It can happen – you get a tax slip late, or you fail to remember you owned an asset which generates income. Or, maybe you received a tax refund last year and forgot to declare the interest you received on your tax refund when you filed your return. The reality is that it is easier than you think to forget to report income on your return!
The good news is that the CRA (Canada Revenue Agency) is generally forgiving. When they assess your return and notice the omission, they simply add the excess income to your return and assess the additional tax. And, assuming you filed your return on time, you end up owing the additional tax along with non-deductible interest on the additional taxes owing at the prescribed rate, which is currently 5%.
However, their patience can wear thin, and when omissions happen more frequently – their tolerance diminishes. For example, if you fail to report income on your 2016 tax return and you have already failed to report income in any of the last three preceding tax years (2013, 2014 or 2015) and the income omitted is greater than $500, you could be subject to a penalty for repeated failure to report income.
Federal and provincial penalties are equal to the lower of:
• 10% of the unreported amount of income on your return for 2016; and
• 50% of the difference between the understated taxes payable (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report.
So for example, if you are an Ontario resident at the top marginal tax bracket and forgot to include $10,000 of interest income in 2016, the penalty would be equal to the lesser of $1,000 and $2,676.50, or $1,000.
Things could get worse. Where the CRA determines that you have knowingly omitted to report income on your return, gross negligence fees may be assessed. Where gross negligence fees apply, the penalty is equal to the greater of $100 and 50% of the understated tax payable (and certain refundable tax credits) related to the unreported income. So in our example above, your penalty would be $2,676.50.
If you are reading this article and are beginning to feel this may be applicable to you, all is not lost. The CRA offers taxpayers a second chance to come clean by applying for the Voluntary Disclosures Program. The benefit of applying through the Voluntary Disclosure Program is that the penalty may be waived by the CRA when they review your application. In the event you find yourself in this position, however, we would suggest that you consult a tax expert before applying.
Lastly, keep in mind that for Quebec residents, the federal penalty will be assessed by the CRA and the provincial penalty will be assessed by Revenu Québec. Additionally, for non-residents and deemed residents of Canada, the provincial/territorial penalty will be applied only if provincial/territorial tax is payable.
In the end, omissions may happen but the best thing you can do to prevent it, is to stay organized and keep on top of your financial affairs. So as 2016 tax season approaches, minimize the risk of omissions by being prepared and where your situation is complex or has changed significantly, work closely with your accredited tax advisor who can help.