April 30 at midnight is the deadline for most Canadians to file personal tax returns, but what happens if you miss the deadline — or decide to skip doing your taxes entirely?
The answer depends mainly on whether you owe taxes or not.
April 30 is the deadline to file in order to avoid penalties. Individuals can still mail in their tax returns over the following months, or Netfile their 2011 taxes up until the system shuts down on Sept. 30 this year.
And as the saying goes, the only sure things are death and taxes — the government wants to see a tax return even if you passed away during the tax year. The person acting for your estate has until April 30 of the following year to file for you, unless you died in November or December, in which case the return is due within six months of the date of death.
If you're late filing and don't owe taxes then you won't pay penalties — but you can still take a financial hit. The government will hang on to any refund until you file a return, and there might also be a delay getting benefit payouts you're eligible for, such as the GST or Child Tax benefits.
"It’s good to file, because a lot of our credits are based on your tax return," says Brian Quinlan, an accountant with Toronto-based Campbell Lawless. "So if the government doesn’t know your income, you won't get these credits sent to you."
If you owe taxes and either don't file a return or don't pay, starting May 1 you'll start racking up penalty charges and daily compound interest on the unpaid amount.
The penalties start at five per cent of the amount owing, plus one per cent of the balance owing for each full month that the return is late — and compound daily interest is charged on the total amount due. If you file late more than once in a four-year period, the penalties can double.
And if you don't report income twice or more within a four-year period, you can be hit with a “repeated failure to report income” penalty. This penalty is a big one – 20 per cent of the total amount of income that was earned and not reported in the most recent year.
It's when you don't pay the taxes you owe, file any returns at all, or when you fudge the numbers that the government can start investigating your finances and things can get sticky.
The country's top auditor, Michael Ferguson, investigated what the CRA does to track down people or businesses that don't file the returns they're required to under the Income Tax Act and the Excise Tax Act. That can include chasing after never-filed income tax returns, as well as identifying businesses that were required to register for the GST or HST but didn't.
The group that tracks down "non-filers" and "non-registrants" isn't terribly large – just 700 of the CRA's 39,000 employees work on it — and the program's budget is $39 million, less than one per cent of the CRA's overall $4.5-billion budget. But the CRA turns up about 185,000 potential non-registrants a year, according to the auditor's report, and reviews about half of these files.
The CRA tends to investigate files that have a good probability of a return for the government. In the two fiscal years the auditor general examined, the sleuthing of those 700 employees uncovered $2.8 billion in additional taxes, interest and penalties each year. That's an average of $4 million in tax revenue per employee per year.
Inside the Canada Revenue Agency's website lies a section titled Convictions, where the department unapologetically publicizes cases in which Canadians have been fined or imprisoned for not paying or for cheating on their taxes.
A recent news release, for example, highlights the case of a Manitoba chiropractor who was fined $162,513 and sentenced to six months in jail for tax evasion. The CRA says it releases such information to the media to seek "publicity on conviction in the case of tax evasion" in order to "increase compliance with the law through the deterrent effect of such publicity." The website also serves as a reminder and warning to Canadians that jail is an option for those thinking of not paying.
"People do go to jail. It does happen," Toronto tax lawyer Jonathan Garbutt told CBC News.
However, he noted that in general in Canada, "people don't go to jail for as long as they do in the U.S." for tax-related offences.
Cases can be settled out of court, but Garbutt said the CRA has a high percentage rate of conviction when it has decided to take a case to criminal trial, somewhere around 98 per cent. "If they go to trial, it's because they have somebody cold."
In its annual report to Parliament, the CRA seems to suggest as much. "The rate of conviction is very high due to case selection," the report says. "Cases are selected for prosecution based on their expected outcome as there is a high cost to this type of compliance intervention ... In this way, Canadians and Canadian businesses are reassured that the most egregious cases are pursued to the fullest extent."
According to the CRA, in the fiscal year 2010-2011, 204 taxpayers were taken to court by the government in cases related to tax evasion or fraud. The government reported a 100 per cent conviction rate, and the court imposed $22.8 million in fines and a total of 47 years worth of jail sentences.
The Income Tax Act lays out the penalties for tax evasion, which is considered a hybrid offence. That means the Crown can treat it as either an indictable offence or summary conviction (an indictable offence is more serious).
On summary conviction, a sentence can range from 50 to 200 per cent of the amount of the tax evaded and/or prison of up to two years.
For an indictable offence, the sentence can range from between 100 and 200 per cent of the amount of tax evaded and/or prison of up to five years.
But tax lawyer Vitaly Timokhov said that, as a rule of thumb, Canada "prefers not to impose criminal sanctions unless those people involved are into bad cases of bad evasion."
"[The CRA] prefers to use civil sanctions. You really don't see a lot of criminal cases."
He said about 90 per cent of cases are resolved by settling with the CRA without going to court.
"Going though any litigation, including tax court litigation, is just too expensive."
While the CRA has a high conviction rate in criminal courts, it is still difficult to get the evidence needed for a guilty ruling. The agency seems to prefer going though civil proceedings, where there's a lower threshold to meet.
"The department of justice has to prove beyond reasonable doubt that all elements of a tax evasion offence have taken place. It's an extremely high threshold to meet, to prove beyond reasonable doubt to a judge that all elements, and intent, and the act have taken place."
Timokhov suggested that, in tax court, the deck is somewhat stacked against the defendant because there's a "presumption of correctness" on the side of the CRA. This means the court presumes the CRA to be correct, unless the taxpayer presents enough information to refute those assumptions, he said.
Timokhov added that a financial judgment against a defendant may "financially destroy" someone, so the threat of a civil ruling can have a strong deterrent effect.
The courts have so far been siding with the CRA in the cases of "tax protesters" who believe the idea of taxation is unconstitutional. Just recently, three Moosejaw tax protesters had their sentences upheld. The sentences ranged from three months to 16 months in jail, with fines of up to $189,796.
This new credit was a budget measure that was designed to address criticism that the earlier Children's Fitness Tax Credit (which is still in effect) unfairly left out parents who paid for programs where the kids had to do more thinking than sweating. It provides a 15 per cent non-refundable federal tax credit on the first $500 spent on your kids' artistic, musical, recreational or cultural development in 2011. That means the tax credit is worth a maximum of $75 per child. Parents of disabled children can claim a 15 per cent tax credit on the first $1,000 of eligible spending, or a maximum of $150. To get the credit, children must be under 16 at the start of the year in which the program is taken (under 18 in the case of disabled children). To qualify, a program must be at least eight consecutive weeks in length, or, in the case of children's camps, at least five consecutive days. Receipts are a must.
If you performed at least 200 hours of service as a volunteer firefighter in 2011, you can see your tax bill reduced by up to $450 - another new non-refundable tax credit introduced in last year's federal budget. That's the net effect of a 15 per cent tax credit on the $3,000 volunteer firefighters' amount. The 200 hours doesn't have to be entirely spent fighting fires. Attending required meetings and training also qualify. Be aware that there's a big wrinkle in this tax credit for those who get an honorarium for their volunteer efforts. Currently, the first $1,000 of that honorarium is exempt from tax. But if you claim that income exemption, you won't be eligible for the volunteer firefighter's tax credit. No documents need to be filed, but the CRA says it may require claimants to provide certified proof that they actually do qualify.
This measure doesn't actually take effect until the 2012 tax year, so you won't benefit from it when filing this year. But people who will eventually benefit can file a new TD1 Personal Tax Credits Return with their employers now to reduce their withholding tax for the remainder of 2012. This credit amounts to an increase of $2,000 in the claim when a taxpayer's dependent is physically or mentally infirm. So the spouse, common-law partner or other eligible dependent claim becomes $12,780 instead of $10,780. Similarly, the claim for a disabled child becomes $4,191 rather than $2,191. The caregiver amount claim for looking after an infirm relative also goes up by $2,000.
Tax-free savings accounts were first unveiled in the 2008 federal budget and have continued to grow in popularity - in part because Canadians can put more money into them each year. If you haven't yet contributed to a "Tiff-sa," the available contribution room rose by $5,000 on Jan. 1, 2012 and now stands at $20,000. TFSA contributions can go into GICs, mutual funds, bonds, stocks or savings accounts and earn profit tax-free, but keep in mind they don't work like a bank account with a maximum balance. When you withdraw funds in one year, TFSA rules don't let you redeposit that amount until the next. In 2009, about 70,000 people withdrew money from one of their TFSA accounts and then redeposited it the same year, so the Canada Revenue Agency levied penalties of one per cent per month on redeposits that were classed as excess contributions. The government eventually relented because of the widespread confusion, and rescinded the penalties in 2010 for people who accidentally put too much into their accounts during the TFSA's debut year. The amnesty is over now, however, and savers can't expect that kind of pity from the tax collector anymore. If you want to move your money from one account or institution to another within the same calendar year, you have to use a formal transfer process that requires filling out forms and, with most banks, paying a fee.
As of the 2011 tax year, examination fees now qualify for the tuition tax credit. That is, as long as the total fees, including exam fees, amount to at least $100 and the exam is required to obtain professional status or to be licensed or certified in a profession or trade. For students enrolled full-time in a university outside Canada, the minimum length of course that qualifies for tuition, education and textbook tax credits has been lowered from 13 weeks to three weeks. The 2011 budget also loosened the restrictions on transferring investments held in one sibling's Registered Education Savings Plans (RESP) to another sibling's RESP. Under the old rules, transferring RESP investments property from one sibling's plan to another's could trigger a repayment of the Canada Education Savings Grant unless the sibling receiving the transferred investment is under the age of 21. But transfers occurring in 2011 and after will not trigger grant repayments as long as the receiving RESP was set up before the beneficiary turned 21.
As of 2011, the maximum medical expense claim of $10,000 for a dependant relative (other than for a spouse, common-law partner or a minor child) has been eliminated. Now, there's no limit. The last budget also made a change to the rules governing Registered Disability Savings Plans (RDSPs). Under the old rules, all grants and bonds paid into the plans in the previous 10 years had to be returned to Ottawa if a disability assistance payment was made to an RDSP beneficiary. Now, no repayment is necessary if a doctor certifies that a plan recipient isn't likely to survive for five years
Most tax brackets and credit amounts were raised in 2011 to account for inflation. In the case of federal tax brackets, they have been raised by 1.4 per cent from 2010's levels. Most of the basic personal amount claims have also been boosted by 1.4 per cent. The 2011 TD 1 tax forms and all of the software and online tax programs reflect the new amounts. Similarly, the thresholds at which some benefits begin to get clawed back (like Old Age Security payments) have been raised by 1.4 per cent. Some refundable tax credits, like the Canada Child Tax Benefit, have also been boosted by 1.4 per cent. Many provinces and territories have also boosted their personal tax credits by indexing factors ranging from 0.8 per cent to 2.0 per cent. But two provinces - Nova Scotia and Prince Edward Island - made no changes in their personal tax credit amounts.