In our September 2023 Tax Letter, we discussed whether you should file a return if you can’t pay the associated tax liability. This month, we reverse the question – if you are late in filing your tax return, should you nevertheless pay money into the CRA to cover the tax?
This might happen because your return is complex and you haven’t been able to collect all the information you need to file – but perhaps you do have a rough idea of how much tax you will need to pay for the year.
Regardless of the reasons for filing your return late, tax on that return is due and payable from April 30, except to the extent tax has been withheld at source or you have paid instalments in advance.
Generally, penalties apply to late filing rather than late payment of tax (except for the late payment of instalments). The penalties for late filing were discussed in our September 2023 Tax Letter.
However, interest will be charged on any late tax payments from the normal payment due date (April 30, for individuals) until the taxes are paid. The current interest rate for overdue taxes is 10%, compounded daily.
Given the significant interest charges – and the fact this interest is non-deductible for tax purposes even if you have a business reason for not paying on time − it is a good idea to estimate the tax due for the year and make a payment to CRA by the normal payment due date. You should also keep current on your instalment obligations.
However, there is one potential exception to this – if the taxes are due from a corporation, and you are years late in filing the corporation’s return, and if you might be overpaying.
The Income Tax Act provides that the CRA must refund any overpayments made provided that the tax return is filed within three years of the end of the taxation year. Refunds are paid with interest, compounded daily, but a lower interest rate (for individuals, 2 points below the [currently 10%] rate charged on late payments, and for corporations, 4 points below).
So, if you are 2 years late in filing a return, and you have overpaid, getting a refund of any overpaid tax should be routine.
However, things get more complicated if you file after this three-year refund period.