Introduction – Repeated Failure to File Income Tax Penalty
Under Canada's income tax system, taxpayers are required to calculate, report and pay their taxes in accordance with the applicable deadlines. In particular, the deadline to file 2020 taxes is April 30th 2021 for individual taxpayers and June 15th 2021 for self-employed individuals. According to the Canada Revenue Agency ("CRA"), while most Canadian taxpayers are compliant with the law, there are taxpayers who do not file or pay their taxes on time. To enforce Canada's income tax system, the CRA is empowered to impose various tax penalties in circumstances where taxpayers fail to live up to their tax obligations. In particular, subsection 162(2) of the Income Tax Act creates a penalty for repeated failure to file income tax for a taxation year.
Repeated Failure to File Income Tax Penalty and Subsection 162(2) of the Income Tax Act
The repeated failure to file penalty under subsection 162(2) of the Income Tax Act may apply if a person:
- fails to "file a return of income for a taxation year as and when required by subsection 150(1)",
- "to whom a demand for a return for the year has been sent under subsection 150(2)",
- "by whom, before the time of failure, a penalty was payable under this subsection or subsection (1) in respect of a return of income for any of the 3 preceding taxation years"
Such a person is "liable to a penalty equal to the total of"
- "an amount equal to 10% of the person's tax payable .... For the year that was unpaid when the return was required to be filed",
- "the product obtained when 2% of the tax payable ...that was unable unpaid when the return was required to be filed..."
Yet, in Hughes v. The Queen, the Tax Court carefully examined both the English and French versions of subsection 162(2) of the Income Tax Act and concluded that "on a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole, the French language version reflects the proper interpretation of the subsection." As such, the Tax Court in Hughes held that subsection 162(2) can only apply where all four of the following conditions are met:
- The person must fail to file a return of income as and when required by subsection 150(1).
- A demand for a return for the year must have been sent to the person under subsection 150(2).
- The person must have failed to file his return within the reasonable time set out in the demand.
- The person must, before at the time of failure, have been liable for a penalty for a failure to file on time or for a repeated failure to file on time in respect of an income tax return for any of the three preceding taxation years.
In accordance with the Hughes test, subsection162(2) of the Income Tax Act can only apply where the taxpayer failed to file his or her income tax returns, for the relevant taxation year, within the time period set out in the demand letter issued by the Canada Revenue Agency to the taxpayer.
Pro Tax Tips – Repeated Failure to File Income Tax Penalty
If CRA's Audit Division applied or proposed applying repeated failure to file penalty to your unfiled tax returns, consider contacting one of our top Canadian tax lawyers for tax guidance. In certain circumstances, our certified specialists in taxation Canadian tax lawyer may be able to help you in obtaining relief from a tax penalty through a tax appeal or through the Taxpayer relief provisions or a possible tax remission order application.
In addition, if you are aware that the repeated failure to file penalty applies to you but the CRA has not acted on this fact yet, you may be able to eliminate this penalty through CRA's voluntary-disclosures program (VDP). Voluntary disclosures, also known as tax amnesty, are a complex area of law that requires detailed analysis and advice from an experienced Canadian tax lawyer. Consider contacting our certified specialists in taxation Canadian tax lawyer for appropriate tax guidance with respect to repeated failure to file penalty, and all other tax penalties.