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