The secret to lower tax penalties

Some people just can’t stick to deadlines. Few know this better than Frank Flynn. In his 12 years as a senior collections enforcement officer at the Canada Revenue Agency he’s seen his share of late filers. Many of the people he dealt with skipped years of tax filing; others never paid.

These days Flynn isn’t looking for delinquent filers, he’s helping them through his company Taxpayer Relief Letters. It is possible to convince the CRA to give you a break on the penalties or interest charges, says Flynn, but the amount of tax you owe the CRA will almost never get reduced.

There are three main categories under which people can apply for tax relief: to correct an error, due to a financial hardship or some other extraordinary circumstance.

Errors and delays

One of the most common reasons someone fights a tax penalty or interest charge happens when the CRA provides incorrect information. For instance, if someone called the agency to ask if she could claim something specific and the answer was yes, when it really should have been no, then you can get any penalties related to that specific question waived, Flynn says.

Penalized taxpayers can also ask for relief if the CRA takes an inordinate amount of time to process a claim or complete an audit. In an audit, interest will still pile up. A three-year audit isn’t uncommon, says Flynn, but you can ask to have the interest halted until the audit is complete. “Stopping the interest clock from ticking can mean huge savings.”

Financial hardship

The CRA will also offer leniency if the penalties create financial hardships. The agency still wants you to be able to cover the basics, like rent, hydro and groceries. If the penalties affect your ability to cover those costs then the tax collector might show some leniency. But for that to work, Flynn says, “you’d have to be border line insolvent.”

By the same token, the CRA doesn’t want someone to have to pay interest in perpetuity on a large tax bill. Seniors who rely on a disability pension and live on a fixed income often fall into this category. “They don’t want people to become indentured servants of the government,” Flynn explains.

To make a claim under this category, you’ll have to provide documentation to show that you really can’t pay interest. Flynn has had people call him up who said they want to reduce charges because of financial hardship, but it quickly becomes clear that they’re making far more than the average Canadian. “They give these long rambling tales of sorrow and woe and then say if you need to reach me over the next three week’s I’ll be on vacation in the south of France,” he says.

Extraordinary circumstances

The last line of defence against punitive penalties and interest charges is to cite extraordinary circumstances, such as a fire or a serious illness, as the reason behind their late filing.

Divorce falls under this category, too. “If a spouse suddenly walks out on you and that person was responsible for most of the household income, you could be up a creek,” says Flynn. Divorce can also cause serious or emotional distress, which could prevent someone from filing. CRA may also consider a death in the family or drug and alcohol issues when reducing penalties.

Flynn points out that there’s no guarantee that a penalty or interest will be reduced. The taxpayer has to clearly make their case to the CRA and back up those claims with proof. Blaming their accountant for a mistake won’t cut it, says Flynn. It’s up to the taxpayer to sue the accountant for damages and then pay that money to the CRA, he explains.

To get the process rolling, you’ll have to file a letter to the CRA explaining your situation. If it’s denied you, file a second level review, which sends your request up to the director of tax. If that still doesn’t work you can file for a judicial review. The courts, however, don’t determine whether you have a case, they look at whether the agency failed to give you due and fair consideration. The CRA can, however, deny your application again.

Still, the process isn’t as difficult as it sounds, says Flynn. People get penalties or interest slashed or eliminated every year. But before you’ll even get the CRA to look at an application, all of your tax returns need to be filed and up to date. Then you have to prove that you deserve the leniency. “It comes down to how compelling a case can you make,” he says.