It Pays to Be Punctual: 3 Big Reasons to be Timely With Your Business’s Taxes

When it comes to your business’s taxes, there’s no such thing as being fashionably late. Failing to file your taxes on time carries serious penalties, and the interest rates on late and unpaid tax and/or installment payments are the highest they’ve been in over a decade. With the deadline for many businesses to file their 2022 corporate returns approaching (June 30, 2023 for those with December 31 year-ends), it’s important you understand the full scope of the painful prices facing those who don’t file or pay on time.

On that cheery note, let’s look at all the instances where being tardy with your taxes can come back to haunt you:

Double trouble for serial late filers

The failure to file penalty for corporations is straightforward: If you file your return late, a penalty applies that is equal to 5% of the unpaid tax that is due on the filing deadline, plus 1% of this unpaid tax for each complete month that the return is late (up to a maximum of 12 months).

Additionally, non-resident corporations doing business in Canada face a similar penalty for filing late, even if no taxes are owed.

It’s not the end of the world if complications lead to your business’s taxes being filed late, but having it occur in consecutive years is something you’ll want to try hard to avoid. The CRA will charge an even larger penalty if it issued a demand to file and assessed a failure to file penalty in any of the three previous tax years. In this case, the penalty effectively doubles to a whopping 10% of the unpaid tax when the return was due, plus 2% of the unpaid tax for each complete month that the return is late (up to a maximum of 20 months).

You don’t need to be a CPA to see why it’s in your best interest to avoid this penalty.

Stay informed of your required information returns

In some cases, in addition to a full corporate income tax return, your business may also be required to file additional information return forms by a certain date each year[1]. These commonly include:

• Form T106: Information Return of Non-Arm’s Length Transactions with Non-Residents (due six months after the end of the taxation year);
• Form T1134: Information Return Relating to Controlled and Not-Controlled Foreign Affiliates (due 10 months after the end of the taxation year); and,
• Form T11335: Foreign Income Verification Statement (due when the tax return is due)

Late penalties apply to these forms as well, with a minimum penalty of $25 per day, to a maximum of 100 days, for each late form. When you’re short on time, it’s easy to overlook these forms, leading to even more penalties than just those applicable to a late T2 filing.

It’s in your best interest to avoid interest

As a business owner, there’s no doubt you’re already feeling the impact of increased interest rates and are taking steps to protect yourself from their effects.

Your taxes are no exception—with the Bank of Canada steadily increasing its benchmark interest rate over a short period from a low of 0.25% early last year to 4.75% (as of June 7, 2023), the CRA’s prescribed interest rates have also rapidly increased.[2] The current compounded daily interest rate is a startling 9%.

It’s important to also note that the interest the CRA charges for unpaid amounts is not tax deductible, meaning if you’ve been using the CRA as a pseudo-bank to earn income, then the effective rate they’ll charge is even higher before tax and would be equal to the CRA rate/(1 – tax rate %).

Some examples, based on the current 9% rate, of this increased effective rate:

• 18.24% on investment income for a Canadian controlled private company (CCPC) in B.C. (based on a 50.67% tax rate)
• 10.11% on business income taxed at the small business rate for a CCPC in B.C. (based on a 11% tax rate)
• 12.33% on business income taxed at the general rate for a Canadian company or CCPC in B.C. (based on a 27% tax rate)

The interest clock starts as soon as the tax (including penalties) is owing, and a further tax instalment penalty applies if your instalment interest charges are more than $1,000—a threshold that’s easily crossed with these higher rates. You can use Form RC4288 to make a request to cancel or waive penalties if you’re unable to pay your taxes due to circumstances beyond your control (e.g., CRA delays in re-assessing); however, circumstances considered sufficient for this request are limited.

You’ve probably sensed a theme by now—file on time, make your prescribed payments and your future self will thank you. That being said, we know approaching tax deadlines can be a stressful time for you and your business. Thankfully, at DMCL our watches are always set to tax time, so reach out to your DMCL advisor and they’ll make sure you know the what, when and why of submitting your business’s tax returns on time.

Article written by Lori Oliver, CPA, CA

[1] Contact your DMCL Advisor for more information on which additional forms may apply to your business.

[2] The rate the CRA charges on unpaid amounts and what it pays taxpayers on overpaid amounts is based on the average 3 month T-bill rate for sales during the first month of the previous quarter. Therefore, we can likely expect another 1% increase for 2023 Q4 with the most recent Bank of Canada rate increase last week (however, stay tuned for the next announcement on July 12, 2023).