Implications of late filing of Income tax?

With so much going on in our life, it’s not always easy to file our taxes on time. So what is the tax implication of filing late?

Before I go into the details, keep in mind that there’s a distinct difference between paying your taxes late and filing your taxes late – a difference that may have a profound effect on your cash situation.

If you file your taxes on time but don’t have the cash to pay the balance owing, you’ll be subject to interest.

However, if you miss the filing deadline and file late, you’ll automatically be subject to a late filing penalty in addition to any interest on the tax balance owing.

It’s this late filing penalty that can make filing your taxes late a real nightmare.

Let’s take a look at what would happen if you filed a few common tax returns one month late with a 20,000 balance outstanding.

Personal income taxes

If you file your 2015 personal taxes late, your late filing penalty will be 5% of your 2015 taxes plus 1% of your balance owing for each additional month (up to a maximum of 12 months).

In our example, as soon as you file one month late, you’ll be hit immediately with a $1,200 late filing penalty.

Unfortunately, the cost doesn’t stop there and you’ll be charged one month of interest in addition to the late filing penalty. The CRA charges interests at prescribed rates which fluctuate slightly each quarter. Assuming an average of 5%, you’ll be looking at an extra $83.

Filing your taxes one month late has now cost you an extra $1,283.

If that weren’t enough, the CRA has special rates for repeat offenders. If you’re careless 2 years in a row, the CRA can charge you double the following year.

Corporate income taxes

Your corporate income tax deadline is generally six months after your fiscal year end date. If you miss the deadline, the late filing penalty for a corporate return is the same as the personal income tax one above.

Filing one month late, you’ll be looking roughly at the same $1,283.

If you haven’t filed your taxes in a while, the CRA may issue you a special notice called a “demand to file.” If the aggressive language on the letter isn’t enough to spoil your day, the CRA can then double the late filing penalties on late returns once you receive one.

Therefore, I hope you get the message – the CRA wants you to file on time.

So what can you do to avoid the penalties?

If you know you’re going to be late on your return, it’s always best to take a guess on how much you’ll owe and pay it before the deadline as an instalment. Lawrence Ogbonnah Professional Corporation can assist you with this.

If you file late but don’t owe any taxes, you’ll have no late filing penalty or interest to pay.

If you don’t have the cash available to make an instalment, you may want to consider filing an estimate. While it may not be the best option, it’ll at least allow you to get your return in on time. Once you’re able to get yourself organized after the deadline, you can then file an amended return. If you end up owing more on the amended return, you may have some interest to pay, but at least you’ll have avoided that nasty late filing penalty.