CRA charges penalties and interest when you file a tax return or fail to pay your taxes or installments as they become due. The Canadian tax act has specific provisions for taxpayer relief through the Canada Revenue Agency (CRA). Income tax regulations allow the CRA a certain amount of discretion to waive penalties and interest.
Penalties are levied on an unfiled tax return at a rate of 5% of the tax owing plus 1% for each month the return is late, up to a maximum of 12 months. If you repeatedly fail to report your income, CRA can charge additional penalties of up to 10% of your unreported income or 50% of the taxes owing. Interest is compounded daily at a prescribed rate on both the penalty and any unpaid taxes.
Once you file your returns and receive an assessment, you may apply for relief through the CRA taxpayer relief program. There are, however, certain conditions that must be met for the reviewer to grant your request. It’s also important to understand that these provisions only deal with penalties and interest, not your underlying tax obligation.
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When might my tax interest or penalties be waived?
The CRA states that you may be granted relief from interest or penalties if the following situations have prevented you from meeting your tax obligations:
- Financial hardship or inability to pay
- Extraordinary circumstances like a natural disaster or medical condition
- Errors or actions by the CRA that lead to interest or penalties
What constitutes financial hardship or extraordinary circumstances?
When the cause behind the interest and penalties is taxpayer generated, the CRA will not easily give up their right to collect what it views as sanctions for negligent behaviour. Part of the reason is that they want to discourage the late filing of income tax returns and late payments from continuing in the future.
However, CRA recognizes that there are extenuating circumstances, events beyond your control or conditions where leaving the charges intact would cause undue hardship.
Examples of financial hardship would include:
- loss of employment with ongoing hardship
- times where the interest charge is a significant portion of the taxes owing
- where paying taxes would limit your ability to pay for necessities like food and housing
Examples of extraordinary circumstances could include:
- a disaster such as a flood or fire
- postal strike
- serious illness or accident
- death in the immediate family causing severe mental distress
CRA recognizes that unusual circumstances can negatively impact a person’s ability to both file and pay their taxes on time. Knowing this, CRA proactively extended the filing and payment due date for individuals during COVID-19 to September 30, 2020. Penalties and interest will not be charged until this date.
Making an application and form RC4288
If you feel that you qualify under one of these scenarios, the CRA will require that you fully disclose your situation and the reason behind your request.
You will be required to complete the Request for Taxpayer Relief form RC4288 available on the Canada Revenue Agency website or through your CRA My Account.
If applying for financial hardship, CRA will also require you to make a detailed disclosure of your finances to assess the validity of your claim. A financial hardship application requires the completion of form RC376 Taxpayer Relief Request – Statement of Income and Expenses and Assets and Liabilities for Individuals.
It is possible to write a letter clearly marked Taxpayer Relief and sending it by mail to a designated office. Your letter must have all the necessary information required in the above forms, and you should attach all supporting documents.
Is there a deadline for requesting taxpayer penalty or interest relief?
You have ten years from the end of the calendar year in which the tax year ended to make a request to the CRA for tax relief.
For example: To be eligible for consideration, a request filed during the 2020 calendar year must deal with an issue related to the taxpayer’s 2010 and later tax years. An application relating to a taxpayer’s 2009 and any previous tax year is not eligible for consideration.
What happens after I’ve submitted a Request for Tax Relief?
Your application will be reviewed by an individual at the CRA or a committee of CRA personnel who will prepare a report for consideration by the designated official assigned to your case. When the review is underway, you may be contacted concerning any missing information or if any clarification of specific points is needed.
The following factors can impact the CRA’s decision:
- Your past record of filing returns and paying on time
- Your efforts when working with CRA to deal with tax issues
- How timely you were in dealing with any omission or delay
The report will include an opinion on whether or not granting relief is warranted. The designated official will have the final say on whether to approve, partially approve, or deny your request.
What do I do if my request for tax relief is not approved?
If your request is only partially approved or denied, you can request a second administrative review. A second review request should include the following information:
- The reasons for your disagreement with the CRA’s decision, e.g., some of the relevant information was not considered or were misinterpreted
- Any relevant new facts, documents, or correspondence
To be fair and maintain impartiality, the second review will not be conducted by the CRA officials involved in the first review and decision. If the second review fails to change the outcome, and you feel that discretion was not adequately exercised during the second review, you can apply to the Federal Court for a judicial review of the CRA decision. This must be done within 30 days of the date you received the second review decision from the CRA.
What if I need relief from my underlying tax obligation?
As I mentioned at the start, the CRA Taxpayer Relief Provision can only waive penalties and interest. CRA representatives have no discretion to reduce the taxes owing as assessed based on your income tax return.
If you don’t qualify for this program, or if relief of interest and penalties is not enough to solve your tax debt problem, there is another solution. CRA will settle taxes through a consumer proposal. Hoyes Michalos can help you negotiate a reduction in your tax debt liability and create an affordable payment plan. As an option of last resort, CRA debt is dischargeable in a bankruptcy.