Late-Filing Penalties Without Unpaid Tax

Is any penalty imposed on the late filing of an income tax return when there is no unpaid tax? The CRA’s answer is yes, even though in practice the CRA imposes penalties in such circumstances only on non-resident corporations and large corporations (CRA document no. 2010-0386341C6, November 28, 2010).

The most common basis for assessing late-filing penalties is subsection 162(1), which provides that a person is liable to a penalty if there is a failure to file a return of income when required by subsection 150(1). The penalty is equal to 5 percent of the tax payable that was unpaid when the return was required to be filed and 1 percent of any such unpaid tax for each full month, not exceeding 12, that the return is late. Subsection 162(2) imposes a similar penalty, computed with reference to unpaid tax payable, when there is a repeated failure to file.

In addition, subsection 162(7) imposes a catchall penalty on every person who fails to comply with a duty or obligation imposed by the Act or the regulations. The penalty is equal to the greater of $100 and $25 for each day, not exceeding 100 days, during which the failure continues; thus, the maximum penalty is $2,500. Subsection 162(7) does not make reference to “tax payable,” and it is applicable only when no other penalty has been imposed under another provision of the Act.

It is the CRA’s view that if a Canadian-resident corporation has not complied with subsection 150(1), and no penalty can be applied under another provision of the Act, subsection 162(7) may apply. However, the TI cited above states that “it has not been [the CRA’s] practice” to apply subsection 162(7) penalties to resident corporations that are late in filing their returns when there is no unpaid tax.

This forbearance in applying subsection 162(7) does not extend to non-resident corporations. In my experience, the penalty is frequently applied to late-filing non-resident corporations that owe no tax.

It is perhaps of some slight comfort to know that the courts have held that this penalty cannot be imposed under subsection 162(2.1), the special rule for non-resident corporations, on late-filing non-resident corporations that owe no tax. In Exida.Com Limited Liability Company v. Canada (2010 FCA 159), a non-resident corporation was assessed a penalty for failing to file its income tax return on time, despite having no tax payable for the taxation year. The court held that penalties under subsection 162(2.1) are applicable only when the non-resident corporation is liable to the “regular penalties” under subsection 162(1) or (2), and no such liability can exist in circumstances where a non-resident corporation has no tax payable. However, this particular finidng is of no practical importance because the penalties under subsections 162(7) and 162(2.1) are equal in monetary value.

More importantly, the court in Exida.Com found that all the elements required for the application of the penalty set out in paragraph 162(7)(b) are present in the situation of a late filer, at least on this set of facts. Thus, it appears that the CRA will be successful in an attempt to correct the bad drafting of subsection 162(2.1) by applying another penalty of equal value in its place.

For large corporations, section 235 imposes a late-filing penalty that is independent of unpaid tax. One element of the penalty is proportional to a corporation’s taxable capital employed in Canada; thus, a corporation with $10 million of taxable capital employed in Canada—the amount used, roughly speaking, in defining a large corporation—will face a penalty of $50 per complete month of late filing, up to 40 months (plus an amount relating to part VI tax on financial institutions).

Jin Wen
Grant Thornton LLP, Toronto

Canadian Tax Focus
Volume 5, Number 4, November 2015
©2015, Canadian Tax Foundation