Repeated failure to report income penalty

A taxpayer who fails to report an amount of income on a tax return for a tax year and has previously failed to report an amount of income on a tax return in one of the three preceding tax years may be assessed a repeated failure to report income penalty. This penalty does not apply if a gross negligence penalty is assessed on the same unreported amount.

Provincial/territorial income tax laws charge an equivalent repeated failure to report income penalty.

Currently, the penalty is calculated as 10% of the unreported amount for the second or subsequent failure to report income. There is an additional penalty of 10% of the unreported amount assessed under provincial/territorial income tax laws. Therefore, the combined federal and provincial/territorial repeated failure to report income penalties total 20% of the unreported amount.

Example

Paul previously failed to report interest income of $300 on his tax return for the 2011 tax year. This was the first failure to report income. In filing his tax return for the 2014 tax year, Paul fails to report employment income of $14,000. Since this was the second failure to report income within four years, a federal penalty of $1,400 plus a provincial/territorial penalty of $1,400 are assessed.

Where a taxpayer has knowingly or under circumstances amounting to gross negligence omitted to report an amount of income on a tax return, they may be assessed a gross negligence penalty equal to the greater of $100 and 50% of the understated federal tax payable (and certain overstated refundable tax credits) related to the unreported income.

Provincial/territorial income tax laws charge an equivalent gross negligence penalty.

In certain circumstances, the repeated failure to report income penalty can be disproportionate to the taxpayer’s tax owed related to the unreported income, especially in situations where tax was withheld from the income. In some cases, the penalty can exceed the gross negligence penalty if that penalty had instead applied to the unreported income. Also, the penalty can be triggered even when the reporting failures involve a small income amount.

Budget 2015 proposes that the repeated failure to report income penalty would only apply where two or more failures to report an income amount of $500 or more have occurred within the four-year period. The budget also proposes changes to the penalty calculation. The amount of the penalty will be the lesser of:

• 10% of the unreported amount of income; and
• 50% of the difference between the understated tax payable (and certain overstated refundable tax credits) on the unreported income calculated based on the existing gross negligence penalty rules and the amount of tax withheld on the unreported amount.

See below for an example of the penalty calculation.

The proposed change to the repeated failure to report income penalty would apply to unreported amounts for the second or subsequent failure that relate to a tax year that begins after 2014.

The following example describes a case where the proposed change will decrease a taxpayer’s penalty amount: Sally, a resident of New Brunswick, previously failed to report interest income of $800 on her tax return for the 2012 tax year. This was the first failure to report income. In filing her 2015 tax return, Sally fails to include a $30,000 lump-sum withdrawal from a registered retirement savings plan (RRSP). The T4RSP information slip shows federal and provincial income tax deductions of $9,000. This is the second failure to report income of $500 or more within four years.

Sally is reassessed for the additional tax payable on the RRSP income and assessed a federal (and provincial) repeated failure to report income penalty on the second failure. The federal and provincial penalties under the proposed changes would be $1,023, which is the lesser of A and B:

Federal penalty - $30,000 x 10%                                                                     $3,000

Provincial penalty - $30,000 x 10%                                                                  $3,000

A. Total federal and provincial penalties                                                     $6,000

and

Federal tax payable - $30,000 x 22%                                           $6,600

Provincial tax payable - $30,000 x14.82%                                    $4,446

Understated tax payable                                                             $11,046

Less: Income tax deducted                                                         ($9,000)

Tax balance due                                                                                                $2,046

B. Total federal and provincial penalties - $2,046 x 50%                             $1,023

Note: The example assumes there is understated tax payable calculated on the full $30,000 at the 22% federal and 14.82% provincial personal income tax rates. For the purposes of this example, we have combined the calculation for the federal and provincial penalty.

Under the current law, the federal and provincial repeated failure to report income penalties would be $6,000. The proposed change would result in lower penalties.

No. Repeated failure to report income penalties already assessed for a tax year prior to the tax year the proposed legislation comes into effect are not affected.

There are no proposed changes to the gross negligence penalty in Budget 2015.

The Canada Revenue Agency (CRA) is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its webpages often. All new forms, policies, and guidelines will be posted as they become available.

In the meantime, please consult the Department of Finance Canada's Budget 2015 documents for details.