When you receive a Demand to File letter from the Canada Revenue Agency (CRA), it means that the CRA has noticed you haven't filed your required tax return(s) and they are asking you to do so immediately. Ignoring the letter could lead to penalties or further legal action, so it’s important to address it promptly.
What is the Demand to File Letter?
A Demand to File letter, usually referred to simply as a Demand letter, is a request for a tax return from the Canada Revenue Agency (CRA).
CRA sends out demand letters for returns that
- Have not been filed
- Are likely to have tax owing
CRA doesn’t send out demand letters for every return that has not been filed. There is no legal requirement to file a personal income tax return, unless there is tax owing. So CRA doesn’t bother pursuing unfiled returns if they believe the taxpayer has no tax owing or a refund coming.
If you don’t prepare your return, you don’t know if you owe tax – and technically neither does the Canada Revenue Agency. So what makes them perk up and start asking for a return?
Typical Contents of the Letter
In this slightly ominous piece of mail, you'll find details on the tax years in question, the deadline for response, and a gentle nudge to stop procrastinating and get your financial affairs in order.
How CRA Tracks You?
CRA HAS ALL YOUR SLIPS
Payers in Canada – employers paying salaries, banks paying interest, investments paying dividends, or capital gains – send out income slips to taxpayers in the form of T4s, T5s, T3s, etc. Taxpayers use these slips to complete their tax returns.
But what some don’t realize is that a copy of every slip is supposed to be sent by the payer to the CRA at the same time. So CRA is aware of much of your income even if you don’t file a tax return. For income where there is some tax withheld at source, e.g. your salary, CRA can also see the withheld tax with regard to that income. CRA is, therefore, able to make a general guess at whether you’d owe tax or not, were you to complete your return.
If you haven’t filed and CRA’s basic information on file suggests you might owe, you’ll eventually receive a Demand letter.
What to Do When That Envelope Lands in Your Mailbox?
1. Review the Letter Carefully
The letter should indicate which tax year(s) you're required to file. Make sure you understand what the CRA is requesting and the specific deadline they have given you for filing.
2. Determine Why You Haven’t Filed
- If you’ve simply forgotten to file, you need to file as soon as possible.
- If you're unsure whether you need to file, review the filing requirements based on your income and residency status. You may also want to contact the CRA to confirm.
3. Gather Required Documents
- Collect your tax slips (T4s, T5s, etc.), receipts, and any other necessary documents to prepare the return for the specific year in question.
- If you are missing tax slips, you can access them through your CRA My Account or contact the CRA for copies.
4. File the Required Tax Return(s)
- Online Filing: You can file your return online using certified tax software or through the CRA's NETFILE service.
- Paper Filing: If you prefer, you can also file by mail. Ensure that it is sent before the deadline mentioned in the letter.
Even if you owe money, it is better to file the return on time to avoid further penalties.
5. Consider Voluntary Disclosures (If Applicable)
If you failed to file for several years or suspect that you owe back taxes, you might want to explore the Voluntary Disclosures Program (VDP), which allows you to correct your tax affairs and potentially avoid penalties.
6. Respond to the CRA if Necessary
If you cannot file by the deadline or you need more time, you should contact the CRA and explain your situation. The CRA may grant extensions in some cases.
7. Address Any Outstanding Penalties or Interest
If you file late, you may face penalties and interest charges. Once you file, the CRA will inform you of any amounts owed. You can set up a payment plan with the CRA if you cannot pay the full amount immediately.
8. Don’t Ignore the Follow-Up
After you send in your return, keep an eye on your mailbox for any follow-up communications. The CRA might reach out with questions or confirmations. Ignoring this is like ignoring that friend who texts you about plans—you’ll only make things messier in the long run.
9. Seek Professional Help (If Needed)
If your tax situation is complex or if you’re unsure about how to proceed, you may want to consult a tax professional or accountant to ensure everything is handled correctly. They’re like guides through a maze; they know the ins and outs of tax laws and can help you navigate this tricky situation. Plus, it can save you a lot of stress and time.
Possible Consequences of Ignoring the Demand
- Late Filing Penalties: The CRA can impose penalties of 5% of the balance owing, plus 1% for each month the return is late, up to a maximum of 12 months.
- Estimated Assessment: If you do not file, the CRA may assess your income and taxes owing based on their estimates, which may not reflect your actual tax situation.
- Legal Action: Continued failure to file could result in more serious legal consequences, including garnishing wages or bank accounts.
Reasons To File Your Late Tax Returns
1. A loss on your self-employment
For example, CRA can see some of the income you earned through self-employment, if your payers issued a T4A slip. But they can’t see your business expenses until you file a return. If your expenses are high enough, they can cancel out or even exceed your income, creating a business loss. That can reduce or even eliminate a tax bill.
2. Claiming RRSP contributions
RRSP contributions can also reduce your taxes. You may have made RRSP contributions in the year that CRA isn’t aware of.
3. No, you’re not in trouble
Understandably, most people have an automatic stress response to a letter from the CRA. And yes, a Demand letter requires action: you must file a return, or have CRA file one for you.
But other than the fact that CRA is missing information (a tax return) that they want, you’re not really in trouble.
Yes, chances are you’ll have a tax bill. And if it does turn out you owe tax, you’ll also be levied a late-filing penalty and some interest. But when you file the return CRA demands, that the return is no more likely to be audited than any other tax return.
Conclusion: Keep Calm and File On
A Demand to File letter doesn’t have to be a source of anxiety. By understanding what it means, gathering your documents, and filing your taxes promptly, you can turn this situation around. Treat it as a temporary bump in the road, not a mountain. Handling the letter promptly and filing your tax returns as soon as possible will help minimize any penalties and interest that may accumulate. Getting your taxes in order can feel like lifting a weight off your shoulders, leaving you free to move forward with peace of mind.
Connect with 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.