What Happens If You Don't File Your Small Business Tax Return In Canada?

Small business owners must pay income tax on the profits generated from business activities. In Canada, whether you're self-employed or running a small business, you must pay income tax both at the federal and provincial or territorial levels.

The Canadian deadline for filing a tax return depends on the structure of your business. Small businesses operating as sole proprietors or partnerships have different filing deadlines than large corporations.

After submitting the tax return by the prescribed deadline, the Canada Revenue Agency (CRA) will review it. Subsequently, they will send the tax assessment, commonly known in Canada as a Notice of Assessment (NOA). The NOA outlines essential details, such as whether you owe money, are eligible for a credit, or will receive a refund.

Preparing and filing a tax return can be daunting, however. It can be tempting to delay it or not file it at all, but late and unfiled tax returns can have severe implications. Thus, before you make the mistake of not filing the tax return of your small business, understand the possible consequences.

High Arbitrary Tax Assessments

The CRA may issue an arbitrary tax assessment if you neglect to file a return by the designated filing deadline. The assessment includes an estimate of the taxes you owe and should have been reported on the unfiled tax return.

The CRA uses the previous years' tax filings to assess the taxes you owe. However, there's no legal requirement for such a basis.

That's why most of these arbitrary tax assessments will lead to higher taxes than if you had filed the required tax return for your small business. One potential reason for this is that the CRA doesn't factor in business expenses for tax credits when making an arbitrary assessment.

Once the CRA issues the arbitrary tax assessment, you legally owe the amount of taxes indicated. However, there may be potential avenues to challenge the CRA's arbitrary tax assessment. An experienced tax professional can help you get your tax assessment problem solved.

Back Tax Repayments With Penalties and Interest

The CRA has extensive powers to collect interest and penalties on late tax returns. They can also enforce repayment of any income tax you owe. Additionally, they can freeze your bank account, garnish your wages, or seize your company's assets to facilitate payment.

Likewise, if you fail to file your tax returns, they can charge a daily interest rate even if you don't owe any back taxes. For first-time offenders, penalties for unfiled tax returns start at five percent of the amount due that year. The penalty rate can rise to 50 percent with repeated late tax return filings.

Potential Criminal Charges for Tax Evasion

Having tax debts isn't considered a crime in Canada. However, it can be a criminal offence if you don't file a tax return when required.

Not filing your business tax return may indicate non-compliance with Canadian tax law. Consequently, the CRA may consider it an intentional attempt to evade taxes. If you're guilty of tax evasion due to unfiled returns, you may be subject to court-imposed penalties, a prison sentence, and a possible criminal record.

An Opportunity for Voluntary Disclosure Program

The CRA provides an opportunity for non-compliant business owners to come back into the tax system through the Voluntary Disclosure Program (VDP).

If you meet the criteria for this special program, you don't have to pay penalties and interest for late or unfiled tax returns. You may also get relief from criminal prosecution if the CRA accepts your VDP application.

The VDP is a great way to correct your past financial and tax mistakes, but that should not become an excuse to intentionally neglect to file your small business tax returns.

As much as possible, you must stay current with your business tax filings and comply with the rules and regulations under Canada's Income Tax Act.