ax season is behind us and you've likely already received your 2014 Notice of Assessment. But what if you forgot to include some income on your return, perhaps because of an errant T5 slip that recently turned up during some summer cleaning? Is it really worth amending your return? Surely the CRA, under its slip-matching program, will simply adjust your return for the unreported income and send you a bill for any amount owing, plus some arrears interest.
The reason you may want to correct the problem on your own is that under the Income Tax Act, penalties may apply if you fail to report all of your income, including income from investments. Specifically, if you fail to report some income in a tax year and you also failed to report income in any of the three preceding tax years, you're automatically liable for a "repeated failure to report income" penalty of 10 per cent of the unreported income for that year.
Another penalty, referred to as the "gross negligence" penalty, can apply if you knew - or, "under circumstances amounting to gross negligence," ought to have known - that income should have been reported on your return. This penalty is generally equal to 50 per cent of the understatement of tax payable (or the overstatement of tax credits claimed) related to the omitted income.
The penalty for repeated failure to report income does not apply if the gross negligence penalty applies.
Consider a case decided last month of an Alberta taxpayer who was hit with a repeated-failure-to-reportincome penalty of $5,172 for failing to report $51,727 of interest income on his 2012 tax return. He also failed to report investment income in 2011.
In 2012, the taxpayer failed to include interest income from two T5 slips. Despite acknowledging that he did receive the income in 2012, the taxpayer claimed he didn't receive the T5 slips by the time he filed is 2012 return, in April 2013.
In upholding the penalty, the judge found that the taxpayer "was playing a game of 'catch me if you can' with the (CRA)" and, indeed, the CRA didn't catch him in 2007 or 2010.
In some cases, however, particularly for lower income taxpayers, the repeated-failure-to-report-income penalty can be quite disproportionate to the actual associated tax liability.
The 2015 federal budget contained a proposal to amend the penalty such that it will only apply if a taxpayer fails to report at least $500 of income in the tax year and in any of the three preceding taxation years. In such cases, the amount of the penalty will be the lesser of two amounts: 10 per cent of the unreported income or 50 per cent of the difference between the understatement of tax (or the overstatement of tax credits) related to the unreported income and the amount of any tax deducted from the unreported income, for example, by an employer through source deductions withheld.
Note, however, that this penalty will still not apply if the taxpayer is subject to the stiffer gross negligence penalty. The budget changes will apply to the 2015 and future tax years.