You file late at your peril

National Post


With less than a week to go before the general tax-filing deadline of April 30, it may seem trite to repeat the mantra of “be sure to file on time, especially if you owe money.” But even if you don’t owe any tax, there is good reason this year to stick to that same deadline.

That’s because of a recent tax case that found in favour of the Canada Revenue Agency over a filer who didn’t owe, but forgot to send in some important forms.

The general rule is that 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 can double to 10% of the unpaid amount, plus a 2% penalty for each late month, to a maximum of 20 months.

So, if you don’t owe any tax, why rush to meet Friday’s deadline?

Ask Jean-Claude Leclerc, who found himself in Tax Court after being assessed two late-filing penalties of $2,500 each, plus nearly $1,200 in arrears interest for failing 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.

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.

Historically, the CRA used to waive these harsh penalties for first-time, non-filing offences, but in recent years has been taking a harder line.

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 his 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, it was ruled that the penalties assessed by the CRA were properly imposed.

Still tempted to file late?