2.5 How are penalties and interest calculated on late payments and late filings?
Gurwant Singh
Late filing of tax returns and late payment of taxes are two different concepts, which could increase overall tax owed significantly. The interest penalty on late payment of taxes is charged when installments and/or final payments of tax are late or insufficient.
Every individual is required to file tax returns with Canada Revenue Agency (CRA) by April 30th (regular filing date) or June 15th (if they, or their spouse, operate a business). The inability of an individual to file taxes within the due date is subject to a 5% immediate penalty, and 1% for each complete month on the amount owing (the penalty doubles for repeat offenders). The interest is then charged on the outstanding balance as well as on the penalty and the interest is compounded daily. Interest is calculated using the prescribed rate of interest which is updated quarterly. Prescribed rates for 2018 are:
| Quarters In the year 2018 | Prescribed Interest rates |
|---|---|
|
January-March |
5% |
|
April-June |
6% |
|
July-September |
6% |
|
October-December |
6% |
Example 2.5.1
Mr. Jackson is self-employed and has tax payable of $75,000 based on his income in the 2017 calendar year. He files his tax return and pays the outstanding tax on October 1st, 2018. His penalty and interest are calculated as follows:
|
|
Taxes Payable | Penalty | Notes |
|---|---|---|---|
|
|
$75,000 |
$6,000 |
(5% + (3 complete months * 1%)) * $75,000 |
| Interest on Tax payable |
$1,875 |
|
6% prescribed rate * 5/12 * $75,000 |
| Interest on penalty |
|
$105 |
6% prescribed rate * 3.5/12 *$6,000 |
| Total tax liability |
$82,980 |
||
Note, for simplicity, the above table does not consider compounded daily interest.
The tax is payable by April 30th, therefore, the interest on tax payable is calculated for 5 months (from April 30th until it is paid on October 1st) using a 6% prescribed rate. The tax return was due on June 15th (as he is operating a business) therefore the interest on late filing penalty is calculated for 3.5 months (from June 15th filing deadline to the date the return is filed on October 1st) using a 6% prescribed rate.
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References and Resources
- Income Tax Act, RSC 1985, c1, (5th Supp.) s 150(1)
- Video – “Tax – Interest and Penalties” (Author: Natasha Dutt)
- Article – “Prescribed Interest Rates” (Author: Government of Canada)
- Chartered Professional Accountants. (2022). The Chartered Professional Accountant Competency Map. Part 1: The CPA Competency Map: 6.4.1
“How are penalties and interest calculated on late payments and late filings?” from Introductory Canadian Tax Copyright © 2021 by Gurwant Singh is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
