Common CRA Penalties and How a Tax Lawyer Can Help

The Most Common Types of CRA Penalties

The Canada Revenue Agency imposes various penalties under the Income Tax Act to encourage compliance and punish non-compliance. Here are the most common penalties taxpayers face in 2025:

1. Late Filing Penalties

If you file your tax return after the deadline, the CRA automatically assesses a late filing penalty.

First-Time Late Filing:

• 5% of your balance owing plus
• 1% of your balance owing for each full month your return is late, up to a maximum of 12 months

Repeated Late Filing:

If the CRA has demanded a return in the past three years and you were assessed a late filing penalty for any of those years, the penalty increases significantly:

• 10% of your balance owing plus
• 2% of your balance owing for each full month your return is late, up to a maximum of 20 months

2. Gross Negligence Penalties

This is one of the most severe penalties the CRA can impose. Under subsection 163(2) of the Income Tax Act, the CRA can assess a gross negligence penalty when a taxpayer knowingly, or under circumstances amounting to gross negligence, makes false statements or omissions on their tax return.

Penalty amount: 50% of the understated tax or overstated credits

When Gross Negligence Penalties Apply:

• Failing to report substantial amounts of income
• Claiming fictitious or inflated business expenses
• Making false statements about residency status to avoid taxes
• Participating in aggressive tax schemes with no legitimate business purpose
• Deliberately concealing foreign income or assets
• Filing returns with obviously incorrect information (e.g., claiming deductions far exceeding income)

3. Repeated Failure to Report Income Penalties

Under subsection 163(1), if you fail to report income in a tax year and you also failed to report income in any of the three preceding years, you face an automatic penalty.

Penalty amount: 10% of the unreported amount in the current year (up to a maximum of $3,000 for certain types of income)

Example:

This penalty is particularly frustrating because it applies even when both omissions were unintentional. Fortunately, it can often be cancelled through taxpayer relief applications when you can demonstrate the failures were accidental.

4. Failure to File Information Returns

Beyond income tax returns, the CRA requires various information returns depending on your circumstances:

• T1135 (Foreign Income Verification Statement): Required if you own specified foreign property exceeding $100,000 at any time during the year
• T1142 (Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust): Required for certain transactions with non-resident trusts
• T106 (Information Return of Non-Arm's Length Transactions with Non-Residents): Required for certain international related-party transactions

Penalties for Failure to File Information Returns:

• $25 per day the return is late, with a minimum of $100 and maximum of $2,500
• For willful failure to file T1135 or T1142: Additional penalty of $500 per month, up to $12,000 per year
• Some penalties can reach $24,000 per form in cases of deliberate non-compliance

5. GST/HST and Payroll Remittance Penalties

Businesses that fail to remit GST/HST or source deductions (payroll taxes) face penalties and potentially director personal liability.

Failure to Remit Penalties:

• 1st failure: 3% of the amount not remitted
• 2nd failure within one year: 5% of the amount
• 3rd+ failure within one year: 10% of the amount
• Gross negligence regarding remittances: 10% of the amount plus additional penalties

Directors of corporations can be held personally liable for unremitted source deductions and GST/HST, meaning the CRA can pursue directors' personal assets to satisfy corporate tax debts.

How a Tax Lawyer Can Challenge CRA Penalties

Just because the CRA assessed a penalty doesn't mean you're stuck with it. Tax lawyers use several strategies to reduce or eliminate penalties:

Strategy 1: Challenging the Legal Basis for the Penalty

The CRA must have proper legal authority to assess penalties. A tax lawyer can challenge penalties by arguing:

For Gross Negligence Penalties:

• The CRA hasn't met its burden of proof to establish gross negligence
• The errors were honest mistakes, not willful misconduct
• You relied on professional advice from accountants or tax preparers
• The circumstances don't rise to the level of gross negligence required by law

For Repeated Failure to Report Penalties:

• You had no previous penalty assessed (the CRA's records may be incorrect)
• The income was reported but to the wrong line or form
• The unreported amount was de minimis (too small to warrant penalty)
• You had reasonable grounds for the omission

These challenges typically occur through the Notice of Objection process and, if necessary, appeals to Tax Court. Lawyers understand the case law and evidentiary requirements for successful challenges.

Strategy 2: Taxpayer Relief Applications

Even if the penalty was validly assessed, subsection 220(3.1) of the Income Tax Act gives the CRA discretionary authority to cancel or waive penalties (and interest) in certain circumstances. A tax lawyer can prepare compelling taxpayer relief applications demonstrating:

Extraordinary Circumstances:

• Natural disasters (floods, fires, earthquakes)
• Serious illness or accident affecting you or an immediate family member
• Emotional or mental distress (death of family member, divorce, job loss)
• Civil disturbances or disruptions in services

CRA Actions or Errors:

• Processing delays at the CRA
• Errors in CRA information or publications that you relied upon
• Incorrect information provided by CRA agents
• Undue delays in resolving objections or appeals

Inability to Pay or Financial Hardship:

• Payment of the penalty would cause undue financial hardship
• Collection of the penalty is unreasonable given the circumstances

Strategy 3: Negotiating Reduced Penalties

In some cases, particularly during audit settlements, tax lawyers can negotiate reduced penalties as part of a comprehensive resolution. If the CRA's position on certain issues is weak, they may agree to reduce or eliminate penalties in exchange for settling other matters without appeals.

Strategy 4: Voluntary Disclosure Program

If you have unreported income or unfiled returns, coming forward through the Voluntary Disclosure Program (VDP) can avoid penalties entirely. The VDP offers:

• Relief from penalties (though you still owe the tax and interest)
• Protection from prosecution
• Limited look-back period (generally 10 years)

A tax lawyer can prepare and submit voluntary disclosures, ensuring all requirements are met to qualify for penalty relief.

Real-World Impact: The Financial Benefit of Fighting Penalties

The financial benefit of successfully challenging or cancelling penalties can be substantial:

In each case, the cost of legal representation was far less than the penalties at stake, making hiring a tax lawyer a sound financial investment.

Time Limits: Act Quickly

Several important deadlines apply when dealing with CRA penalties:

Common Questions About CRA Penalties

Protecting Yourself from Future Penalties

Prevention is always better than fighting penalties after the fact. Here's how to minimize your penalty risk:

• File on time, every time: Even if you can't pay, file your return by the deadline to avoid late filing penalties. You can negotiate payment arrangements later.
• Report all income: The CRA receives copies of T-slips and can easily identify unreported income. Don't risk repeated failure to report penalties.
• Keep accurate records: Good record-keeping supports the positions you take on your return and demonstrates due diligence if issues arise.
• Comply with information return requirements: If you have foreign assets over $100,000 or other reporting obligations, ensure you file required forms.
• Seek professional advice: When facing complex tax situations, consult a tax professional before filing rather than fixing mistakes afterward.
• Use reminders and systems: Set calendar reminders for filing deadlines and remittance due dates. Consider automatic payment arrangements for predictable tax obligations.

If you do make a mistake, address it promptly. The sooner you correct errors, the lower your penalties and interest, and the better your chances of obtaining relief.

When to Hire a Tax Lawyer for Penalty Issues

Consider hiring a CRA penalties lawyer when:

• The penalty amount is substantial (typically $5,000 or more)
• You're facing gross negligence penalties which can be difficult to overturn without legal expertise
• You need to file a Notice of Objection challenging the legal basis for penalties
• You're preparing a taxpayer relief application and want to maximize your chances of success
• You have multiple penalty issues across several tax years requiring coordinated strategy
• You're considering voluntary disclosure to avoid penalties on unreported income
• The penalties are threatening your financial stability or business viability

Tax lawyers bring specialized knowledge of penalty provisions, case law, and CRA practices. They can assess your situation objectively, identify the best defense strategies, and present compelling arguments that self-represented taxpayers often miss.