Late filers: Get your tax debt sorted before the end of the year

Consider the following points:

background. The normal reassessment period under the Income Tax Act is three years from the date of mailing or receipt of notice of assessment or reassessment. However, adjustments for errors or omissions in personal tax returns from a 10-year period can be requested under taxpayer relief provisions.

The 2015 tax year takes center stage. Under the 10-year taxpayer relief provision after December 31, 2025, the 2015 tax year will lose its statute of limitations. This means that, for the 2015 tax year, the following tax saving opportunities will be lost now and in the future:

1. The tax refund owed to you for the 2015 tax year.
2. There is an opportunity to build RRSP contribution room for the 2015 tax year, thereby reducing the potential for future retirement income security.
3. Additional “carryover” portions of deductions and non-refundable tax credits, such as moving expenses, medical expenses, Charitable donations and political donations.
4. Refundable tax credits owed, such as the Canada Child Benefit, the GST/HST Credit, the Canada Workers Benefit, and the Refundable Medical Expense Subsidy.
5. Unreported losses, including capital and non-capital losses, will not be offset against their respective 2015 sources of income or carried forward. In some cases, this may significantly increase the future tax payable.
6. For disposals occurring in 2015, there is an opportunity to use the lifetime capital gains exemption.
7. AMT (alternative minimum tax) carryforwards from previous years no longer apply to 2015.

Spousal returns may be affected. If one spouse fails to file, it means that the family income is not properly reported for the purposes of the income test provisions. If the on-time filing spouse does not correctly estimate the missing spouse’s net income, part of the tax benefit received by the on-time filing spouse may need to be repaid upon a CRA audit, and/or the tax payable will increase. Spouses may also be liable for each other’s tax debts in certain circumstances, such as when certain property is transferred or there are joint financial transactions.

Provincial tax credits have different rules. Not all items on the federal T1 return are eligible for the 10-year adjustment for errors or omissions. The normal reassessment period for federal returns (three years from the date of the original assessment notice) is the full period available for these purposes in most provinces. In Quebec, the reassessment period is four years.

Splitting pension income with spouse. Certain tax-reducing elections also have different filing rules. For example, a pension income split optimization or joint election has only a three-year window for income splitting on Form T1032, which is three calendar years after the filing due date. Taking the 2023 tax year as an example, the filing deadline is April 30, 2024, and adjustments can only be made for the 2024, 2025 and 2026 tax years. In other words, through April 30, 2026, the regulation can only be adjusted for the calendar years 2025, 2024, and 2023.

Beware of loss of social welfare. Unless a senior is severely incapacitated and unable to claim benefits, they can only apply for missed Old Age Security (OAS) benefits that have not been extended back 11 months. OAS is earnings tested; that is, the benefits you are entitled to may be clawed back when your net income for the year exceeds a certain threshold. Therefore, filing a tax return is necessary.

Other social benefits include the new Canada Dental Care Plan (CDCP) and the Canada Disability Benefit (CDB).

The article continues as follows

• According to the CDCP, the CRA may reconsider your entitlement if you apply within 24 months of the end of your benefit period. However, if a false or misleading statement is made, the government has 72 months (six years) to recover this tax from you.
• CDB is available from July 2025, allowing retroactive payments for up to 24 months if you qualify during that time (starting in July 2025). Likewise, the government has a six-year statute of limitations to recover any overpayments from beneficiaries.

Why late commits are usually a bad idea

For the reasons above, it always pays to file your tax return on time. When timelines for other terms come into play, missing a deadline can be even more damaging. Late tax payments can result in hefty fines and interest. For those who owe money to the CRA and miss filing their tax return, there could be a range of costly penalties, including compound interest fees and, of course, the tax due itself. These may be considered one or more of the following:

• Gross negligence. This is a civil penalty imposed by the CRA for turning a blind eye to a tax filing obligation. Calculated at 50% of the tax payable. Adding 4% interest compounded at the stated rate can quickly turn a tax balance into a snowballing problem. Of course, penalties for late submissions also increase.
• tax evasion. Other possible punitive penalties for deception include tax evasion, which will result in penalties equal to 200% of the tax owed, plus compound interest plus civil penalties, which may be punishable by up to five years in prison.
• Tax fraud. Under Article 380 of the Criminal Code, those who default on their tax returns may be sentenced to up to 14 years in prison. Other consequences include fingerprinting and restrictions on travel abroad.

To pay as little as possible if you owe the CRA, first have a tax expert confirm whether the agency assessed the taxes correctly (sometimes they didn’t due to missing information or some gray area in the law). Then pay quickly.

bottom line

Always remember that obtaining any tax benefits and benefits starts with filing your tax return. Plan before the end of 2025 to catch up. File a missed tax return or request an adjustment for errors or omissions. In 2026, a compliment from the CRA might even lead to a little financial freedom.

Learn more about how to minimize your taxes:

About Evelyn Jacks, RWM, MFA, MFA-P, FDFS

Evelyn Jacks is president of Knowledge Bureau, a world-class financial education institution where readers can earn micro-credentials in financial literacy, the fundamentals of income tax preparation, and professional certificates for career advancement, all online.