Just when we think the personal tax season is behind us, we start to hear from those clients who habitually file their returns late. Often, their rationale is, “I always get a refund, so there is no sense being in a hurry.” Many of us remind these clients that, if they owe taxes, filing late means paying penalties and interest. If they are eligible for a refund, filing late means making an interest-free loan to the Government of Canada. Many of us also, likely, are happy to delay that filing until after the busy April 30 deadline.
Can filing late cause our clients’ difficulty, even if they are entitled to a refund? Well, most veteran tax preparers will probably agree anything can cause problems for our clients, so what are the issues late filing can cause:
Delay or Loss of Social Benefits
Many social benefits, such as the Guaranteed Income Supplement, the Child Tax Benefit and the GST Credit, are computed based on net income from income tax returns. A delay in filing can result in this information not being available to the agency paying out such benefits, resulting in a delay in payments, usually starting in July. For lower income families with children, or low income seniors, the Child Tax Benefit and Guaranteed Income Supplement can be significant monthly payments. Delay of these receipts can create significant hardship.
Sometimes, our clients can benefit from filing certain elections with their tax returns. Many of these elections are technically valid only if filed on time, commonly with the income tax return to which they relate. For example, the election to split pension income must be filed with both spouses’ tax return, “on or before their respective filing due dates.” Of course, the Taxpayer Relief Provisions allow Canada Revenue Agency to accept many elections after the usual due date, subject to a penalty which is often waived under those provisions. However, it is probably not the best planning to rely on Canada Revenue Agency’s benevolence in accepting an election filed after the due date.
Similar to elections, disclosure forms are often required with income tax filings. One of the more common examples is the T1135 required to file reporting foreign property holdings with a cost in excess of $100,000. Many clients hold large bank accounts in foreign countries (snowbirds come to mind), or hold significant foreign securities in their Canadian brokerage accounts. Even if no tax is payable on their returns, late filing of these disclosure forms can attract significant penalties.
Loss of Refund
Finally, the Income Tax Act tells us that a refund is no longer payable if the related return is not filed within three years of the end of the relevant taxation year (eg. by December 31, 2011 for the 2008 tax year). Extensive procrastination can make the refund go away entirely. For individuals and testamentary trusts, the Taxpayer Relief Provisions allow Canada Revenue Agency to issue a refund at their discretion up to ten years after the end of the tax year (eg. by December 31, 2018 for the 2008 tax year), but this means, again, relying on the good graces of the Canada Revenue Agency.
Corporations and inter vivos trusts are not eligible for such relief. The recent case of Landmark Auto Sales Ltd. is an example of the losses which can result from excessive delays in filing. (See Video Tax News 327, November 2008, page 21, VTN 327(12))
Even if a refund is received on the original return, any future reassessment giving rise to a payable will result in a late filing penalty if the original return was not filed on time.
The Canada Revenue Agency is now prohibited from releasing any refunds until all of a taxpayer’s filings for income tax and GST are current. Falling behind in one area can delay receipt of refunds from other fillings, sometimes considerably. Consider, for example, a corporation operating as a homebuilder. While late filing the corporate return in a year of no sales may not seem like a significant issue, it can delay recovery of GST refunds resulting from large input tax credits in a period of no revenues, and thus no GST collected.
Demands to File
Of course, a delay often results in a demand to file by Canada Revenue Agency. While not a direct cause of additional costs where the client is entitled to a refund, such demands often impose tight deadlines, and can result in greater Canada Revenue Agency scrutiny of the client’s filings – something most clients, and their advisors, would prefer to avoid.
United States Filings
Some of our clients may also be entitled to refunds from countries other than Canada. For example, clients with property in the Untied States may see a significant withholding on sales of such property (hopefully, they did not sell in the current downturn!). The US rules for paying out a refund allow only three years after the date of filing, or two years after payment of the tax. If no return is filed, the deadline is two years after payment of the tax. For a client who sold their US vacation home in January 2008, that two year deadline will come up pretty fast – January 2010. Many practitioners refer their clients to preparers with experience in US tax filings, and do not prepare these in-house. It would be prudent to ensure the client is aware of the potential cost of delaying such filings.
Overall, most of us in practice are well aware that there is seldom any benefit to filling late, and we encourage our clients to remain current with the Canada Revenue Agency. The above are just some of the reasons for clients who do not expect to have taxes payable to remain current in their filing obligations.
Over the past 30 years Joe Truscott has been assisting his clients with the various late filing issues. He has saved countless taxpayers significant sums of money by appealing the penalties assessed.
If you have any questions, please call Joe Truscott at 905-528-0234 or email Joe at [email protected].