Unexpected Income Tax Penalties

Many people file their income tax returns well before the April 30 deadline, only to receive yet another income slip (T3 or T5), or perhaps multiple income slips from an investment company, bank or insurance company. Inevitably, the temptation is either to ignore the additional slips or to add them to the next year's income tax return. The proper course of action, however, is to amend the appropriate income tax return and have the Canada Revenue Agency ("CRA") issue a Notice of Reassessment for that year's income tax return.

The CRA conducts a matching program, which takes place after the Notice of Assessment has been sent to you. Under this matching program, the CRA compares the information reported on your income tax return with third-party sources, such as employers and financial institutions. For example, the amount of income you report on your income tax return can be compared to the employment income shown on T4 slips that your employer has filed with the CRA, or to the investment income shown on T3 or T5 slips filed by financial institutions.

Once these unreported slips are matched to your income tax return, the CRA adjusts the income tax return to reflect the unreported income, and a Notice of Reassessment is issued. However, where you have also failed to report income in any of the three preceding years, the CRA assesses a penalty equal to 10% of the unreported income under subsection 163(1) of the federal Income Tax Act. The CRA also imposes a parallel penalty under the applicable provincial Income Tax Act equal to another 10% of the unreported amount, resulting in a total penalty of 20% of the unreported income. 

Had you taken the proper course of action and amended your income tax return to report the additional income reported on the late slips received, you would, at worst, only be subject to interest on the resulting unpaid income tax, rather than incurring the 20% penalty on the unreported income, plus interest on the unpaid income tax. In order to avoid these penalties, the adjustment must be filed before the CRA completes the matching process and processes an adjustment to include the unreported income. 

In our age of computerization, the CRA knows when you have these additional late slips. It is always less costly to correct what has been filed, rather than ignore the additional slips.  Please consult your Collins Barrow advisor for assistance.

Jeff Kelly, CA, is a Tax Partner in the Leamington office of Collins Barrow.