If you are a Canadian resident, you are required to report all of your worldwide income, including foreign pensions, on your tax return each year. If you don’t, then you may have to pay federal and provincial penalties, plus interest compounded daily.
There are basically two types of civil penalties: 1) The “repeated failure to report penalty; and 2) the false statements or omissions penalty ( the “gross negligence penalty”) .
The “repeated failure to report penalty” is the lesser of, 10% of the amount you failed to report for the particular tax year, or 50% of the difference between the understated tax or overstated credits that you failed to report and any tax withheld from the amount you failed to report. If you fail to report income on a tax return for a tax year, and have previously failed to report an amount of income on a tax return in any of the three preceding tax years, then you may be assessed a repeated failure to report income penalty. Prior to 2014 this penalty applied to any amount of unreported income, no matter how small. After 2014, the penalty only applies if a person fails to report an amount of $500 or more. This penalty does not apply if a gross negligence penalty is assessed on the same unreported amount. You will also be assessed a provincial income tax penalty on that unreported income equal to amount of the federal penalty. So you are actually subject to a 20% penalty, or 100% of the difference mentioned above.
The gross negligence penalty applies if you knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in a tax return. This penalty is calculated as either 50% of the understated tax or overstated credits related or $100, whichever is more. The onus of proof is on the Canada Revenue Agency (the “CRA”) to establish that a gross negligence penalty is deserving. The Courts have held that this is a very high standard “tantamount to intentional acting”.
The above penalties are what are called “civil penalties”. However, if the CRA during its investigation believes that you wilfully contravened Canadian tax laws in order to evade taxes, they may prosecute you for tax evasion or tax fraud. If you are convicted of tax evasion, you must pay the full amount of taxes owing, plus interest and any civil penalties assessed by the CRA as described above, AND you may be fined up to 200% of the taxes evaded and sentenced to a jail term of up to five years. A conviction for tax fraud carries a sentence of up to 14 years in prison.
The CRA also charges compound daily interest on unpaid tax debts including penalties. The interest rate is reviewed each quarter, Currently the prescribed rate is 7% annually. So if you have tax liabilities going back many tax years, the interest on the debt could add up to more than the value of your home or your life savings.
If you don’t pay the amounts owing, then the CRA then can take drastic measures such as garnishing your wages, garnishing your bank account, registering a tax lien against your home, and even garnishing your CPP, OAS, or pension.
There is room for tax relief though. You can make an application to the CRA to cancel or waive the penalties and part of the interest through a program called the Voluntary Disclosure Program IF you voluntarily disclose amounts that you failed to report and/or credits that you overstated BEFORE the CRA contacts you or anyone who is related to you.
Click here to find out more about the Voluntary Disclosure Program