Not paying your back taxes is serious business. Those most susceptible to letting taxes lag from one year to the next include part-time workers and the self-employed. Statistics Canada shows that in 2012, more than 2.6 million Canadians worked for themselves.
“Disciplining yourself to set aside money every week in a tax account requires a lot of discipline,” notes Caroline Thompson, president of Thompson Accounting and Tax Inc. This is especially true if money is tight and the economy is poor.
However, there are ways to file for past years and repay back taxes. Some options even offer ways to forgo penalties and prosecution.
Canada Revenue Agency (CRA) applies penalties for failure to report income and for late filing. If you filed your tax return after the filing deadline, CRA charges a late-filing fee. For 2018, this penalty is 5 percent of the balance owing plus 1 percent for every month you were late, to a maximum of 12 months.
However, if CRA charged a late-filing fee for past years, you would be charged 10 percent on your most current year plus 2 percent for each month of that year. CRA also charges compound interest on any amounts owing.
Once you start making payments, they are first applied to previous years, working up to the most current year. Thompson notes, “The late penalties and interest owing on the unpaid tax keeps accruing until all is paid.”
T1 Tax Adjustment
To amend a previous tax year, file Form T1-ADJ and a T1 Adjustment Request. The CRA will also accept a signed letter outlining the details of your situation along with supporting documents, your social insurance number, and a daytime phone number along with your address.
If you choose to file form T1-ADJ, you only need to send the supporting documents you wish to change. Do not send the form with your tax return. You also have the option of amending your past returns online by logging in to your CRA My Account and selecting the “change my return” option.
Choosing this method only allows you to amend the current year and two previous years. Although CRA is under no obligation to process any amendments, usually you will receive an amended electronic request within two weeks.
For a request that is mailed, eight weeks is the average waiting time. Penalties and interest may apply.
Voluntary Disclosure Program
If you haven’t filed tax returns for previous years, and you know you’ll have taxes to pay, you may have another alternative. “The best way to repay back taxes is to simply complete and finalize the respective tax returns,” advises Thompson. But before filing them, see if you meet the criteria under CRA’s Voluntary Disclosure Program. CRA lays out four conditions that must be met to qualify.
- Your disclosure must be voluntary.
- One of your returns must be at least one year overdue.
- Your disclosure must be complete and all forms and other tax requirements have been met, such as HST.
- The disclosure must be related to return that is subject to a potential penalty.
The disclosure is made on form RC199. If CRA accepts your voluntary disclosure, you may only be charged the taxes owed plus the interest, with no penalties.
Taxpayer Relief Provisions
CRA does have the discretion to offer taxpayer relief provisions. It has the option to decrease the amount owing, reduce or remove penalties and interest, reduce the tax amount owing beyond the normal three-year period or elect an alternative tax method of repayment.
In other words, you may be able to negotiate payment terms on back taxes. “It’s sometimes possible to reach an agreement of terms in regard to repaying back taxes. However, once you commit to an amount, it’s important to stick to the payment schedule,” Thompson cautions.
“Only commit to what you can afford. If you default, the amount is immediately payable in full. And collections just don’t go away.”
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