CRA Penalties and Interest

In this article, we’re breaking down CRA penalties and interest - what they are, when they’re applied, how they’re calculated, and most importantly, how to avoid them.

What Are CRA Penalties and Interest?

So let’s start with the basics, what exactly are CRA penalties and interest?

Well, they’re the CRA’s way of encouraging timely and accurate tax filings. They’re financial consequences for missing deadlines or not paying what you owe.

Now, there’s a pretty significant difference between a penalty and interest, and it’s important to know what each one means.

A penalty is a fixed amount or percentage charged when you’ve done something wrong, like filing a return late or not submitting the right info. 

Interest, on the other hand, is what you’re charged when you owe money and don’t pay it on time. It keeps adding up daily until the balance is paid. So the longer you wait, the more you owe.

These penalties and interest charges can pop up across different CRA programs. If you’re running an incorporated business in Canada, the main ones you’ll want to watch are:

• GST/HST – That’s your sales tax filings.
  
  
• Payroll remittances – These are the deductions you send in on behalf of employees.
  
  
• Corporate income tax – Your T2 tax returns and payments.
  
  

Understanding these charges is the first step to avoiding them, and saving your business from unnecessary costs.

When Are Penalties and Interest Applied?

So, when exactly does the CRA start handing out penalties or charging interest?

Let’s break it down into some common situations where business owners get tripped up.

Late Filing

First up, late filing.

This is one of the most common ways business owners get hit with a penalty - submitting your return after the due date can trigger a penalty.

For example, if your corporate income tax return isn’t filed on time, the CRA may charge a percentage of the tax that would have been owed. The same thing applies to GST/HST and payroll filings.

So keep an eye on those filing deadlines to limit the chances of incurring penalties and interest. 

Late Payment

Next is late payment.

Let’s say you filed your return on time, great! But if you didn’t pay the amount owing by the deadline, the CRA will start charging daily interest on the unpaid balance.

The interest keeps piling up until the full amount is paid. And it’s compounded daily, which means it grows faster than you might expect.

So while filing on time is a great first step, it doesn’t get you off the hook if the payment’s late.

Incorrect or Incomplete Filings

The third big one is incorrect or incomplete filings.

If the CRA finds errors or missing information in your return, especially for GST/HST or payroll remittances, they can apply additional penalties.

For example, if you underreport GST collected, or miss payroll deductions, the CRA may treat that as a serious compliance issue. And the penalties in these cases can be steeper than you’d think.

That’s why it’s always a good idea to double-check your filings, or better yet, have a professional take a look before you submit.

How Are CRA Penalties and Interest Calculated?

Next, let’s talk about how CRA penalties and interest are actually calculated.

Interest Rates and Compounding

Starting with interest.

The CRA charges interest daily on any unpaid balance, and they compound it… daily. That means each day, interest is added to your balance, and then the next day, they calculate new interest on the new, slightly higher amount.

The rate itself changes every quarter, but it’s usually a few points higher than the Bank of Canada’s average rate, so it can add up quickly!

And just to make things extra motivating, the CRA charges interest on unpaid penalties too. So if you’re hit with both, that interest can snowball fast.

Common Penalty Scenarios

If you’ve incurred CRA penalties, those can be calculated differently depending on the type of CRA account in question.

Here are a few common examples to watch for:

• Late corporate tax filing: The penalty is 5% of the unpaid tax owing, plus 1% for each full month it’s late, up to 12 months. So if you’re late by a year, that’s a 17% penalty right there.
  
  
• GST/HST filing: The penalty for late GST/HST payments is 1% of the amount you owe, plus an extra quarter of a percent for each full month the balance is overdue, up to a maximum of 12 months.
  
  
• Payroll remittances: This is a big one. If you’re late with your remittance, penalties start at 3% and go as high as 10%, even for being just a few days late. And if you’re late more than once in a year, those penalties can go up to 20%!
  
  

So yeah, it pays to be on time, quite literally!

How to Avoid CRA Penalties and Interest

Alright, let’s talk about some good news - how you can avoid CRA penalties and interest in the first place.

These charges are frustrating, but the truth is, they’re usually avoidable with a few good habits and systems in place.

Know Your Deadlines

First things first, know your deadlines.

Each CRA program has its own due dates, and missing even one can lead to penalties. Here are a few of the key ones for incorporated businesses:

• Corporate tax returns (T2) are due six months after your year-end.
  
  
• Corporate tax payments are due two or three months after year-end, depending on your situation.
  
  
• GST/HST returns are most commonly filed quarterly or annually, depending on your setup.
  
  
• Payroll remittances are usually due by the 15th of the following month, but if your payroll is large enough, the CRA may move you to a more frequent schedule, like twice per month.
  
  

A missed deadline, even by a few days, can trigger a penalty. So it’s worth setting up calendar reminders, to stay on top of them.

For more details check out our full article on tax deadlines linked here.

Use a Bookkeeper or Accountant

If tax filings stress you out, or you’re always scrambling to get things submitted, having someone else take care of it can be a game changer.

A good bookkeeper will help you stay organized throughout the year, and an accountant will make sure your filings are complete, accurate, and on time.

Having a professional involved can bring peace of mind and help you to focus on running your business without second-guessing your taxes.

Make Partial Payments if You Can’t Pay in Full

And finally, if you can’t pay your balance in full, it’s best not to ignore it altogether.

Make a partial payment if you can. Interest is only charged on the unpaid balance, so reducing that number right away helps minimize what you owe in the long run.

You can also reach out to the CRA to set up a payment plan, which we’ll talk about a bit more later.

So those are your best strategies to avoid CRA charges altogether. But what if you’ve already got a penalty or interest sitting on your account?

What to Do If You Get Penalty or Interest Charges

What if you’ve been hit with a CRA penalty or interest charge already, what should you do now?

The good news is, you’re not out of options. There are a few practical steps you can take to deal with it.

Double-Check the Notice

First up, double-check the CRA notice.

Mistakes can happen. The CRA might not have processed your return or your payment properly. Or perhaps you filed for the wrong period (I know I’ve been there). So before you stress out, take a close look at the notice and compare it to your records.

If something doesn’t look right, don’t be afraid to call the CRA and ask for clarification. It’s better to sort out any discrepancies early rather than letting interest build up on an amount you may not even owe.

Taxpayer Relief Requests

Next, if the penalty or interest is valid but the situation was out of your control, you might be eligible for what’s called a Taxpayer Relief Request.

This is a formal process where you can ask the CRA to cancel or waive penalties and interest, usually due to circumstances beyond your control. 

That could include things like:

• A serious illness or accident
  
  
• A natural disaster
  
  
• A CRA processing delay
  
  
• Financial hardship that made it impossible to pay on time
  
  

To make a request, you’ll need to fill out Form RC4288 “Request for Taxpayer Relief” and provide details about your situation, along with any supporting documents. 

It’s not a guarantee, but if your reasons are reasonable and well-documented, the CRA may reduce or remove the charges.

So if you’ve been hit with a charge, step one is to verify it’s correct, and step two is to see if there’s a valid case for relief.

How to Pay CRA Penalties and Interest

And if you’ve confirmed the penalty or interest is valid, the next step is to make a payment.

There are a couple of good options that make paying the CRA pretty straightforward.

CRA My Business Account

The easiest way for most incorporated businesses is through CRA My Business Account.

Once you're logged in, you can view your account balance, see any outstanding penalties or interest, and make a payment directly through the portal.

You can choose to pay the full amount or make a partial payment if that’s all you can manage right now.

If you haven’t already set up your CRA My Business Account, check out our guide on setting up and using the CRA My Business account. 

Online Banking

Another simple option is through online banking.

Just log into your business bank account and add the CRA as a payee. It’s usually listed as something like “CRA – corporate tax” or “CRA – GST/HST.”

Make sure you choose the right CRA program when setting it up, whether that’s GST, payroll, or corporate income tax, and use your correct account number so the payment gets applied properly.

This method is fast and works well if you’re just paying a one-off amount.

Pre-Authorized Debit and Other Options

If you want something more automated, you can also set up pre-authorized debit through your CRA account. This allows the CRA to withdraw funds directly from your bank account on a scheduled date.

And if you're more old-school, you can still pay by mailing a cheque or pay in person at a Canada Post Outline but it takes longer and requires a payment voucher. So online options are generally quicker and easier.

Once your payment is made, it may take a few business days to show up on your CRA account, so don’t panic if the balance doesn’t update right away.

Summary

CRA penalties and interest can definitely be a headache, but they’re usually avoidable if you stay organized, know your deadlines, and take action early when something goes off track.

If all of this still feels a bit overwhelming, or if you’ve already been hit with penalties and want help getting back on track, we’re here to help.

At Avalon Accounting, we help Canadian small businesses stay compliant, reduce stress, and make smart financial decisions. Check out our packages and services to learn more or reach out to chat with someone on our team.