Failed to report income on your tax return?

Have you failed to report income on your tax return ? Be prepared for steep penalties from Canada Revenue Agency.

Did you know that if you forget to report income on your personal tax return in one year and then accidentally repeat the error in the next three years following, the CRA will charge you a penalty of 20 per cent? Yes, that’s right – 20 per cent.

How is the penalty determined?

If in 2010, 2011 or 2012 you missed reporting income on your return, the agency will require this income to be included on your return, and if applicable, you will need to pay the missed tax amount owing and interest penalties as you failed to pay the balance owing by April 30 of the following tax year.

Then in 2013, you again missed reporting income to the CRA, they will still assess you with the standard tax and interest penalties, but on top of this, they will charge a “Repeated Failure to Report Income Penalty,” which is 20 per cent of the income that was not reported on your 2013 return. (Technically, this is a 10 per cent federal and 10 per cent provincial penalty.)

Putting it into numbers: An example

If the missed income from 2010 was for $3, you would only be assessed on the inclusion of the additional $3 of income. Depending on your situation, this may cause additional tax to be owed based on your marginal rates and an interest penalty on the balance owing. But obviously, in this example, it’s minimal.

But, let’s say you missed income from 2013 of $10,000. Depending on your situation, this may cause additional tax to be owed based on your marginal rates, and mean an interest penalty on the balance owing. In addition to this, you will get an additional penalty of $10,000 x 20 per cent = $2,000. This will be required to be paid regardless of your tax situation.

So, while the increase in income of $10,000, may mean you do not owe additional tax given your situation (enough income tax was withheld), you will still be required to pay the $2,000 penalty for missing this income in the first place. Essentially, it is irrelevant how much income was missed in the prior three years, but the amount of the income that was excluded in the current year, which is what you will be charged the penalty on.

How to avoid this penalty

The number one thing you can do is provide your accountant with all of the slips you have. If you are unsure whether you should have received a slip from a particular institution, contact them to ensure that you have all of your slips.

What this all boils down to is that even the small income amounts count, and to make sure you provide them to your accountant when you have your tax return prepared. If you are unable to determine an exact amount, an estimate is better than nothing.

There are of course, many different interests and penalties the CRA charges outside of this penalty which you should make yourself aware of. However, this seems to be one that catches many people off-guard when they receive a Notice of Reassessment from the CRA.