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Last updated: February 21 2018
Tax Time: Canada’s Income Tax System Is Here to Stay
The first tax returns of the year will be processed on February 26 this year. February 28 is the last day to catch up your filings and preserve appeal rights under the old Voluntary Disclosure rules that allow for full interest relief. That means tax deniers or procrastinators must step up now.
It’s a late start to processing returns in 2018, which marks the 101st anniversary of the first income taxes in Canada. Back in the early fall of 1917, Canada’s “War Income Tax” was introduced, and to this day there are still many who think—incorrectly—that income taxes in Canada are a temporary measure! But just how much has much changed since 1917?
To begin, a much greater percentage of Canadians are paying much more in personal income taxes. Back in 1918, the share of government revenues from personal income tax was 2.6 percent; in 2017 it was the biggest line item: 51 percent of all revenues came from personal income taxes. In 1918 the average tax burden per tax filer was $14; in 2017 it was $4,120.
The Fraser Institute(1) believes this trend will not change anytime soon. In a recent study published in early 2018, it estimates that as a result of tax changes implemented since 2016, and with changes to the CPP (Canada Pension Plan) that will begin in 2019, 98 percent of middle-income families will pay an average of $2,260 more and 92.2 percent of all families will pay $2,218 more.
Things have also gotten a lot more complex. In 1917, the tax return was six pages long and contained 23 lines; today there are over 300 lines on the return, and it is estimated that it costs each Canadian taxpayer an average of $500 a year to comply with their tax system.(2)
But not complying is even more expensive! Tax avoidance, deliberate or accidental, will attract penalties and interest. Here’s a rundown of what you need to know about that:
| Circumstance | Penalty |
|---|---|
| Failure to file a return on time | 5% of unpaid taxes plus 1% per month up to a maximum of 12 months from filing due date, which is June 15 for unincorporated small businesses |
| Subsequent failure to file on time within a three-year period | 10% of unpaid taxes plus 2% per month to a maximum of 20 months from filing due date |
| Failure to provide information on required form | $100 for each failure |
| Failure to provide Social Insurance Number | $100 for each failure unless the card is applied for within 15 days of the request |
| Failure to file a return or comply with a duty | For each such failure, the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100 during which the failure continues. |
| Gross negligence: false statement or omission of information in the return | 50% of tax on understated income with a minimum $100 penalty. This penalty will also apply to a false statement relating to the GSTC. |
| Late or insufficient instalments | 50% of interest payable exceeding $1,000 or 25% of interest payable if no instalments were made, whichever is greater. |
| Misrepresentation by a third party: penalty for tax planning arrangements or valuation activities | $1,000 and the total of gross entitlements from the plan or in all other cases, $1,000 |
| Third-party participation in make of false statements | $1,000 and lesser of the penalty to which the taxpayer is liable to under S. 163(2) and the total of $100,000 plus the person’s gross compensation |
| Failure to deduct or remit source deductions | 10% of amount not withheld, or remitted |
| Second such failure in same year | 20% of amount not withheld or remitted if this was done knowingly or through gross negligence. |
Bottom line: Canada’s income tax system and the laws that enforce it are here to stay. It’s really a lot less expensive to comply with tax law than to try to evade or avoid it. Be sure to catch up your tax filings if you are behind before March 1st to preserve appeal rights to reduce your penalties and interest costs.
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(1) Fraser Research Bulletin, January 2018 https://www.fraserinstitute.org/sites/default/files/effect-on-canadian-families-of-changes-to-federal-income-tax-and-cpp-payroll-tax.pdf
(2) The History and Development of Canada’s Personal Income Tax, edited by William Watson Fraser Institute April 2017.
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