Tough tax penalty raises fairness concerns
Most people know that if they file their personal tax return after the deadline, they’ll be assessed a penalty – five per cent of the amount owing, along with one per cent a month in interest. If they don’t owe any tax, there’s no penalty.
But each year, tens of thousands of Canadians are hit by something they may not have known even existed – the "repeated failure to report income" penalty.
It doesn’t take much to trigger it. Forgetting to report two T-slips in a four-year period – once in the most recent tax year and once more in any of the previous three tax years – is enough to set the wheels in motion.
And make no mistake, this penalty is a big one – 20 per cent of the amount that was not reported in the most recent year.
To be clear, that’s not 20 per cent of the amount of tax that wasn't paid. In many cases, no tax is being evaded at all. This penalty is applied to the entire amount of income that never made it onto the tax return.
This may come as a jolt to those who got a tax slip for some extra income after they’d filed their tax return. Often people don't bother forwarding the information to the tax authorities, assuming that the tax department would know about it anyway since the issuers always provide the same tax slip information directly to the Canada Revenue Agency.
That turns out to be a mistake. It’s the failure to report the income that is the real offence here, not the failure to pay tax.
The rationale behind this penalty isn’t hard to fathom. In a self-reporting tax system like ours, people are required to report all their income. Failure to do that repeatedly should bear some consequences beyond merely being assessed the additional taxes owed.
"I understand what they [the CRA] are trying to do," says Wayne Drew, a partner with the accounting firm MNP in Waterloo, Ont. "You don’t want people to not report income."
But the rigid application of this rule has caught people who never intended to avoid taxes.
Accountants CBC News talked to say they have seen clients assessed thousands of dollars in penalties, sometimes tens of thousands of dollars, for what have often amounted to inadvertent slip-ups – tax slips sent to an old address, late-arriving slips, lost slips, forgotten slips. All of these situations can and have triggered penalties.
Are you on track to file your income taxes on time? Take our poll.
Drew cites one recent example he’s aware of, a senior citizen who’s been assessed a $3,600 penalty. This on top of the tax and interest owed, a penalty levied for "repeated failure to report income."
What did this senior do wrong?
It turns out a tax slip had been sent to an old address and he never got it. Combine that with one previous incident in which a tax slip had not been reported … and the result was a nasty and unexpected surprise for a man who’d never intended to evade his tax obligations. He’s appealing the penalty.
As it stands, the assessment of the "repeated failure to report income" penalty doesn’t require that there be any evidence of tax evasion. Failing to report a couple of T-slips – even if the proper amount of tax had been withheld from both of them – still triggers the penalty.
It’s assessed automatically by the CRA’s computers, and since the system of matching T-slips is more effective than ever, failing to report a slip is very likely to be caught.
Repeated failure to report income penalty
|Year||Number of Penalties||Federal Penalty*|
|* Note: Federal penalties are matched by provincial/territorial penalties|
|Source: Canada Revenue Agency|
These penalty assessments are not rare. Figures provided to CBC News by the Canada Revenue Agency show that more than 81,000 Canadians were assessed this penalty in 2011— and more than 300,000 in the past four years.
Total federal penalties, which account for half the annual tally of penalties levied, came to $39.3 million last year. Provincial and territorial penalties account for up to another $39.3 million in penalties – $78.6 million in all.
The average penalty works out to almost $1,000.
It isn’t hard to find critics of the fairness of how these penalties are applied. Keith MacIntyre, a tax partner with the accounting firm Grant Thornton in Halifax, notes that the penalty in some situations can be even greater than the Income Tax Act’s penalty for a fraud.
"The CRA’s audit staff have been understanding in different situations to the size of the penalty relative to the offence," he notes.
But the CRA can’t simply refuse to levy the penalty.
"It’s legislation," he says. "You can’t just go and waive away legislation."
While there are provisions that allow the CRA to waive penalties in accordance with taxpayer relief provisions, MacIntyre says fairness applications for this type of offence are not easy cases.
Allowable reasons for requesting taxpayer relief:
- 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
The CRA acknowledges that questions about the appropriate application of this penalty have arisen before and have been sent on to the Department of Finance. Any changes to that penalty would be up to that department.
As for the Finance Department, officials there defend the penalty.
"Where a taxpayer fails to report income more than once over a four-year period, a penalty based on the amount of the most recent unreported income is justified," the department said in an email to CBC News.
While Finance says the CRA does have discretion to waive or cancel interest and penalties in some circumstances, it says that "officials generally exercise this discretion when taxpayers have not complied with the income tax law because of circumstances beyond their control or because of delays or errors on the part of the CRA."
The taxpayer’s conduct is critical in making the decision about whether to waive or cancel penalties. Basically, the CRA wants to see that taxpayers "have exercised a reasonable amount of care in administering their affairs under Canada’s self-assessment system of taxation."
So it comes as no surprise that accountants CBC News spoke to stressed the importance of listing every T-slip on tax returns.
"Anyone who doesn’t report a T-slip is foolish," MacIntyre says. "It’s going to get picked up."
Missing a tax slip?
Here's what the Canada Revenue Agency says you should do if you are filing your taxes and are missing an income-related slip:
"Attach a note to your paper return stating the payer's name and address, the type of income involved, and what you are doing to get the slip. Use any stubs or statements you may have to calculate the income you have to report and any related deductions and credits you can claim. Attach the stubs or statements to your paper return. If you are filing electronically, keep all of your documents in case we ask to see them."
MacIntyre notes that the CRA’s matching program doesn’t begin until the fall. That’s when the CRA’s computers begin to match the slips taxfilers have reported with the ones that the issuers filed with the CRA. So you do have some time to report slips that were left off your return, but don’t wait too long.
The best advice?
If a slip turns up late, get in touch with the CRA or send the slip in "immediately," MacIntyre says.
Wayne Drew agrees. "As an accountant, I’d be pro-active and send it in right away."
A T1 Adjustment Request form is available on the CRA website.
This is one penalty where waiting can be an expensive proposition.