April 30 at midnight was the deadline for most Canadians to file personal returns for the 2011 tax year, but what happens if you missed it — or have decided to skip doing your taxes entirely?
The answer depends mainly on whether you owe taxes or not.
April 30 was the deadline to file in order to avoid penalties. Individuals can still mail in their tax returns over the following months, or Netfile their 2011 taxes up until the system shuts down on Sept. 30 this year.
And as the saying goes, the only sure things are death and taxes — the government wants to see a tax return even if you passed away during the tax year. The person acting for your estate has until April 30 of the following year to file for you, unless you died in November or December, in which case the return is due within six months of the date of death.
If you're late filing and don't owe taxes then you won't pay penalties — but you can still take a financial hit. The government will hang on to any refund until you file a return, and there might also be a delay getting benefit payouts you're eligible for, such as the GST or Child Tax benefits.
"It’s good to file, because a lot of our credits are based on your tax return," says Brian Quinlan, an accountant with Toronto-based Campbell Lawless. "So if the government doesn’t know your income, you won't get these credits sent to you."
If you owe taxes and either don't file a return or don't pay, starting May 1 you'll start racking up penalty charges and daily compound interest on the unpaid amount.
The penalties start at five per cent of the amount owing, plus one per cent of the balance owing for each full month that the return is late — and compound daily interest is charged on the total amount due. If you file late more than once in a four-year period, the penalties can double.
And if you don't report income twice or more within a four-year period, you can be hit with a "repeated failure to report income" penalty. This penalty is a big one – 20 per cent of the total amount of income that was earned and not reported in the most recent year.
It's when you don't pay the taxes you owe, file any returns at all, or when you fudge the numbers that the government can start investigating your finances and things can get sticky.
The country's top auditor, Michael Ferguson, investigated what the CRA does to track down people or businesses that don't file the returns they're required to under the Income Tax Act and the Excise Tax Act. That can include chasing after never-filed income tax returns, as well as identifying businesses that were required to register for the GST or HST but didn't.
The group that tracks down "non-filers" and "non-registrants" isn't terribly large – just 700 of the CRA's 39,000 employees work on it — and the program's budget is $39 million, less than one per cent of the CRA's overall $4.5-billion budget. But the CRA turns up about 185,000 potential non-registrants a year, according to the auditor's report, and reviews about half of these files.
Going to court
The CRA tends to investigate files that have a good probability of a return for the government. In the two fiscal years the auditor general examined, the sleuthing of those 700 employees uncovered $2.8 billion in additional taxes, interest and penalties each year. That's an average of $4 million in tax revenue per employee per year.
Inside the Canada Revenue Agency's website lies a section titled Convictions, where the department unapologetically publicizes cases in which Canadians have been fined or imprisoned for not paying or for cheating on their taxes.
If you miss the tax filing deadline, need to correct errors on a return or have trouble paying taxes owed, it doesn't necessarily mean automatic penalties. There are circumstances that allow you to apply to the Canada Revenue Agency for what's called "taxpayer relief" and have penalties reduced or waived:
- Canada Revenue Agency (CRA) error.
- CRA delay.
- Financial hardship/inability to pay.
- Natural or man-made disaster.
- Death, accident, serious illness, emotional or mental distress.
- Civil disturbance (includes postal strike).
- Other extraordinary circumstances, on a case-by-case basis.
Source: Canada Revenue Agency
A recent news release, for example, highlights the case of a Manitoba chiropractor who was fined $162,513 and sentenced to six months in jail for tax evasion. The CRA says it releases such information to the media to seek "publicity on conviction in the case of tax evasion" in order to "increase compliance with the law through the deterrent effect of such publicity." The website also serves as a reminder and warning to Canadians that jail is an option for those thinking of not paying.
"People do go to jail. It does happen," Toronto tax lawyer Jonathan Garbutt told CBC News.
However, he noted that in general in Canada, "people don't go to jail for as long as they do in the U.S." for tax-related offences.
Cases can be settled out of court, but Garbutt said the CRA has a high percentage rate of conviction when it has decided to take a case to criminal trial, somewhere around 98 per cent. "If they go to trial, it's because they have somebody cold."
In its annual report to Parliament, the CRA seems to suggest as much. "The rate of conviction is very high due to case selection," the report says. "Cases are selected for prosecution based on their expected outcome as there is a high cost to this type of compliance intervention ... In this way, Canadians and Canadian businesses are reassured that the most egregious cases are pursued to the fullest extent."
According to the CRA, in the fiscal year 2010-2011, 204 taxpayers were taken to court by the government in cases related to tax evasion or fraud. The government reported a 100 per cent conviction rate, and the court imposed $22.8 million in fines and a total of 47 years worth of jail sentences.
Mostly 'civil sanctions'
The Income Tax Act lays out the penalties for tax evasion, which is considered a hybrid offence. That means the Crown can treat it as either an indictable offence or summary conviction (an indictable offence is more serious).
On summary conviction, a sentence can range from 50 to 200 per cent of the amount of the tax evaded and/or prison of up to two years.
For an indictable offence, the sentence can range from between 100 and 200 per cent of the amount of tax evaded and/or prison of up to five years.
But tax lawyer Vitaly Timokhov said that, as a rule of thumb, Canada "prefers not to impose criminal sanctions unless those people involved are into bad cases of bad evasion."
"[The CRA] prefers to use civil sanctions. You really don't see a lot of criminal cases."
He said about 90 per cent of cases are resolved by settling with the CRA without going to court.
"Going though any litigation, including tax court litigation, is just too expensive."
While the CRA has a high conviction rate in criminal courts, it is still difficult to get the evidence needed for a guilty ruling. The agency seems to prefer going though civil proceedings, where there's a lower threshold to meet.
"The department of justice has to prove beyond reasonable doubt that all elements of a tax evasion offence have taken place. It's an extremely high threshold to meet, to prove beyond reasonable doubt to a judge that all elements, and intent, and the act have taken place."
Timokhov suggested that, in tax court, the deck is somewhat stacked against the defendant because there's a "presumption of correctness" on the side of the CRA. This means the court presumes the CRA to be correct, unless the taxpayer presents enough information to refute those assumptions, he said.
Timokhov added that a financial judgment against a defendant may "financially destroy" someone, so the threat of a civil ruling can have a strong deterrent effect.
The courts have so far been siding with the CRA in the cases of "tax protesters" who believe the idea of taxation is unconstitutional. Just recently, three Moose Jaw tax protesters had their sentences upheld. The sentences ranged from three months to 16 months in jail, with fines of up to $189,796.