Did you know that if you forget to report income on your personal tax return in one year and then accidentally repeat in the next 3 years following, the CRA will charge you a penalty of 20%? Yes, that’s right, 20%.
How is the penalty determined?
This is how it works: If in 2010, 2011 or 2012 you missed reporting income on your return to the CRA, they will require this income to be included on your return and if applicable, you will need to pay the missed tax amount owing and interest penalties as you failed to pay the balance owing by April 30th of the following tax year.
Then in 2013, you again missed reporting income to the CRA, they will still assess you with the standard tax and interest penalties, but on top of this, they will charge a “Repeated Failure to Report Income Penalty” which is 20% of the income that was not reported on your 2013 return. (Technically, this is a 10% federal and 10% provincial penalty.)
Putting it into numbers: An example
If the missed income from 2010 was for $3, you would only be assessed on the inclusion of the additional $3 of income. Depending on your situation, this may cause additional tax to be owed based on your marginal rates and an interest penalty on the balance owing. But obviously, in this example, it’s minimal.
But, let’s say you missed income from 2013 for $10,000. Depending on your situation, this may cause additional tax to be owed based on your marginal rates, and mean an interest penalty on the balance owing. In addition to this, you will get an additional penalty of $10,000 x 20% = $2,000. This will be required to be paid regardless of your tax situation.
So, while the increase in income of $10,000, may mean you do not owe additional tax given your situation (i.e. enough income tax was withheld), you will still be required to pay the $2,000 penalty for missing this income in the first place.
Essentially, it is irrelevant how much income was missed in the prior 3 years, but the amount of the income that was excluded in the current year, which is what you will be charged the penalty on.
Avoiding this penalty? How?
The number one thing you can do is provide your accountant with all of the slips you have. If you are unsure whether you should have received a slip from a particular institution, contact them to ensure that you have all of your slips.
What this all boils down to is that even the small income amounts count and to make sure that you provide them to your accountant when you have your tax return prepared. If you are unable to determine an exact amount, an estimate is better than nothing.
There are of course, many different interest and penalties that the CRA charges outside of this penalty which you should make yourself aware of, however this seems to be one that catches many people off guard when they receive a Notice of Reassessment from the CRA!
George E. Dube, CPA, CA (gdube@bdo.ca) and Danielle Kitzman, CPA, CA (dkitzman@bdo.ca)
Tags: penalties, personal tax
