the reasonable time set out in the demand.
- The individual must have been liable for a penalty for a prior failure to file on time or for a continuous failure to file on time regarding a tax filing for any of the three preceding tax years.
In summary, subsection 162(2) can only apply to you as a taxpayer when you fail to file your tax filings for the applicable tax year within the time frame set out in the Canada Revenue Agency's demand letter.
Tips and Suggestions
Our accountants can assist you if the CRA has applied or proposed applying a routine penalty to your unpaid tax returns. In certain instances, our accountants may be able to help you obtain relief from a tax penalty by helping you file a tax appeal, apply for Taxpayer Relief provisions, or apply for a possible tax remission order.
Further, if you are aware that you are subject to the repeated “failure to file penalty”, but the CRA hasn't taken any action, there may be a way for you to eliminate this penalty through the CRA's voluntary-disclosures program (VDP). Our accountants are prepared to help you each step of the way.
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