It pays to file outstanding tax returns before year end, not only to recover refunds that CRA may still owe you, but also to avoid paying penalties and interest that would be charged for gross negligence or in some cases, tax evasion. But also, when you don’t file on time, you miss out on important tax planning opportunities that may end for you on December 31. Here are 8 important reasons to review your return before year-end.
To the first point, it makes no sense to have CRA hold onto your tax refund; you will receive no interest payment from the government as it holds onto your money. Leaving this money in their hands means that not only is it being eroded by inflation, but you are also missing out on opportunities to maximize tax-efficient investment opportunities for your retirement. You must file a return to earn unused RRSP contribution room and class capital losses incurred in a non-registered savings account.
Second, you must file a tax return to avoid penalties and interest if you owe money to the CRA when any of the following circumstances apply to you. Do file a tax return immediately if:
1. You have taxable income and must pay federal or provincial income tax in the current tax year or any of the three preceding tax years. This is the normal statute of limitations for CRA to request additional information for audit purposes. However, if CRA expects fraud, they can go back a full ten years. A tax services specialist can help you assess if it’s to your benefit to file or adjust returns, if applicable, for the full ten-year period, whether or not fraud applies. These returns or adjustments will be accepted by the CRA.
2. You have disposed of any capital property in the year, including a principal residence, which requires the filing of form T2091 Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). Failing to file a return in this situation comes with a separate “failure to file” penalty of up to $8,000.
3. You will be required to repay OAS (Old Age Security) or EI (Employment Insurance) benefits to the government.
4. You are repaying, or are required to repay, HBP (Home Buyer Plan) or LLP (Lifelong Learning Plan) amounts to your RRSP through your tax return.
5. You are required to make contributions to the CPP or are electing not to contribute.
6. You are holding offshore properties with a cost of $100,000 or more and must file form T1135 Foreign Income Verification (whether or not you file a return).
7. You received an advance on the Working Income Tax Benefit.
Paying penalties and related interest costs is extremely expensive, and a good way to erode the wealth you are otherwise trying to accumulate in your investments. Here’s why: When you owe money to the CRA, it will charge the prescribed annual rate of interest, currently 2 percent, plus 4 percent more, on top of the taxes, repayments or additional penalties owing. That’s 6 percent compounded daily, from the date the return was due. It quickly adds up to a financial quagmire.
Here is an 8th reason to file prior-missed returns: the 2008 tax year becomes statute barred after December 31, 2018. Be sure to recover potential tax refunds, create unused RRSP contribution room and log any losses available for carry overs before then.