It’s Tax Season Again… Why Filing Your Tax Returns Matters
Filing a tax return might feel unnecessary, especially if you’re not legally required to file, but avoiding it can lead to significant financial and legal consequences. Here’s a breakdown of why filing your tax returns—on time—is essential for every Canadian taxpayer.
The Consequences of Late or Non-Filing
- Late-Filing Penalties
Filing after the deadline incurs late-filing penalties under the Income Tax Act and Excise Tax Act. These penalties are a percentage of taxes owed and increase monthly, up to a year. - Failure-to-File Penalties
Repeated failures to file can result in compounded penalties, especially for multiple reporting periods. These penalties are often calculated based on the amount of tax owing. - Demand to File
The CRA’s Non-Filer agents can issue a demand to file if you miss deadlines. Ignoring these demands can lead to additional penalties or arbitrary assessments, where the CRA estimates your tax liability—often much higher than what you actually owe. - Criminal Tax Charges
While not paying taxes is not inherently a crime, tax evasion—intentionally misreporting or failing to file—can lead to criminal charges. In some cases, even failing to file a return may be deemed willful non-compliance.
What Happens If You Don’t File? Arbitrary Tax Assessments
When taxpayers fail to file, the CRA can issue an arbitrary (or notional) tax assessment under the Income Tax Act or Excise Tax Act. These assessments are based on estimated data and usually result in inflated tax liabilities.
Key Points About Arbitrary Assessments:
- The CRA can immediately collect on GST/HST assessments and, for income tax, take action 90 days after issuance.
- Collection actions include wage garnishments, account seizures, and property liens—even if the assessed amount is incorrect.
- Interest accrues on unpaid taxes, penalties, and arbitrary assessments.
Correcting Arbitrary Assessments:
- File a late return to correct the CRA’s assumptions (subject to acceptance).
- Submit a Notice of Objection within 90 days of the assessment to halt collection actions for income tax debts. However, GST/HST debts remain collectible during this process.
The Importance of Filing for Limitation Periods
Filing a tax return triggers limitation periods, after which the CRA can no longer audit or reassess. The clock starts when the CRA issues an initial assessment.
Examples:
- For income tax, reassessments are barred after three years from the original notice of assessment, unless fraud or negligence is proven.
- For GST/HST, reassessments are barred after four years from the later of the filing deadline or the actual filing date.
If you don’t file, no limitation period begins, leaving you vulnerable to indefinite CRA audits and reassessments.
Claiming Tax Credits by Filing Tax Returns
Filing tax returns is often necessary to claim valuable tax credits, including:
- Carry-Forward and Transferable Tax Credits
For example, the tuition tax credit can be:- Carried forward to offset future income tax liabilities.
- Transferred to a spouse, parent, or grandparent to reduce their taxes.
- Filing is required in the year the credit is earned to maintain eligibility.
- Refundable Tax Credits
Some credits, like the GST/HST Credit or Canada Child Benefit, provide periodic, tax-free payments based on the income reported in your return. Non-filers miss out on these benefits.
Pro Tax Tips: Stay Compliant and Maximize Benefits
- File on Time
Filing ensures you avoid penalties and start limitation periods for audits and reassessments. - Use the Voluntary Disclosure Program (VDP)
If you’ve missed past filings, the CRA’s VDP allows you to correct errors or omissions without penalties and with reduced interest. This program is only available if the CRA hasn’t contacted you yet. - Consult Professionals
Engaging experienced accountants can simplify compliance, and they can assist with late filings or objections to arbitrary assessments.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.
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