Late Tax Returns & Getting Mortgage or Credit

If I Ignore CRA’s Request to File Outstanding Returns – Tales of Two Taxpayers

– submitted by Lilly Woo, CA, CFE, CFP

It has been a strange summer for me. As the 2014 tax season came to an end on April 30, 2015, I was relieved as always and mentally plan for the lazy summer I wanted to enjoy.

Then a strange thing happened. I received a phone call from a friend (“Paul”) whom I have lost touch with six years ago. He sounded stressed right away. As soon as we were through the initial greeting, he told me the CRA had garnished his bank account (this meant even his mortgage couldn’t be paid!). When I asked the reasoning for this, he informed me that hasn’t filed for the last six years – about the time that we ended up losing touch. The reason – he has been too busy working.

Very Late on Filing Taxes

The second phone call came during the same week from another friend (“John”) with whom my last contact was ten years ago. We lost touch after he met the love of his life (a doctor). The relationship has been over for two years, but John could not get a desperately needed bank loan. The reason wasn’t that he hasn’t worked in the last ten years – it is more that he hasn’t filed in the last ten years.

Overdue Taxes & Your Mortgage

We all know from experience that the first thing banks and mortgage brokers request is confirmation that all tax filings are current along with the notice of assessments. The CRA has the power to put a lien on a house for any unpaid tax debt so the banks do not want any problems with CRA in splitting the proceeds from the sale of the home.

Interest & Penalties

I assisted Paul with filing his personal and GST returns for the last five years and three of those years were extremely profitable. This will be an expensive mistake that Paul will remember indefinitely. For starters, Interest charged on late balances owing is 4% plus the prescribed rate of interest for the quarter. Moreover, Paul is also required to pay the late filing penalty.

For the first late filing offence, the penalty is 5% of the unpaid tax at the filing due date, plus 1% for each complete month (part months do not count) the unpaid tax is outstanding up to a maximum of 12 months. If there are no taxes owed on the due date, or if the taxpayer is entitled to a refund, the late filing penalty would be nil. If the taxpayer has been charged a late filing penalty in any of the three preceding taxation years, the penalty is increased to 10% of the unpaid tax at the filing due date, plus 2% per month up to a maximum of 20 months. In this case, there was likely also a demand to file from CRA, which was ignored, so more penalties are incurred, and none of the interest or penalties are tax deductible either.

Getting a Credit Card

In John’s case, he didn’t work during his marriage. Fortunately, he has little income to report. In fact, the CRA has agreed to credit him the full GST credits for the previous ten years to offset whatever personal income taxes he will owe from his filings. No banks or credit card companies will provide John with any credit until all the outstanding returns are filed and assessed, which will take a few months as the returns have to be assessed manually.

The lesson here is CRA will eventually stop you on your tracks to force you to file your tax returns.

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