CRA Tax Penalties Explained: Late Filing, Late Payment, Repeated Failure to Report, and More — A Complete Guide by a Montreal CPA Firm Near You

Introduction

CRA imposes some of the harshest penalties in the Canadian tax system for late filing, missing information slips, inaccurate reporting, GST/HST non-compliance, payroll errors, and gross negligence. Many taxpayers believe penalties apply only when they “owe money,” but CRA penalties often apply even when refunds are expected or when income was omitted accidentally. Understanding how CRA penalties work—and how to avoid them—is critical for individuals, self-employed professionals, corporations, landlords, gig workers, and newcomers. This guide breaks down every major CRA penalty, how they’re calculated, and what taxpayers can do to prevent or reverse them.

1. Late-Filing Penalty

CRA imposes a late-filing penalty when a tax return is filed after the deadline and a balance is owing. Penalty:
5 percent of the balance owing

• 1 percent per month for up to 12 months
  If CRA has issued a late-filing penalty in any of the previous three years and the taxpayer files late again, the penalty increases dramatically.

2. Repeated Failure-to-Report Income Penalty

One of the most misunderstood penalties. Applies when a taxpayer fails to report ANY income (even $1) in the current year and failed to report income in one of the previous three years. Penalty:
10 percent federal

• 10 percent provincial
  This applies even if the taxpayer owes zero tax and even if the income omission was accidental. This is one of CRA’s most common reassessment penalties.

3. Gross Negligence Penalty

CRA applies this in serious cases where it believes the taxpayer:
knowingly misrepresented
was careless or reckless
ignored CRA obligations
participated in a tax scheme
Gross negligence penalties are extremely high:
50 percent of the tax avoided or false statement
Taxpayers must fight these penalties aggressively, as they suggest intentional wrongdoing.

4. Late-Payment Penalty

If a taxpayer files on time but does not pay the tax owing by the deadline, CRA charges interest daily and may impose late-payment penalties depending on the situation. CRA interest compounds daily at prescribed rates, which change quarterly.

5. Instalment Interest and Instalment Penalties

Taxpayers required to pay instalments (self-employed, investors, landlords, and some employees) may face instalment interest if payments are late or insufficient. CRA may impose instalment penalties when interest exceeds $1,000.

6. GST/HST Late Filing and Late Remittance Penalties

GST/HST has its own penalty structure under the Excise Tax Act. Penalties apply when:
returns are late
returns are not filed at all
GST/HST collected was not remitted
CRA may charge:
penalties of 1 percent of the GST/HST owing

• 0.25 percent per month up to 12 months
  Late GST/HST remittance often leads to aggressive CRA collections, bank freezes, and garnishment.

7. Payroll Source Deduction Penalties

Employers who do not remit CPP/QPP, EI/QPIP, and income tax withheld from employees face severe penalties:
3 percent for 1–3 days late
5 percent for 4–5 days late
7 percent for 6–7 days late
10 percent for more than 7 days late or repeated failures
Payroll penalties escalate quickly and cannot be avoided by filing objections when amounts are clearly remitted late.

8. Information Return Penalties (T4, T5, T5018, etc.)

Missing or late information slips generate penalties for each slip. Penalties depend on the number of slips and the lateness. Corporations and employers often overlook these.

9. TFSA Overcontribution Penalties

CRA charges 1 percent per month on excess contributions until withdrawn. Many taxpayers unknowingly contribute twice in a calendar year or use cross-border accounts incorrectly.

10. RRSP Overcontribution Penalties

Overcontribution above the $2,000 lifetime limit triggers a 1 percent per-month penalty. Filing the RC343 form late increases penalties.

11. UHT (Underused Housing Tax) Penalties

UHT penalties are extremely high:
$5,000 per individual per property
$10,000 per corporation per property
Even if no tax is owed, penalties apply when the UHT return is not filed. Many Canadian citizens are also required to file and don’t know it.

12. T1135 Foreign Asset Reporting Penalties

Failure to file the T1135 can lead to:
$25 per day late (minimum $100, maximum $2,500)
gross negligence penalties up to $12,000
T1135 penalties apply even when no foreign income exists.

13. Penalties for False Statements or Omissions

CRA may apply penalties when taxpayers fail to keep adequate records, exaggerate deductions, misstate information, or use improper tax shelters. These penalties can overlap with gross negligence penalties.

How CRA Detects Penalties

CRA uses extensive data-matching tools:
T-slips
bank deposits
foreign bank data under CRS
U.S. IRS FATCA data
crypto exchange reporting
real estate registry matching
digital platform reporting
CRA applies penalties automatically when mismatches occur.

How to Avoid CRA Penalties

file on time
track all income (even side gigs and platforms)
keep receipts and documentation
track mileage and home-office expenses
register for GST/HST when required
remit payroll on time
avoid RRSP/TFSA overcontributions
report foreign property accurately
use a CPA when income or deductions are complex
Avoiding penalties requires proactive bookkeeping and compliance.

How to Reverse or Reduce Penalties

1. File a Notice of Objection

If CRA made an error or misapplied the law.

2. Apply for Taxpayer Relief (Form RC4288)

CRA may cancel penalties and interest for:
illness
family crisis
mental health issues
natural disasters
CRA delays
financial hardship

3. Use the Voluntary Disclosures Program (VDP)

For unreported income, foreign accounts, GST errors, or past non-compliance. VDP can eliminate penalties entirely.

Mackisen Strategy

At Mackisen CPA Montreal, we help clients prevent penalties, reverse incorrect assessments, file strong Taxpayer Relief applications, manage GST/HST and payroll compliance, and correct past errors through the VDP. We provide full audit defence and ensure CRA cannot penalize you unfairly.

Real Client Experience

A Montreal consultant avoided gross negligence penalties after proving a bookkeeping error. A landlord reversed repeated-failure penalties through proper slip matching. A corporation avoided payroll penalties by restructuring remittances. A newcomer resolved T1135 penalties through the VDP after missing foreign reporting.

Common Questions

Can CRA remove penalties? Yes — through Taxpayer Relief. Are penalties automatic? Many are. Can I fight gross negligence penalties? Yes — with strong evidence. Do late-filing penalties apply if I expect a refund? No — only if you owe. Can GST penalties be reversed? Yes — with evidence and relief.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps taxpayers avoid, minimize, and reverse CRA penalties through expert compliance, accurate reporting, and strategic dispute resolution.