Late-Filing Penalties and Repeated Failure-to-Report Income: How CRA Penalties Compound

Summary

Two recent Canadian court cases, both reported by the Financial Post, show how CRA penalties escalate quickly when filing problems repeat. In the first, a 71-year-old Saskatchewan English instructor who filed numerous personal returns late asked the Federal Court to overturn the CRA's refusal to waive late-filing penalties and arrears interest. The court upheld the CRA's decision, finding the relief officer's reasoning reasonable — even while expressing sympathy for the taxpayer's financial, physical and emotional challenges.

The mechanics explain why the numbers grow fast. The base late-filing penalty is 5% of the balance owing, plus 1% per full month late, to a maximum of 12 months. If a late-filing penalty was assessed in any of the three prior years, the penalty doubles to 10% of the unpaid amount plus 2% per late month, to a maximum of 20 months. On top of that, the CRA charges non-deductible arrears interest, compounded daily, at the prescribed rate — currently 7%.

The second case involved a "repeated failure to report income" penalty heard by the Tax Court in Vancouver. Under the Income Tax Act, failing to report at least $500 of income in a year, combined with a similar omission in any of the three preceding taxation years, can trigger a federal penalty equal to the lesser of 10% of the unreported income and 50% of the difference between the tax understatement related to the omission and tax already paid on that amount; a corresponding provincial penalty of 10% is often assessed as well. The taxpayer — herself a chartered accountant — failed to report $501 of income in 2022 (just over the threshold) and $12,715 of income in 2023. The court found she had not exercised the required due diligence, noting that a very knowledgeable taxpayer knowingly filed incorrect returns and "waited for CRA to correct the error." Her appeal was dismissed.

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Our Take

For cross-border filers — newcomers in their first Canadian year, residents with foreign income or assets, or U.S. citizens living in Canada — these cases are a practical reminder that small slips carry a three-year memory. One unreported item can put every subsequent return under penalty risk, and overseas income is exactly where omissions tend to happen. The taxpayer relief provisions exist for genuine hardship, but relief requests need evidence, and hardship means more than inconvenience. File on time, disclose foreign income and assets, and when in doubt, consult a CPA before the CRA does the correcting for you.

Disclaimer: This article is general information only and does not constitute tax advice; it should not substitute professional tax counsel. Please consult a licensed CPA for advice specific to your situation.