Last updated: Jun. 18, 2024
Every small business owner in Canada must file an annual tax return. However, not everyone fulfills this obligation, which can lead to serious consequences.
The Canadian tax system, governed by the Income Tax Act, imposes strict penalties on those who fail to comply with tax filing requirements. This includes not filing a tax return, making false statements, or underreporting income. If someone commits serious fraud or evades taxes intentionally, they may face criminal charges. These charges could lead to large fines or imprisonment.
Understanding the importance of timely and accurate tax filing is essential for every business owner. We will review the consequences of filing taxes late or evading taxes. As well, we will outline options available to correct any past errors, such as the Voluntary Disclosures Program.
Penalties for Filing Late
The deadline for filing an annual tax return in Canada is April 30. Self-employed individuals who have unincorporated businesses must file by June 15. However, if you have a balance owing, you must pay that amount by April 30.
If you do not file a return and need to pay taxes, you will be assessed a penalty of 5% of the amount owning plus 1% of the unpaid tax for each month the tax return is late (to a maximum of 12 months).
You will also incur compound daily interest on any outstanding tax owed.
Penalties for Tax Evasion and Fraud
Tax evasion refers to the illegal practice of not paying taxes by underreporting income, overstating deductions, or hiding money and its sources. This action aims to reduce the amount of tax owed to the Canada Revenue Agency (CRA). Tax evasion is a serious offense and can result in penalties, fines, and even jail time.
People convicted of tax evasion must pay their full tax balance, plus interest and can face the following criminal penalties:
- A jail term of up to five years (though this is not common)
- Fines of up to 200% of the amount the filer is trying to avoid paying
- Foreign travel restrictions
And those convicted of tax fraud can also face up to 14 years in prison.
Voluntary Disclosure Programs
If you didn’t pay taxes or made a mistake on your return last year, the CRA has a program to help. This program aims to reduce the impact of not paying taxes or making mistakes on your return.
Under the CRA’s Voluntary Disclosures Program, (VDP) Canadian taxpayers who made mistakes in their tax return, didn’t file, or failed to declare what they earned, can apply for relief from interest, penalties and prosecution.
All taxpayers, from individuals to corporations and trusts, may be eligible if you meet the following criteria:
- Your application must be voluntary. If the CRA has already requested information before you apply for the VDP, you are not eligible.
- You must include all relevant information such as your returns, schedules and forms.
- Your information must involve a penalty (actual or potential).
- Your information must be at least one reporting period past due or more than a year old. Your application cannot include a current filing.
- You must include payment of your tax owing or request a payment arrangement which will be subject to CRA approval.
The VDP is available for individual income tax returns (T1), corporate tax returns (T2), trusts (T3) as well as GST/HST returns, or any other requirement to report or remit an amount as or account of tax, provided the above criteria is met. There are specific circumstances that would make a taxpayer ineligible for participation and we recommend working with a tax consultant to ensure you are eligible.
Why Participate in VDP?
The primary benefit of the VDP is that, while you will still need to pay any back taxes and possibly interest, you can avoid penalties and prosecution.
As well, your participation in the VDP can also reinstate your government benefits such as the Canada Child Benefit or GST/HST credit.
Ensure Compliance and Have Peace of Mind
Filing your business tax returns on time is not just a legal obligation but a crucial step in maintaining the financial health and stability of your business. The consequences of failing to file, underreporting income, or committing tax fraud can be severe, ranging from hefty fines and interest charges to potential criminal prosecution. However, by understanding and adhering to the tax laws, you can avoid these pitfalls.
If you’ve made mistakes in the past or have overdue taxes, the CRA’s Voluntary Disclosures Program provides a valuable opportunity to come forward voluntarily and rectify your tax situation. This program can help you avoid the harshest penalties and get back on track with your tax obligations.
Working with a tax consultant who specializes in your industry can also provide significant benefits. A knowledgeable consultant can help you navigate complex tax regulations, ensure compliance, and even identify potential tax savings, allowing you to focus on what you do best—running your business.
If you need expert guidance, don’t hesitate to reach out to us.
Stay compliant, stay informed, and secure the future of your business.
About FBC
For more than 70 years, we have helped hard-working Canadian small business owners, farmers and agricultural producers save time and money by connecting them to a people-powered network of tax, bookkeeping, payroll and financial planning experts.
We deliver industry-specific support for your business that helps maximize your tax savings, simplify your books and manage your payroll. Our paralegal team can get your business incorporated, file your minute books and annual returns. And our financial and estate planning team can help you manage your wealth and plan your transition to retirement.
Take 15-minutes to connect with us. Let’s see if we’re a good fit for you and your business. Book online or call us at 1-800-265-1002
