CRA Penalties & Interest – how to avoid them

This is a very exciting blog, about CRA penalties, interest, and how to avoid them.

Nothing that’s new, but – in this era of rising interest rates – this is much more front-and-centre than it used to be. So, please consider this a “public service announcement”.

CRA Penalties are typically because you’ve done something wrong.

The “Oops” penalty:
Most often, CRA charges these because you’ve filed something late – or completely forgotten to file something. The penalties are meant to be enough to remind you not to do it again, rather than to really punish you. But, they can still add up.

Some of these penalties are a flat amount. For example, if you have to file a foreign income schedule with your personal tax return (let’s say you own a rental condo in Florida), the penalty for not doing so is $25 per day, to a max of $2,500 for each year. This applies even if you didn’t make a surplus on the condo. The only way to avoid this penalty: Know what you have to file, and file on time. Trust me, we have good process to make sure we know what our clients have to file and when! (See HERE for an example)

Most penalties are a percentage of the amount of tax that was owed for that filing, as at the date when you should have filed it. Eg. you late-file a personal or corporate tax return or an HST return.

That gives us some strategies for avoiding that type of penalty. For example: if you come to us 2 days before the tax filing deadline, we probably won’t be able to complete your return on time. But, we may be able to do enough to give you a heads-up on the estimated tax. If CRA receives that money before the deadline, then there will be no penalty, even if you file late – because there was no money owing on the deadline date. (If you send too much, they’ll send back the extra). And… if you owe no taxes…. No penalty.

The “You’re busted” penalties apply if you deliberately filed something on your taxes that you know is wrong (or should have known) – and CRA caught you. The penalties are meant to be punitive. We try very hard to not let our clients get into that position.

CRA interest is getting a lot more attention than it used to. CRA’s interest rate on overdue taxes has now increased to 10% (updated as of January 2024) – which is double what it was 18 months ago.

There are two reasons that CRA may charge you interest:

Arrears interest – you’ve paid your taxes later than the due date for that particular filing. Confusingly, that due date can be before the filing deadline, especially in these cases:

• You are self-employed so face a filing deadline of June 15. You file and pay your taxes on May 31. You’re surprised when CRA sends you a bill for one month’s interest – they expected the money by April 30.

• You own a corporation with a December 31 year-end, so face a filing deadline of June 30. You file and pay your taxes on May 31. CRA will send you a bill for either 2 or 3 months’ interest, because (depending on your situation) they expected the money by either Feb 28 or March 31.

This can clearly present some challenges because often the taxes are due before you’ve finished working out what you owe. You can either pay an estimate upfront or grit your teeth and accept the interest. We try to advise clients before the balance-due date whenever possible.

We also acknowledge that clients may not be in a position to pay their taxes immediately and so are going to be exposed to CRA interest (which is non-deductible). Possibly for a long time.

In these cases, we often have a heart-to-heart. We may suggest you consider taking out a bank loan, and using that to pay the CRA debt. There are several good reasons for this: (a) the bank’s interest rate will probably be lower than CRA; (b) in many cases, that would be a deductible expense, and (c) I’d rather owe money to my bank than to CRA, any day. But…. take it as a loan that you’ll pay back over time. Not a line of credit. Somehow, they never seem to disappear.

Instalment interest is one that catches people by surprise. In summary: if you owed taxes when you filed a tax return, then CRA will want you to make prepayments of your taxes for the next year, so you don’t owe when you file the next return. It’s not a legal requirement to pay these instalments. But, if you still owe money when you file, CRA has the right to charge you interest (9% again) on any instalments that you chose not to pay – from the due date of the missed instalment.

In most cases, you’ll be notified of instalments that CRA expects. If you have a corporation, please read the cover letter on your tax return. If you file personal taxes, CRA will send you an instalment reminder. In both cases, they’ll tell you what they want.

Most people know about income tax instalments. The one that catches people out is HST for annual filers – which typically includes most self-employed people. CRA will not send you a reminder, nor will they tell you what instalments to pay. The only flag you’ll get will be a small script in the bottom of your annual HST assessment, encouraging you to pay instalments. Many people miss this, and the first thing they know about it is when they get a bill for interest on top of the HST they’ve already paid.

Please be aware of this! Don’t forget – HST collected by a business is never really yours, anyway. So… send it more often, and avoid a needless interest cost. Particularly at 10%. (updated for new Jan. 2024 increase)

Finally – CRA does recognize that life happens. There are provisions that allow you to request relief from penalties and (occasionally) interest.

One is the amnesty route (technically “Voluntary Disclosure”), where you go to CRA first, and ‘fess up that you made a mistake. There are some parameters. Notably, you have to call CRA before CRA calls you; and you have to pay any taxes in full when you apply. This often works for genuine good-faith mistakes.

The other is the “extenuating circumstances” route. For example, you were about to file your returns on April 28th – but then suffered a death in the family, and didn’t get to it until 2 weeks later, after the deadline. The CRA is often very fair in these cases. But it needs to be genuine.

Hope that helps!

~Jules