By the time you read this column, chances are that both you and most of your clients will already have filed their 2009 tax returns. The normal filing deadline is April 30th but if you or your spouse or common-law partner were self-employed in 2009, your returns are due on June 15, but any taxes owing for 2009 must still be paid by April 30.
If you file your return late, there is an automatic 5% penalty on the amount of tax unpaid, plus an additional 1% per month penalty on the amount due each month the return is late, up to a maximum of 12%. Late-filers are also subject to arrears interest.
If this is not the first time you have filed late, and you have been assessed a late-filing penalty in any of the prior three years, the penalties double to 10% of the unpaid amount plus a 2% penalty for each late month to a maximum of 20 months. Fortunately, this higher penalty is only charged if you have also received a formal demand to file from the Canada Revenue Agency.
However, if you fail to pay the required amount of tax owing on time, but your return is filed on time, you will only be subject to arrears interest. The interest, which is not tax deductible, is compounded daily and charged at the CRA's prescribed interest rate, which is currently 5%.
The historical school of thought, therefore, is that if you don’t owe the CRA any tax, then there really is no harm in filing late…or is there?
A recent tax case decided in February 2010 (Leclerc c. La Reine, 2010 CCI 99), however, may be a game-changer as far as the decision to late-file goes.
The case involved Jean-Claude Leclerc, who was assessed two late filing penalties of $2,500 each plus nearly $1,200 in arrears interest for failure to file Form T1135, the “Foreign Income Verification Statement” in both 2003 and 2006.
Form T1135 must be filed annually if the total cost of all your foreign investments, including foreign stocks (but not Canadian mutual funds with foreign holdings) held in non-registered Canadian brokerage accounts was over $100,000.
On the T1135 Form, you are asked to specifically state the types of foreign investments you own and the cost of those investments, along with geographical locations. You are then asked to identify the total income you reported on your tax return from the identified foreign investments.
The penalties for failing to file this form are severe: $25 per day, to a maximum of $2,500. If you knowingly or under circumstances amounting to "gross negligence" fail to file the form, the penalty jumps to $500 for each month the form is not filed, to a maximum of 24 months.
While historically, CRA used to waive these harsh penalties for first time, non-filing offences, in recent years it has been assessing them on first time offences.
Mr. Leclerc filed his income tax returns late in the two years in question, but there was no balance of tax payable and therefore no penalty was assessed for late-filing those returns. He argued that his failure to file Form T1135 on time was due to his return to school and the illness of his mother.
Mr. Leclerc testified that he never failed to declare any foreign income and that the penalty was unreasonable since for 2003, it amounted to 148.4% of the total tax payable.
While the Judge was sympathetic to Mr. Leclerc and agreed that he made an honest mistake caused by his ignorance of the consequences of not filing Form T1135 within the time limit, nevertheless, the penalties assessed by the CRA were properly imposed.
A heavy price to pay for Mr. Leclerc and an important lesson for the rest of us.