All adult citizens in Canada have a duty to pay their taxes in full as everyone benefits from taxes collected by the government. By paying taxes, you help strengthen the country and your communities as a whole since these monies pay for our world-renowned services and programs such as education, healthcare, beautiful parks, Old Age Security, Employment Insurance, and the Canada child benefit. Therefore, the act of not paying any tax borders on gross treachery. However, due to oversight, willful blindness, or error, many Canadians fail to report some incomes at tax time.
If you have unreported income, here is what you ought to know:
The underground economy
Not all people fail to declare income deliberately. For some, unreported income can result from lack of knowledge about incomes that are taxable. If you fail to report an activity for purposes of income tax, it falls into the category of the underground economy, which is also called moonlighting, working under the table, or working for cash.
Moonlighting includes underreported or unreported income from sources such as:
- Gratuities and tips
- Employment
- Business
- Money from sharing economy, for example, ride sharing or renting out a room
- Gift cards
- Cash payment for services and goods
- Barter trading
- Incentives
Generally, any income you earn is taxable. Whether the activity that earned you money is a side hustle or you did not receive a T4 slip, it is your duty to report all incomes on your tax return.
The Canada Revenue Agency knows
Some people have the belief that you can bypass the system if you fail to declare small amounts of income, operate in cash, or avoid keeping records. This is a misguided belief as the Canada Revenue Agency possesses many tools that will smoke out anyone who does not pay taxes. The agency has tailored strategies to combat and prevent the underground economy (not reporting activities for GST/HST and income tax purposes). Therefore, you should strive hard to pay all taxes that you owe. Failing to report taxes is never a safe move; eventually, the authorities will catch up with you.
Penalties for unreported income
The CRA dedicates time and resources to determine how many times someone has failed to report income. There are three types of penalties for those who fail to declare income:
1. Late-filing penalty: This is where you fail to report income for a certain year but declare it the next time you are filing taxes. In such a case, you pay a late-filing penalty and interest which CRA charges on the penalty. The interest you shall pay is determined by the number of days that have passed since the filing due date.
2. Repeated failure:It is a penalty charged for those who have repeatedly failed to report incomes, year after year. When you fail to report certain incomes in consecutive years, you are liable to pay 20% of the total unreported income. This 20% represents 10% provincial penalty and 10% federal penalty.
3. Omissions or false statement penalties: This is a penalty for offenders who have knowingly omitted an income on a year’s tax return. The price to pay here is $100 and 50% of the entire omitted income.
CRA is very strict about tax these days and they have created systems that you cannot bypass. Luckily, they also have channels of waiving taxes for those who cannot pay due to unavoidable circumstances. Find out if you are eligible for a tax waiver so that you can ease your tax burden.
Bottom line: pay your taxes in time to avoid many negative issues.