Filing your taxes in Canada is a straightforward process that needs to be done every year. If your taxes are simple, it shouldn’t take too long to do. However, sometimes people forget (or intentionally avoid) doing their taxes. This might be a one-time occurrence, but some people let it drag on for years.
There’s no reason to get worked up about why you didn’t file your taxes in the past, what’s important is getting things in order now so you can continue on with your life. You might be worried about big penalties or any potential taxes owed, but the Canada Revenue Agency (CRA) is pretty reasonable. The key thing here is just getting your taxes done for any missed years so things can be assessed properly.
Here’s what to do if you haven’t filed taxes in years.
Contact the CRA
If the CRA hasn’t been trying to contact you for the years that you haven’t filed taxes, consider that a good sign. That said, you’ll want to contact them as soon as possible to explain the situation of your case.
The CRA doesn’t need some elaborate reason. Just tell them the truth. Maybe you were not in the right mental state or perhaps you had no idea how to do your taxes. Some people have paid accountants to do their taxes but they never actually filed the paperwork. The CRA has heard every excuse, but you need to contact them so you can let them know that your intention is to file your taxes for the previous years.
While speaking to a rep from the CRA, they’ll be able to walk you through the process. If you have any questions, now would be the time to ask them.
Gather your documents
Getting all your documents in order is the most important thing to do when you’re filing your taxes. This applies to any year, so it’s no different when you’re filing for previous years. The tricky thing might be tracking everything down, especially if you’re doing taxes as a freelancer.
If you’ve lost the T4s that your employers have given you, don’t panic. The CRA has copies of your T4s and they can be downloaded directly from your CRA My Account. It’s all the additional paperwork you’ll need to worry about. I’m talking about things such as tuition, charity receipts, capital gains on investments, expenses for rental properties, etc.
Since tax rules change every year, you may want to review the tax packages from previous years. There may be credits for things such as fitness, energy-efficient upgrades, family credits, etc. that you qualify for but may no longer be available in the current year.
Decide how you’re going to file your taxes
Many people don’t know what to do if you haven’t filed taxes in years, but it’s no different from if you had applied on time. You just need to file your taxes for each individual year that you’ve missed. Most people will do this in chronological order so they can use any tuition credits or claim Registered Retirement Savings Plan contributions. That said, if you’re near the current year’s tax deadline, you may want to file that return first to avoid any additional late penalties.
You now need to decide if you’re going to file things on your own or if you’re going to hire an accountant. If your tax situation is simple, then doing things yourself with tax software shouldn’t be too difficult. That said, with software, you can only access the previous five years of returns. If you need to go further back, you’ll need to download the tax packages directly from the CRA and do things by hand.
Hiring an accountant isn’t a bad thing if you think your taxes are complicated or if you don’t want to deal with them yourself. It can also be beneficial since an accountant will be able to help you maximize your refund. Of course, you’ll need to pay them for their services.
What is the penalty for filing your taxes late?
For the years where you’re owed a refund, no penalty is applied. You’ve basically given the CRA an interest free loan during this time so they’re not going to charge you for it.
If you owe taxes for any given year, the penalty is 5% on anything owing, plus 1% of the balance owing for each full month that the return is late. That late fee does cap at 12 months, but depending on how much you owe, it can still add up to quite a bit.
There may be an additional late-filing penalty on any returns that are older than three years.
A lot of people freak out about taxes owed, but it’s worth noting that any years where you’re getting a refund would offset any taxes you need to pay. Quite often things aren’t nearly as bad as you may think.
What if I can’t afford to pay taxes owed?
The reality is that if you owe any back taxes, the CRA expects you to pay it in full. The odds of you getting any penalties waived are unlikely. The CRA would only consider this if it’s an extreme circumstance such as if the taxes being collected would affect your ability to afford the necessities of life. This is known as the Taxpayer Relief Provisions.
That said, the CRA does offer pre-authorized debits through My Account, so you can pay off your balance over time. You would have to contact the CRA to set this up and they would only offer it if you can prove that you can’t come up with the full amount on your own within reason.
If you truly can’t afford to pay any taxes owing, you may need to seek the services of a Licensed Insolvency Trustee in Canada who may recommend a consumer proposal or bankruptcy.
Filing your taxes for previous years can be easy, but some people push it off due to a fear of owing back taxes. While this is certainly a concern, quite often it’s not nearly as bad as you may have thought. Not only is filing your taxes a requirement, but it also gives you access to government benefits such as employment insurance, which you may need in the future.