How to file overdue taxes without penalty

If you've avoided filing taxes for more than a year, the CRA penalties can be Draconian. But there is one way to avoid them

(Graeme Roy/CP)

(Graeme Roy/CP)

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For the last few months, Fraser Simpson has noticed a curious thing. Every time he walks into his neighbourhood Starbucks in downtown Toronto, he sees groups of young men huddled in the back of the coffee shop all talking about pooling their money in the hopes of buying and flipping condos. “You can hear them talking about putting up a certain amount of money each, say $20,000, and the talk ultimately turns to how they’re just going to hold on to the property for a few months tops, flip it for $200,000 more than they bought it for, and then all get rich,” says Simpson, a tax accountant in Toronto. “What I never hear is who’s going to pay the capital gains taxes to the Canada Revenue Agency (CRA)? If they fail to report this capital gain they’ll face huge penalties—and that’s just the start.”

Not a week goes by that Simpson (known locally as the Tax Mechanic) doesn’t have someone who hasn’t filed their taxes for a while, walk into his accounting office. Sometimes, they haven’t filed for 10 years or more.  “All sorts of people put off filing their tax returns and that’s a serious problem,” says Simpson. “The key questions to ask yourself right now is, ‘Am I up to date on my taxes?’ If you aren’t, it’s time to do something about it.”

Not filing taxes is a serious problem. In fact, just this spring, the (CRA) sent out 30,000 intent-to-audit letters and more are coming. So if you have overdue or unfiled taxes, now is the time to take charge and get in front of the issue. Simpson was happy to answer a few questions for MoneySense and let us in on what you can do if you’ve put off filing your tax return for a year or more. Here’s what he had to say:

Why do people put off filing tax returns?

It’s a fast-paced society. Once people skip one year, they get worried and so tend to skip the second year as well. Then if they don’t get caught by the CRA they feel they’ll never get caught. But with today’s sophisticated technology coupled with the federal government aggressively seeking revenues for the nation’s coffers, the CRA is ramping up its search, and going after tax money and taxpayers everywhere.

Who are the most likely not to file?

The self-employed, who have no T4 slip, often let tax reporting slide off their plates—especially those in today’s sharing economy. Either they get busy or they think they won’t have the money to pay the taxes they owe. Entrepreneurs especially often fall into the trap of using the money they should be putting aside to pay taxes and reinvest it in their businesses instead. Then it snowballs. Say you owe $50,000 in taxes and you don’t have the money. Well, maybe you have a house and a car and you’ve probably got a job. So right away your house will have a lien put on it and then you can’t sell or refinance your house because of the tax debt. But the good news is that tax professionals can often approach Revenue Canada on your behalf and set up a manageable payment plan. Often, the person owing money can refinance some of what he owes and do the rest on a payment plan.

So what should I do to file overdue tax returns without penalty?

The Voluntary Disclosure Program is set up by the CRA for those people who are behind in reporting their taxes. In my case, people who come to me don’t even have to give their name. All people have to do is get a tax representative/accountant and they will get you a number.  This ensures you are registered with them. Even if they send you a letter in the next week, you will not pay penalties because you contacted them first. But this is a time sensitive process and it comes down to who contacts who first. If you wait until the CRA contacts you, you’re in a penalty situation that can be a nightmare. If the CRA tracks you down—and they will—you’re going to pay penalties and interest.

Can you give us an example of what those penalties would be?

Sure. Let’s say you sold a condo and Revenue Canada finds out about it. If you’ve been avoiding them and they catch you, they will assess you a penalty. The penalty is quite Draconian. It’s usually equal to the tax that you owe. So if you owe $50,000 in tax and feel like you can get around this and keep going on, well, what if they catch you? If they catch you, now that $50,000 problem becomes a $100,000 problem plus interest, which is usually another $50,000 in such cases. So now you’ve tripled your problem from $50,000 to $150,000.

Can taxpayers do this themselves?

They can try but the problem is that the Voluntary Disclosure Program is very sensitive for qualification. A tax professional has a better idea of what circumstances qualify and which don’t. I tell people that it’s easier to pay a tax expert a small fee to do this for you than to do this incorrectly yourself.

When does it really become a problem?

Once Revenue Canada notices and comes after you—then it’s a real problem. You’re incurring interest and penalties and they could seize bank accounts, put a lien on your property and garnish accounts receivable. Even if you haven’t filed for a couple of years and haven’t been caught yet, it’s important to contact Revenue Canada before they contact you.

But isn’t it true that the CRA can’t go back more than three years to get taxes they’re owed?

Actually, they can, and they can go back as far as they want. All they have to do is implement the “General Anti-Avoidance Rule.” Basically, it’s a provision by the CRA to override just about any other tax rule. And they can do this quickly. They will want to see not only the income and expenses for the three years you haven’t filed, they’ll also want to audit the three years previous to that. This rule basically gives Revenue Canada the power to do just about anything they want to collect the money they’re owed.

What should taxpayers know about payment plans?

Payment arrangements for paying back taxes can be made with the CRA—taking into account what the CRA will accept and what the taxpayer can afford. The amount varies, but say you owe $20,000. If you have a house with equity, you’ve got to pay that $20,000 right away. There’s no way around that. You can borrow it at the bank and get it paid, so it’s done. But you can’t get around it. You can’t even make payment arrangements. And of course, if Revenue Canada is forced to come to you before you go to them, then you have to expect the penalty as well. If you don’t have much in assets, then monthly payments of back taxes can likely be arranged.

What is a ‘notional assessment’ and where does it happen?

Say you haven’t filed for five years. Sometimes Revenue Canada catches you and they don’t say anything, and they assess those five years arbitrarily. It’s called ‘notional assessment.’ They will take your previous five years’ income (since you last filed) and use that to estimate what your next five years income will be, and then they will probably double it. It’s then up to you to object to that assessment and prove otherwise.

This is happening a lot right now in Toronto, where the condo market is going through the roof. People are buying five condos at once and then selling them off and not reporting the capital gains. They’re trying to claim the condos as personal residences, so it causes a huge tax bill when reassessed. Revenue Canada doesn’t have all the details except that maybe five condos were sold and you were the owner. So they’ll just say, “Okay, you’re the owner of five condos? Okay, we’re going to assess you—I don’t know—$100,000 on each property.” Now you’ve got $500,000 in income, with $250,000 in tax payable, plus penalties of another $250,000, plus interest. It’s a horrendous situation. And Revenue Canada doesn’t have much sympathy for taxpayers like that, because they just see the situation as, “You were trying to avoid tax.” It’s becoming more and more of an issue. (You can learn more about the various tax penalties for not filing taxes here.)

Any last piece of advice?

Yes, file your taxes and if you haven’t filed for a year or two—or more—speak with a tax professional who can help you get it resolved. Oftentimes people may find that once they file, they’re owed a refund and don’t owe taxes at all. After all, the filing will likely cost less only a few hundred dollars. But best of all, you’ll be able to sleep at night.

(If you want to read more about how to deal with the CRA, learn more in tax expert Simon Fraser’s free e-book How to deal with the CRA. It has all the info you need to get caught up with your tax payments.)