What Happens If I Don't File My Tax Returns in Canada

There are many probable consequences related to unfiled tax returns in Canada. Failing to file your tax returns in Canada can have various consequences, ranging from financial penalties to legal actions. Here are some potential repercussions of not filing your tax returns:

Late Filing Surcharge

The late filing surcharge is a penalty fee when an individual misses the Income Tax Return deadline. The amount of the surcharge depends on how late the return is filed.  The penalty is calculated as a percentage of the unpaid tax balance owing, plus a flat fee. The penalty increases the longer you delay filing your return.

Noncompliance Result in Loss of Benefits and Credits

CPP benefits, old age security payments, spouse transfers, tax elections, student loans, GST/HST, and child tax benefits will be reduced or not available. Personal tax returns of either spouses or common-law partners have to be filed as family income is an important determinant of many calculations and entitlements.

You are Presumed Guilty

CRA assumes guilt until taxpayers prove themselves innocent. That is the law. Significant costs usually result if CRA takes action – warranted or not. Taxpayers need to stay ahead of CRA and take advantage of the self-assessing tax system – complete with valid tax planning opportunities.

CRA Will Proceed Against You

Once the CRA discovers unfiled tax returns and is not satisfied with communication outcomes they often have to get attention by issuing notional (estimated) assessments (tax bills), these assessments are valid tax debts until you file the correct tax returns. These estimated assessments are usually 2 to 3 times what CRA suspects your income to be and will include penalties and interest. The collections department will act on these notional assessments

Increased risk of CRA Audit

A late Income Tax Return also increases the risk of a CRA audit. This is because the CRA is more likely to scrutinize the tax affairs of individuals who have not filed their tax returns on time. An audit can be a stressful and time-consuming process, and you may need to engage the services of a tax advisor to help deal with the CRA. If you are selected for an audit, you will be required to provide documentation to support your tax return and failure to comply with an audit can result in further penalties and fines.

Legal Actions

 If you repeatedly fail to file your tax returns despite repeated reminders and warnings from the CRA, they may take legal action against you. This can include garnishing wages, seizing assets, or obtaining a court order to compel you to file your returns.

Noncompliance Affects Others

 Unfiled tax returns will affect spouses or common-law partners, business partners, and customers. CRA likes group audits and may assume that there are likely others in family or business groups who are non-compliant. More importantly, if asset ownership or bank accounts are co-mingled or taxpayers have provided funds (not loans) to nonarm’s length related parties; CRA is quite active in pursuing third parties for one’s tax debt.

Severe, Debilitating Costs

The cost of tax owing increases relentlessly with the application of negligence penalties, late filing penalties, interest on unpaid installments, interest on unpaid taxes, and interest on penalties. Assuming penalties and interest are applied in the usual CRA practice, you can expect your tax debt applicable to each year in arrears to double every eight years. Late filing penalties and gross negligence penalties are ‘hard’ penalties and quite difficult to dispute if the facts are not in the taxpayer’s favor.

Loss of Tax Refunds

Failing to file your tax returns means you won't receive any tax refunds you may be entitled to. If you have overpaid taxes through source deductions or installment payments, you can only claim a refund by filing your tax return.

Limited Access to Financial Services

Some financial institutions may require proof of filed tax returns before providing services such as loans, mortgages, or lines of credit. Not filing your tax returns could hinder your ability to access these financial services. Financial institutions and many organizations that provide financial assistance almost always insist on the notice of assessment of corporate or personal tax returns to validate income for debt repayment ability or qualification for program payments. If this independent proof of income is unavailable, you may not receive the financing you require at reasonable rates and terms. Spinoffs of this debacle include a negative impact on credit ratings, delays in receiving benefits, grief to executors and estate beneficiaries, and landlord problems.

Transferring Assets

 It bears repeating – transferring assets to non-arm’s-length parties (spouses, family, and partners) will create jeopardy for the people who have received assets from you for what CRA will assume are for purposes of tax payment avoidance. In other words, CRA collections will demand information from you (which you must provide) to inform them of assets you have hidden or transferred. There exists legislation regarding fraudulent conveyances.

Criminal Charges

In extreme cases of deliberate tax evasion or fraud, individuals who fail to file their tax returns may face criminal charges, prosecution, and potential imprisonment.

It's important to note that the CRA generally prefers voluntary compliance and encourages taxpayers to file their tax returns on time. If you're unable to file your tax returns by the deadline due to exceptional circumstances, it's advisable to contact the CRA as soon as possible to discuss your situation and explore options for filing your returns and resolving any outstanding tax liabilities.

Do Late Filings Affect Next Year's Tax Returns?

Yes, late filings impact the next year’s tax returns. This is because along with filing the annual Income Tax Return and paying income tax, business owners and directors are also liable to pay annual preliminary tax – i.e. the tax that you expect to pay for the next tax year.

If you are late filing your Income Tax Return, you could potentially underestimate or not pay any preliminary tax, and therefore, when it comes to filing your tax return next year, you could face paying additional interest on the late preliminary tax from last year.

If you are late filing the Income Tax Return, we recommend that you reach out to our team to discuss your options and let us help you take care of your tax obligations.

We Can Help!

We understand that sometimes individuals may be late filing the income tax return due to various reasons. It's important to note that all of these consequences can apply to those who are late filing the Income Tax Return. By knowing what to expect, you can take steps to minimize the impact and get back on track with your tax obligations. Let us help you navigate through the process and avoid any unnecessary stress or penalties. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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