Expert Advice: Help! I'm behind on my taxes
Do you have a financial question that's keeping you up at night? Ever wished you could get a second, or third, opinion on what to do with your money? Here's your chance: Bankrate.ca is introducing a new monthly feature whereby you submit a question, and we ask three industry experts to weigh in. The topics are up to you -- you ask the questions, and we'll get the answers.
Here's this month's question: I haven't filed my taxes in a few years, and I know I owe money, so what's the best route to take to clear this up?
Just do it
When it comes to filing taxes, late or not, Hugh Smilestone, a Halifax-based certified general accountant and Certified Financial Planner, or CFP, has this advice: "It's like pulling off a Band Aid -- you've just got to do it."
As Smilestone says, not filing one's taxes isn't just stressful, it's costly. "Even (a) small amount, if you let it go, can become huge quickly." Late filing penalties amount to five per cent of the unpaid taxes owing, plus one per cent for every month the amount goes unpaid.
"That's a combined 17 per cent interest and penalties of the taxes owing for each year you don't file, and then there's interest on top of interest. In five calendar years, you could double what you owe," he says.
Visit an accountant who will examine your case and see if you qualify for any taxpayer relief programs. Smilestone says, however, that one shouldn't expect an accountant to make the problem go away. "I've seen this before, and typically people don't have a really good excuse, so expecting it to disappear is unrealistic. You're going to have to pay your taxes, and you're probably going to have to pay some penalties."
Accountants will explore different options and may come up with ways to save some interest and penalties, but their real value lies in helping you sort out the mess and get back on track. For example, many people say they don't file because they've lost documentation or moved and T-4 slips got sent to an old address. An accountant will tell you this isn't a major problem, as all employers file copies of T-4 slips with the government, so it's just a matter of requesting copies from the Canada Revenue Agency, or CRA.
Smilestone has good news for individuals who are behind in filing taxes,"99 percent of the time, the government owes them money." However, people who run their own businesses or work as independent contractors usually end up owing money.
"One of the common misconceptions is that they think the CRA is going to want all the money right away, which they do, but they are certainly open to some sort of payment arrangement," says Smilestone, who encourages late filers to make amends and pay what they owe."Why should they think they're any different from the rest of the Canadian population?"
Voluntary disclosure is essential
According to David Rotfleisch, a Toronto lawyer who specializes in taxation issues and tax amnesty or voluntary disclosure, the best option for those behind on their tax filing is voluntary disclosure. "If they don't, they're going to be sleepless for the rest of their lives," he says of the stress people often feel when they know they're behind on taxes or have not reported some income. It's important to contact the CRA before the agency contacts you; otherwise it's too late for voluntary disclosure.
People turn to tax lawyers to help solve their tax problems because they have the protection and privacy of client-solicitor privilege. "We file voluntary disclosure and retain an accountant to act on behalf of the taxpayer," says Rotfleisch, adding that part of the value of working with lawyers who specializes in the field is they know the system and can help clients reduce their liability for interest and penalties. "If you don't know what to ask for, you won't get it."