Canadian Income Tax Penalties: Repeated Failure to Report Income

Penalties and interest charges are the most common tools the CRA uses to enforce compliance with the Canadian Income Tax Act. ‘Compliance’ refers to filing the tax and information returns in their entirety and on time. When a taxpayer (a person or a corporation) files late, there are late filing penalties on unpaid balances.

There is another serious penalty in the Income Tax Act that is catching some taxpayers by surprise. This penalty arises when a taxpayer fails to report an income amount in the current year and also fails to report an income amount in any of the last three years. This repeated failure to report penalty is 20% of the unreported amount or 10% at the federal level and 10% at the provincial level.

Many taxpayers don’t realize that the repeated failure to report can happen very innocently and easily. For example, a small interest slip for $100 from your bank can be lost in the mail and consequently not included on your 2011 tax return, which is later reassessed by the CRA. Now assume that in 2014, another slip – an RRSP withdrawal slip – for $5,000 was missed again. When CRA includes the $5,000 in income, there will be the regular taxes and interest levied on this unreported income, just like in 2011 with the interest income from the bank. But wait – on top this would also be the repeated failure to report income penalty of $1,000 from the CRA that would also take place in 2014!

Does the above scenario happen often?  More often than you may think.

Here is how innocently the repeated failure to report income occurs: many adult children prepare the tax returns for the senior parents and an RRIF withdrawal slip could be easily missed without the preparer noticing it. Many taxpayers receive income slips from their bank, brokerage house, insurance company, current and old employers, etc. so it is easy to miss one small slip in one year and be half way down the path to qualifying for the CRA’s repeated failure to report income penalty. Most taxpayers would not remember a small reassessment from three years ago. In cases where adult children prepare their senior parents’ returns, the preparer may not even be aware of prior reassessments and all the parents’ financial activities for the current year. All it takes is a little sloppiness, mindlessness or an innocent omission and a large penalty is then triggered by the CRA.

This is exactly what happened to a friend who prepared her father’s tax return. A small interest slip was not reported two tax years prior. During 2013, her father had taken out an extra withdrawal from his RRIF for which an extra slip had been prepared by the bank but misplaced by her father. My friend compared current year tax slips to the prior year but was not aware of the extra RRIF withdrawal. When CRA reassessed her father’s 2013 tax return, the repeated failure to report income penalty was 20% of the withdrawn RRSP.

Related Posts on the CRA & Late Income Taxes

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