With so much going on in life, it’s not always easy to file your taxes on time. So what happens if you file your taxes late?
Before we dive 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 bank account.
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 10K balance outstanding.
Personal income taxes
If you file your 2014 personal taxes late, your late filing penalty will be 5% of your 2014 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 $600 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 $44.
Filing your taxes one month late has now cost you an extra $644.
If that weren’t enough, the CRA has special rates for repeat offenders. If you’re tardy 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 $644.
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 later isn’t enough to spoil your day, the CRA can then double the late filing penalties on late returns once you receive one.
Sales tax (GST/HST)
The sales tax late filing penalty is calculated by a special formula. In short, you can take one 1% of the balance owing as your starting point. On top of that, you can add a quarter of the penalty, multiplied by the amount of months you’re late by.
In our example, you’d be looking at $125 for a failure to file penalty.
You’ll also need to add the interest cost which for sales tax is about 4%.
That leaves us with an extra $34 of interest to pay for a total cost of $156.
OK – perhaps you get the point – 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. 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.