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Last updated: March 03 2015
The “Cost of Borrowing” via Non-Compliance
The one thing about an electronic age – computers do exactly what they’re told to do – right or wrong!
CRA computers are no different and are programmed to automatically add penalties and interest to taxpayers’ accounts as soon as certain events occur, or don’t occur, depending on your point of view. The questions arises that with all the variations of penalties and interest, what is the true cost of forgetfulness or procrastination?
Balances Owing
CRA imposes interest costs on income tax balances that are not paid in full beginning on May 1st at prescribed interest rates. While on the surface the current rate of 5% doesn’t seem to be an unrealistic rate of interest, as every accountant knows, it’s all in the interpretation and calculation. CRA’s calculation on unpaid tax balances is compounded on a daily basis meaning interest on interest. If you look at simple interest over one year on a $10,000 balance at 5%, interest costs would be $500. Compounding daily interest costs rise to $512.67.
Penalties
Legislation also gives CRA a wide choice of penalties which electronics applies to the taxpayer immediately when an event subject to penalty occurs.
Late Filing Penalties result in a 5% penalty plus an additional 1% for each full month the amount remains outstanding up to 12 months. If you were also charged a late-filing penalty in any one of the prior three years, the penalty doubles to 10% plus 2% for each full month the amount remains outstanding up to 20 months.
So let’s say that our client needs to file their 2013 personal tax return on October 31, 2014 – six months late. They are already late and after calculating the return have a balance owing of $10,000. They were also a year late in filing their 2011 tax return making them non-compliant 2 out of the 4 years.
| Balance owing from T1 return | $10,000.00 | |
| Late Filing Penalty at 5% | $500.00 | |
| Repeat Late Filer Penalty at 5% | $500.00 | |
| Balance as of May 1, 2013 | $11,000.00 | |
| Monthly Late Filing at 2%/ month (5 complete months) | $1,000.00 | |
| Interest Costs for 6 months at 5% compounded | $ 293.52 | |
| Total cost of "Borrowing" for 6 months | $2,293.52 |
Based on the calculations, this equates to an annualized APR of 45.87% - a long way from 5% prescribed rates.
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