Suppose you are (or your corporation is) ready to file your income tax return, or GST/HST return, by the filing deadline (which might be, say, April 30 or June 15). But you don’t have enough money to pay the balance owing. Should you file anyway?
Of course, we recommend that you always file on time. If you have tax to pay for the year, you’re legally required to file by the deadline, and you should do so. This article explains the consequences if you do not.
Penalty for filing late
If you file late, there is a late-filing or “failure to file” penalty. For an income tax return, the penalty (Income Tax Act section 162) is 5% of the balance owing as soon as you’re one day late, plus an additional 1% for each complete month you file late, to a maximum of 12 months. So if you are over a year late, the penalty is 17%. (This penalty is doubled if the CRA sends you a demand to file a return, and you fail to file in two out of four consecutive years.)
For a GST/HST return, the penalty (Excise Tax Act section 280.1) is 1% of the balance owing as soon as you’re one day late, plus an additional 0.25% for each complete month you file late, to a maximum of 12 months. So if you are over a year late, the penalty is 4%.
Both of these penalties are non-deductible, so they must be paid out of after-tax income. So filing on time and paying the balance later is better for you, financially.
Of course, if you have a balance owing — whether or not you have filed on time — interest will continue to run on your outstanding balance, compounded daily. The prescribed rate of interest is 9% annually for July-September 2023, compounded daily; the rate is adjusted every quarter based on current treasury bill rates. (The same rate applies for both income tax and GST/HST.) A rate of 9% compounded daily is equivalent to an annual rate of 9.416% over a full year.
What happens if you file on time and do not pay the balance?
If you file on time but do not pay, the late-filing penalty will not apply. However, CRA Collections will be after you to pay. Because you’ve filed, the CRA knows exactly how much to assess you and therefore how much you owe.
For income tax, one way to slow down the Notice of Assessment, without filing late, is to file your return on paper. Paper returns are processed much more slowly than those filed electronically, typically taking months rather than a couple of weeks. If your T1 return is prepared by a tax preparer, there is a $25 penalty for filing on paper, for each paper return above 10 per year (5 per year starting 2024).
What happens if you don’t file?
If you don’t file on time, the CRA will send you notices demanding that you file. If you still don’t, the CRA may eventually issue an “arbitrary assessment” or “factual assessment”, where they guess how much you owe based on past years and available records, and assess that amount.
The CRA might also send you a formal demand that threatens criminal prosecution if you do not file; or obtain a compliance order from the Federal Court ordering you to file. In that case, not filing would be a criminal offence (contempt of Court, if there is a Court Order), and you must comply within the deadline, or you will be subject to fines and even jail.
Either way, you’ll be subject to the late filing penalty, but collection action won’t start until the CRA has issued a Notice of Assessment.
How soon can the CRA take legal action to forcibly collect tax?
For an income tax debt, Collections normally cannot take legal action (such as seizing your bank account or sending a Requirement to Pay to your employer to seize wages) until 90 days have passed from the date of the Notice of Assessment that establishes your liability. After 90 days, collection enforcement can start, but it will usually be some time before Collections actually takes steps to seize funds from you (depending on the size of the debt and whether the debt is considered to be at risk). Also, if you file a Notice of Objection contesting your assessment — even if the assessment matches what you filed — that stops collection action, although interest will continue to accrue on the unpaid balance.
However: during the 90-day period or the objection or appeal process, if the CRA believes that collection is in jeopardy (because you are dissipating your assets or moving them offshore, or are planning to leave Canada), the CRA can apply to the Federal Court, without notifying you, for a “jeopardy order” allowing the CRA to take collection action (section 225.2).
For a GST/HST debt, there are no restrictions on legal action once a Notice of Assessment is issued. Because amounts of GST/HST collected are trust funds (deemed held in trust for the federal government), CRA Collections officials are usually quite prompt in insisting on immediate payment, and may take action to seize your bank account or garnish your wages almost immediately after if you are not paying.
