First off, take a deep breath – it is going to be okay. You are not alone with thousands who are either too busy or procrastinating in filing their Income Tax returns.
Maybe you are afraid you will owe. Or perhaps you have Forosophobia, which is the medical illness of the phobia to file taxes. And yes, if you actually can be diagnosed, then Canada Revenue Agency (CRA) and the USA counterpart (IRS) will consider this in waiving penalties and interest.
Now, let's get back to fear of owing something. Unfortunately, CRA has its penalties and interest based on the length of time you do not file, meaning the longer you leave it, the worse it can become. But enough of scaring you, a little further down in this article, we give you the nuts and bolts of penalties and interest and even a way that you might be able to have them reduced or eliminated.
Maybe you were behind in filing one a two years, and now all of a sudden, you have 15 years to file (and yes, if you are at this level, you are again not alone!). The good news is that except in certain situations, CRA is only interested in the last ten years, but before you shred the other five years check with an accountant to make sure you meet the exclusion.
Now, what about the tax information. Even if you have all of your slips, your accountant (including our firm) should match against CRA records. Why? Because CRA receives the filing copy of every single tax slip you receive, including RRSP's, Pension, Interest, Employment etc. While in the olden days (back three years or more), this would take months to receive by snail mail (postal). Now CRA allows accountants to gain access to their tax account online by downloading the slips.
If you have lost other information such as daycare, medical expenses, or donations, remember that all businesses and charities must keep records for seven years. They should be able to generate a duplicate receipt. All major pharmacies keep electronic records for medical expenses, which allow you to get an annual report of all prescriptions from the Pharmacy. We suggest this for everyone as it saves you from keeping those tiny little prescription receipts – as the annual information will include all of them with a yearly total.
Suppose you happened to have run a business well. In that case, you are required to include all years outstanding, and your accountant should be able to give you a checklist of what type of revenue and expenses you should be tabulating or organizing. If you do not want to tabulate this information, my firm tells clients not to sort by expense type or even date, instead focus on including as much as possible. Now CRA normally says the expense has to be the actual receipt. Still, recent rulings have allowed reasonable records in the case of prior years – if you were unable to access the original tax receipts. So even if your dog ate all the receipts, bank or credit card statements can be suitable for finding out the expenses your business incurred. In our office, we will tell you to get a big box and put all of the receipts in the box as our tabulation software will take care of the expenses category, and dates will separate the tax years.
Now comes the filing stage. With CRA, the returns should be filed from the oldest to the newest. For years before 2017, this has to be in paper form, meaning the entire return is printed, signed and submitted to CRA. Paper filed returns take about 4-6 weeks to process. On the other hand, electronically filed returns (2017 or newer) have processing times of 7-21 days.
Now, if you have multiple years that include 2016 or prior when it comes to getting the tax refunds, you will have to wait until all returns are processed to confirm that CRA has processed your returns according to the accountant's preparation.
Now with the fees. While we can not comment about other accountants, our firm charges the same fees for prior returns as the current year's return. The only exception is an extra $10 for paper-filed returns to cover printing and processing costs as our office sends in the paper return to ensure filing. We may also charge an XPressPost (trackable delivery) to ensure that CRA receives the returns – we, of course, will provide you with the tracking information upon request.
Now, what happens if you owe on some or all of the tax returns. Well, first off, any balance due comes off any expected refund before you will get the refund. As far as penalties, CRA assesses a 5% (of the taxes owing) if you file late (and owe taxes) along with 1% per month for up to 12 months. While this seems high, think about it for a second. If you owe $1,000 in taxes, then the maximum penalty is $170 – even if that tax return is eight years old. Now CRA can assess level two penalties, but most accountants (including our firm) will argue this level, and these are normally reserved for those who are habitual late filers (meaning that this is not your first time filing tax returns late). And yes, CRA does also charge interest, but this is extremely low (as it is based on the Bank of Canada prime lending rate). For the past few years, this has sat around the 5-6% per year. But again, most accountants (including our firm) will guide you through this process. This consists of the preparation in the paperwork for reducing penalties and interest.
Now, what about this reducing or eliminating penalties or interest? Yes, CRA does allow you to apply for either reduction or forgiveness of tax penalties and/or interest if your application meets the guidelines for consideration. The general consideration is that the tax balance due could not be paid due to circumstances beyond your control. This can include illness (and yes, even Forosophobia-Fear of Tax filing, if properly diagnosed), death of a family member, relative, and many other areas. And yes, again, most accountants (including our firm) can walk you through the process and assist in the application for Taxpayer Fairness.
So, in a nutshell, you will be okay if you have prior years' tax returns owing. In our firm, we make it very straight forward and everyone who uses our prior year's tax filing services comments that the service is amazingly painless.