What to do if you are hit by surprise late-filing penalty

National Post


If you've just received your Notice of Assessment for the 2009 tax year and were surprised to be hit with a late-filing penalty, all is not lost if you can demonstrate that you did, indeed, file before the deadline.

The penalty for late-filing is severe and is equal to 5% of the amount owing plus 1% per month for each month the return is late, up to a maximum of 12 months.

A recent Tax Court decision tells the story of octogenarian Elizabeth Saunders, who faced an uphill battle trying to convince the Canada Revenue Agency that her 2007 tax return, on which she owed nearly $45,000, was indeed filed on time.

The CRA slapped her with a late-filing penalty on the basis that her return was filed on May 20, 2008, the date stamped on the return by the CRA.

Ms. Saunders maintained that her return was filed on April 29, 2008, the day before it was due, when it was placed by her accountant in the return collection box located inside the Montreal CRA office.

Prior to 2008, each return was individually date-stamped by a CRA official. In 2008, however, the CRA changed its procedure and instead of having to wait in a long line at the counter for a date stamp, the return could be inserted into the slot of a closed container similar to a Canada Post mailbox.

Of course, the problem with this system was that there was no way for the date of the return's insertion into the box to be automatically date-stamped.

Despite this, the CRA maintained that it did have a procedure in place by which, either at the end of each day or early the following morning, each day's returns were retrieved and date-stamped before being dispatched to the appropriate CRA office for processing.

When a CRA official was asked about the reliability of the new system, his response was that "it was pretty reliable."

The judge was not convinced. As she wrote, "I must say that I do not share [the CRA official's] faith in the infallibility of a huge government bureaucracy, especially during its busiest time of the year ... While I can understand [his] belief that the system was supposed to work, I am not convinced in [this] case that it did."

As a result, the judge concluded that any doubt should be resolved in favour of the taxpayer and ordered the CRA to cancel Ms. Saunders' late-filing penalty.

The court also observed that after 2008, the CRA modified its collection box procedure to allow for date-stamping when returns are delivered.

My advice to avoid hassles is that unless you file electronically, which produces an undisputable electronic date stamp receipt upon submission, it is best to obtain proof of the date of filing, especially if you have tax owing.