Have you not filed your personal tax returns in over ten years?
If you’ve put off filing your taxes for far too long, take inspiration and wisdom from that old Chinese proverb that states the second best time to plant a tree is now. Whatever the reason for not filing, take that weight off your shoulders and get going, it may not be as bad as you think.
Six Year Rule
Every person who pays personal taxes in Canada is required to keep records for six tax years, which equals seven calendar years, in the event of a review by the Canada Revenue Agency. This includes cheques, vouchers, receipts, invoices, tax slips and other documents that support your taxable income and taxes owing. Keep in mind that a document may only become relevant for tax purposes years after it was created. If you don’t have backup copies you will need to make every painstaking effort to reconstruct your records by connecting with your financial institution(s), credit card companies, and whoever else for copies of your records. You may need help to negotiate with the CRA.
If you are a small business owner with a sole proprietorship or a partnership and you decide to close up shop, you will have to keep those records for six years from the end of the last tax year. An incorporated business must keep records for two years from the date of dissolution of the corporation. It is your responsibility to take all sensible measures to keep your paper or electronic books and records safe. We suggest having a responsible third party such as a bookkeeper or accountant retain copies. Backups should be made and kept in a safe, and electronic versions in cloud storage. Make sure you share the name of your bookkeeper, accountant or the location and access to these backups with family and/or the power of attorney and executors of your will just in case something happens to you and they need to deal with the CRA on your behalf.
Voluntary Disclosure Program
You’re not the only tax-tardy Canadian. The Voluntary Disclosure Program was set up by the Canada Revenue Agency for people who are behind in reporting their taxes. If you register, you will not pay penalties since you contacted them first. But, if you wait until the Canada Revenue Agency contacts you, you’re going to be paying both penalties and interest. The CRA may provide some relief but it is up to their discretion.
You must include all Canada Revenue Agency returns, forms, and schedules needed to amend the non-compliance with your Voluntary Disclosures Program (VDP) Application, or a letter with the same information, which must be signed by you and, if applicable, a representative submitting the application on your behalf. UpSide Accounting is often the representative for non-filers, so if you’re the creative avoidant type, we can help you.
With the Voluntary Disclosure Program (VDP), income tax stream applications are processed under two tracks:
- General Program
This track provides partial relief of interest to taxpayers, who want to correct unintentional errors, for assessments for the years preceding the three most recent years of returns that must be filed.
- Limited Program
Unfortunately, there is no interest relief for taxpayers who intentionally avoided their tax obligations, but you will not be referred for criminal prosecution related to the information disclosed and you will not be charged for gross negligence penalties. Various factors may be considered in determining if your application is accepted, including the dollar amounts involved and the number of years of non-compliance.
Payment of the estimated taxes owing is required as a condition to qualify for the VDP. You, or your representative, can ask to be considered for a payment arrangement on the application. The CRA can grant relief for interest that accrued during a 10-year limitation period. Paragraph 18 of CRA’s IC00-1R6 information circular states:
“The Minister’s ability to grant interest relief is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed. This is the case regardless of the taxation year (or fiscal period) in which the tax debt arose.”
Any tax years beyond that 10-year limitation period is still important to disclose on the Voluntary Disclosure application. One of the requirements for the program is completeness, so if you were non-compliant for the years both within the limitation period and prior, then it makes sense to disclose all the non-compliant years when filing your application. Since acceptance of a Voluntary Disclosure is discretionary, it’s better to just come clean and confess to the years before the 10-year limitation period so that you’re not rejected because your application was deemed incomplete.
Taxpayer Relief Provisions
The Canada Revenue Agency will only grant relief from interest and penalties when certain types of situations prevent someone from filing their income tax. These situations include the inability to pay because of serious financial adversity, or when a spouse/close family member dies or has a terminal illness and tax returns just get pushed to the bottom of the priority list. It may be possible if you’re young to claim “oops, I didn’t know, but now I have a relationship with an accountant and it won’t ever happen again”, but we don’t suggest using that as an excuse.
General Anti-Avoidance Rule
The General Anti-Avoidance Rule is a provision by the Canada Revenue Agency to override just about any other tax rule, and have the power to do just about anything they want to collect the money they’re owed. The CRA can go back as far as they want to get taxes they’re owed, and they can do this quickly. They will want to see not only the income and expenses for the last three years and audit years previous to that.
Interest and Penalties
Unfortunately, not filing taxes results in interest and penalties. The Canada Revenue Agency charges an annual interest of five per cent on overdue personal tax returns, interest is compounded daily, which means it is recalculated every day on the initial principal and the interest accumulated. The penalty is five per cent of your balance owing for the current tax year, plus one per cent of your balance owing for each full month your return is late, capped at a maximum of 12 months.
If you don’t have much in assets, you can authorize the Canada Revenue Agency to withdraw payments directly from your bank account on dates of your choosing through My Account, which is your personal CRA account where you can see your taxes and benefits information. If you don’t have My Account, here’s how to get it. You can make a six month payment option, but any longer than that and you will have to get a letter from the bank saying they won’t give you any debt. If you owe $25,000 and have a house with equity, you’ll have to pay that $25,000 right away by borrowing it at the bank so that it’s done.
CRA Collections Officer
Again, don’t wait for a Canada Revenue Agency Collections Officer to contact you. If Canada Revenue Agency comes to you before you go to them, then you have to expect to pay penalties. You will typically get a better result when you are coached by an advisor and then speak with the collector yourself. UpSide Accounting can have a conversation on your behalf if it’s necessary. There are also specialists that can get involved for large debts.
If you haven’t filed your personal tax returns in over ten years, but you’ve read this whole article, then congratulations! You’re on your way to getting back on track. Contact us today so we can help you become up-to-date with your tax filing obligations and minimize any penalties through voluntary disclosure.