Filing 10 Years’ Worth of Personal Tax Returns (Or More)Brian Jang ON September 28, 2020
It is relatively common for people to dislike doing their taxes, and that can, unfortunately, be one of the reasons they neglect to do so. Some might even miss a second year, or a third. Still others might go as long as a decade or more without paying their taxes.
If you have not filed your income tax in ten years or more and are wondering what you can do to get caught up, keep reading.
The Six Year Rule
In Canada, it is mandatory to keep your tax records for six tax years (seven calendar years) so the Canada Revenue Agency (CRA) can review them if they decide to do so. Failing to meet this requirement could result in a great deal of work for you as you try to collect the needed information from your bank, credit card company, and other institutions. Keep in mind that you need to keep not only the tax forms themselves, but all supporting documents, such as invoices, receipts, and more.
If you are the owner of a small business—either in a partnership or as a sole proprietor—and you decide to close your business, you will need to retain your records for six years following the end of the final tax year. In the case of an incorporated business, you will keep records for two years following the dissolution of the corporation. It’s important that you keep these documents secure, and it’s recommended to create backups that can be stored safely, as well as keep electronic versions saved to cloud storage. In the event of something unforeseen occurring to you, your family or your will’s executor should have access to these documents.
The Voluntary Disclosure Program
In order to assist those who have fallen behind on their taxes, the CRA created the Voluntary Disclosure Program. You will not even be required to pay penalties, provided you make the initial contact before the CRA comes looking for you. If the CRA contacts you first, you will be faced with not only penalties, but accrued interest.
When submitting your Voluntary Disclosure Program application, you will need to include all pertinent CRA returns, forms and schedules. You will also have to include a letter detailing the same information, signed by you. If applicable, it will also be signed by the representative who makes the submission on your behalf. The application will be processed under two possible tracks:
- The General Program is for those who are correcting errors that occurred unintentionally on the returns preceding the three most recent years of returns needing to be filed.
- The Limited Program is for anyone who intentionallydid not file as required by law. Although you will avoid criminal prosecution and gross negligence penalties, you will not receive any relief on accrued interest. Whether or not your application is accepted is dependant on multiple factors, such as the number of years you did not file, and the dollar amounts in question.
Of course, one of the conditions for qualifying for the VDP is the payment of the estimated taxes owing, though you or your representative can request that a payment arrangement be considered. The CRA has the option to grant relief for interest accrued during a 10-year limitation period. Years that extend back past that limit period must still be reported. A condition of the program is complete disclosure, so if you failed to file in years prior to the 10-year limitation, admit it now or risk having your application rejected.
Failing to file tax returns results in penalties and interest. The annual interest rate on overdue returns is 5%, compounded daily, while the penalty is 5% of the balance owing for the current tax year plus 1% of the balance owing for each full month that your return is late, to a maximum of 12 months.
Although the CRA does provide relief from interest and penalties, they only do so in particular situations. For example, you might be faced with an extremely difficult financial situation that leaves you unable to make payments.
The General Anti-Avoidance Rule
The CRA is able to use a provision known as the General Anti-Avoidance Rule in order to collect on monies owing. This rule grants tremendous power, overriding virtually every other tax rule and allows the CRA to go back as many years as they wish. This means that in addition to asking to see your income and expenses for the past three years, they can audit previous years.
If you are in a difficult position financially and lacking assets, you can have the CRA make pre-authorized withdrawals from your account over six months on dates chosen by you in My Account. If you need longer than six months, you will need a letter from your bank stating they won’t give you any debt. For example, if you owe $20,000 and have equity in your house, you will have to borrow from the bank to clear the debt right away.
Many Canadians have experienced falling behind on their taxes. The most important thing is to ensure that you contact the CRA before they contact you in order to avoid having to pay penalties. If you have missed filing your taxes, whether just once or for several years, now is your time to get back on track.
For help filing your taxes, contact BCJ Group.