Accidentally forgetting to include income with your taxes means big penalties
Most people know that if they're late with their taxes, they'll be assessed a penalty – five per cent of the amount owing, along with one per cent a month in interest. Fair enough, you're supposed to settle up on time.
Every fall, however, tens of thousands of Canadians get stung by something they may not have known even existed – the "repeated failure to report income" penalty.
Failing to report two T-slips in a four-year period – one in the most recent tax year and one more in the previous three tax years – is enough to get you in real trouble, warns says Mark Goodfield, a tax partner at Cunningham LLP in Toronto and the man behind The Blunt Bean Counter blog.
And the tax authorities do like to balance the books. Each year, the CRA checks the T-slip information in its database against taxpayer’s tax returns to ensure the T-slip income reported matches up.
When it doesn't, you can expect a reassessment demanding payment of the tax due. If it's your first offence, you're on the hook the actual income tax owing and possibly some interest. However, if it's the second occurrence in the last four years, CRA will hit you with a 20 per cent penalty of the unreported income.
Yep, that's right. You'll get dinged on the income not reported, not on the tax underpaid.
Tax slips arriving late isn't a new problem, of course. The T-slips issued by mutual funds and other investment trusts often arrive just before the deadline. And, since they're often for small amounts, people forget about them - which is a mistake.
Failure to settle up repeatedly should bear some consequence beyond merely being assessed the additional taxes owed. That's why the rule is pretty much applied without exception.
But the penalty itself is too high, Goodfield argues. And the way it's applied is unfair. For instance, if you fail to report $2,000 two years ago and fail to report $100 this year, your penalty is $20. However, if the sequence is the other way around, the penalty is $400.
Here's his advice: "If you received a T-slip after filing your tax return and ignored the slip since it was a small amount, dig it out tonight and file a T1 adjustment as soon as possible before the matching program gets you. Even a small $10 missed slip will start your clock ticking for a potentially larger penalty if you miss reporting income again in the subsequent three years."
Have you even been stung this way? Did CRA ultimately offer you any relief?
By Gordon Powers, MSN Money
Posted by: Don | Sep 10, 2021 4:07:07 PM
This is the govt's way of making it look like they are doing something about people who avoid paying taxes. Pick on the small guy, hit him hard. At the same time don't do the intelligent thing and chase the big time players who knowingly avoid biliions of dollars in taxes, knowing full well the govt doesn't have what it takes to chase them. It could be lack of personnel or lack of guts to actually do the right thing. Really, is this approach anything new? Govt always goes to the fishing hole with the most fish....the middle and lower classes. They are less likely to fight back. Heaven forbid they should ruffle the feathers of the well-to-do.
Posted by: don | Sep 10, 2021 6:00:34 PM
It amazes me how so many people think how 2 wrongs make a right. OK....maybe they don't go after the big guy enough but that is no excuse for someone smaller to get away with it either. No different than pennies saved turn into dollars. Wrong is wrong. Does that excuse they guy who asked me while in line at a checkout to have my receipt because he laughed and told me he claims $3000.00 per year in light bulbs. Sad as it is most people I know cheat. Single Moms getting subsidized housing while living with men with perfectly respectable incomes, income "missed", receipts collected (not actually for items purchased for their business) etc etc....you get the picture.
Posted by: Reverse Raisismus | Sep 11, 2021 1:21:52 PM
Property Taxes up and up for no reason for years and for years to come, right ?
Posted by: Don | Sep 11, 2021 9:34:40 PM
I'm not suggesting the middle and lower classes be allowed to get away with anything. What I am saying is the laws should be applied across all levels of income. Don't cherrypick the low hanging fruit, get the act together and track down ALL evaders.
Posted by: Dennis | Sep 13, 2021 1:43:24 AM
This is a terrible section of the Income Tax Act that simply amounts to usury. The government should be ashamed that this section exists.
I once had a client (owner manager) that filed his T4 return but forgot to report his $40,000 salary on his personal tax return. Two years previously he had omitted a $300 interest slip that was received after he had filed. Now he faced a penalty of $8,000 plus interest. He had actually paid the tax owing through source deductions.
On principal we filed an objection. My argument was that in filing the T4 return, he had in fact reported the income to CRA. He just didn't report it on the T1 return (i.e. he made a miscalculation). I further argued that if he hadn't reported the income to CRA they would not have been able to do the T4 matching which proved he had reported to them. We were successful! My client thought I was brilliant particularly when CRA refunded the penalty and interest to him even though he had not remitted it!
Posted by: KD | Sep 13, 2021 8:30:18 AM
@Dennis: Be careful what you brag about - CRA no doubt has someone reading articles like this, and when they see that they refunded something they didn't receive in the first place, they'll claim it back, with interest. And if your client cashed the refund cheque (or accepted the direct deposit) knowing that it should not have been received, it could also be considered theft and/or fraud.
Posted by: Sierra | Sep 14, 2021 9:18:17 AM
How on earth can you forget to report $40,000 in salary? After working in the tax prep area for a long number of years, I have heard a lot of excuses. While I agree a 20% penalty is high, Canada relies on the self-reporting tax system. It's because of those who self-report incorrectly (whether deliberately or not) that CRA is becoming much much stricter (and of course, the technology is getting better)