File Timely Returns or Risk Losing Refunds

Failing to file a tax return is not an option in Canada when you owe taxes.

Eventually Canada Revenue Agency (CRA) will ask for the returns to be sent in. Sometimes, taxpayers simply ignore the requests. If this goes on long enough, the CRA will mail an arbitrary estimated assessment of income earned and taxes owed. The assessments can be quite generous in favour of the agency and eye-opening for the taxpayer.

At that point, taxpayers usually start to make payments on their arrears to avoid collection proceedings. By making payments the taxpayers get time to file their late returns and correct the balances owed to the actual tax liability, which is generally lower than the assessment.

On the surface, this seems like a good strategy: The CRA starts getting some of the money it is owed and the wage earner avoids collections calls. Once the returns are filed the balance owed is adjusted, usually down to the actual amount you owed. And all is right with the world. Or is it?

There can be a downside to this tactic. The CRA is becoming increasingly tough on late returns and has refused to issue refunds for tax returns that are filed after the three-year limit allowed by the Income Tax Act. So, taxpayers can still be denied a refund of overpayments when they file their returns more than three years late.

On top of that, there are filing deadlines that also apply to allow CRA to deny refunds of overpayments of Canada Pension Plan or Employment Insurance that were either a result of employer payroll deductions or CPP calculated on self-employment income.

Individual taxpayers can appeal the refund denial or to ask the CRA to consider applying overpayments to other balances owed. This is not possible for corporations, however. Corporate taxpayers must be very careful before making payments on accounts for any returns filed more than three years after the filing date.

Taxpayers can also file a formal Notice of Objection. In that case, the facts will be reviewed and the CRA may issue a reassessment. If taxpayers are still not satisfied they can take the issue to court, but the costs of battling the tax agency in court can be high.

It is also to file a request under taxpayer relief, if there were extenuating circumstances that prevented the filing the return within the three year time period if a taxpayer is experiencing financial hardship. This could result in a reduction of some penalties or interest, or the CRA could decide to pay refunds beyond the three-year limit.

If you have fallen behind in your tax filings, received a demand to file or estimated tax assessments, especially for any taxes due more than three years ago, discuss the issue with your accountant who can help assess your situation and determine the best course of action.