If you receive a T-slip after you have already filed your tax return, what would you do? The worse thing is to ignore it. You may be caught in the snare of subsection 163(1) penalty, also known as “repeated failure to report income” penalty.
The penalty is heavy
The “repeated failure to report income” penalty is not just big. It can be huge! It is 20% of the amount that was not reported.
To be clear, that is not 20% of the amount of tax owed.
It is easy to be trapped
It is quite easy to trigger “repeated failure to report income” penalty. Failing to report two T-slips in a four-year period – one in the most recent tax year and one more in the previous three tax years – is enough to get you on the chopping board.
In tax year 2011, 81,000 Canadians were hit by this nasty penalty and the Canada Revenue Agency (CRA) pocketed $78.6 million ($39.3 million federal penalties matched by $39.3 million provincial/territorial penalties).
Here is a story:
Sabrina is a nice girl living in Toronto. She has never thought of anything like evading taxes. She is just a little disorganized when it comes to paper work.
One day in October 2011, she received a letter from the CRA. It is a notice of reassessment because she did not include a T5 slip for the interest income from an almost-zero-interest-rate small term deposit when she filed her 2010 tax return. “I totally forgot about it. You know, I am not that organized.” Sabrina said hopelessly.
It was lucky Sabrina found a new job with a big jump in salary in 2011. And more importantly, the career path looked brighter in the new job. She immediately moved into a nicer suite to reward herself of the year’s effort she put into job hunting.
One day in late April 2012, she received a package from her roommate of her old apartment. In the package were the letters that were still sent to her former address. She found a T4 slip from her former employer. By the time, the tax return had already been filed. Sabrina was not concerned since the taxes had already been withheld from the income. “I guessed I din’t owe them anything. They would just adjust my tax return by themselves.” Sabrina said.
Sabrina received a letter from the CRA in September 2012. It was the notice of reassessment of her 2011 tax return. This time, she was shocked. She was hit by $3,000 penalty for the omission of the T4 slip. It was 20% of the $15,000 income reported on the T4 slip. “It is not fair!” Sabrina is still grieving.
The penalty is stiff
There may be good reasons why you faile to report income. Perhaps a T3 arrives late from the brokerage firm. A T4 is sent to your old address. A T5 is simply lost in the mail. A T3 is misplaced and totally forgotten. You see, the list can go on and on.
The bad thing is that the chance to get relief is little once you are trapped, even if the omission is inadvertent. The rationale behind this penalty is that, in a self-reporting tax system like ours, people are required to report all income. Failure to do that repeatedly should bear some consequence beyond merely being assessed the additional taxes owed. That is why the rule is applied rigidly. In some situations, the penalty is even harsher than that for a fraud.
How to avoid the penalty
The best weapon to defend is to gather all information together when you prepare your tax return. Don’t miss anything. If any slips arrive late after you file your return or you find slips that were forgotten, file a T1 Adjustment immediately. Don’t take chance. You will eventually be caught by the robust matching program the CRA runs day and night. It is too late once you are contacted by the CRA.
If you return is prepared by a tax preparation firm, you should contact the preparer as soon as you find any additional slips. Any responsible preparer will deal with this issue quickly.