Don’t despair if you’ve fallen years behind on your tax filing

It starts with missing one year. Tax time rolls around and you’re going through some things so you put it off or it slips your mind. Second year – it happens again. It starts to bother you, but life is hectic. Third year: now it’s becoming a habit not to file. Every now and then, randomly, you remember and it bothers you, but it’s never quite the right time to tackle what’s starting to look like a huge job.

Gradually, not filing becomes a habit, the unfiled years are piling up and getting more intimidating, and the feeling of pressure and guilt is something you avoid thinking about. But it never quite goes away.

Falling a few years behind happens to plenty of Canadians, most of whom sincerely want to do the right thing. If you’re in this position you’ve got some work ahead of you, but I promise it’s going to be all right. But you’ll have to do some work.

Step By Step

They say the way to eat an elephant is one bite at a time [1], and doing many years of taxes is similar. There’s work to do, but no one step is particularly difficult. The challenge is just to stay focussed and take it one step at a time.

Gather your paperwork

The first thing you’re going to want to do is gather whatever materials you have and sort them by year. Try to find:

  • Tax slips (T4, T4A, T5 etc)
  • RRSP contribution receipts
  • Charitable donation receipts
  • Medical receipts
  • Business expense receipts

Don’t let missing paperwork slow you down at this stage!

Don’t get too bogged down here if you can’t find everything. For one thing, most tax slips can be obtained from CRA if you’ve lost track of yours. You can call CRA and have them sent to you, or, if you’re working with a professional firm, a tax preparation office can usually obtain them for you.

The other thing to remember is that while receipts can help lower your tax bill, they’re not essential to filing. If you don’t have everything you can still file a return. Later if something turns up, you can request a change to a previously-filed tax return to incorporate it.

Did you know?

A return can be changed after it has been filed with CRA.

Prepare the returns

Once you have all your materials together, you can start preparing returns, one year at a time. If you’re trying to do it yourself, you may have difficulty finding tax software for prior years. You can file on paper if you like (returns can be downloaded from CRA’s website), or you can hire someone. Well-established tax preparation firms have access to all prior-year tax software.

Where to start?

Filing chronologically is straightforward

You can file returns in chronological order (starting with the oldest) or start with the most recent and move back. The advantage of chronological order is that it can help with the accuracy of figures that are carried forward from one year to the next, such as education amounts or capital cost allowance figures.

Build your confidence by starting with the most recent year

But if you’re still feeling daunted, go ahead and build your confidence by starting with the most recent year. This is because the most recent return is going to be the easiest: easiest to find the documents, easiest to remember details, easiest to find the software if you’re going DIY. It is perfectly acceptable to CRA to file returns out of order. Start with the easy win and then you can go back and do the older, more challenging returns.

OrderProsCons
Oldest to newestEducation amounts, other carried-forward figures easy to calculate; feels logicalOld returns can be the hardest; can be daunting
Starting with most recent yearEasiest, helps build confidenceCarried-forward amounts can get tangled or miscalculated

What if CRA has already billed me for a return I never filed?

If CRA requests that you file a return and you don’t respond, sometimes they get impatient and just file something on your behalf. This is called an arbitrary or notional return, and it usually generates a tax bill. However, that doesn’t mean you can’t still file!

Usually notional returns aren’t very favourable – you’d get a better outcome with a return you filed yourself. The good news is, you can override a notional return by filing your own version. If you have already paid an inflated tax bill, fear not: the overpayment will either be credited to your taxes, or refunded to you.

What if I’ve been garnisheed?

A garnishee is a situation where your employer or payer is legally required to forward part or all of your income to the government before it gets to you. CRA sometimes resorts to this if their requests for tax returns and/or amounts owing repeatedly go ignored. The garnishee is applied against taxes owing – even if those taxes are inflated by a notional assessment.

Be aware that you are in fact getting credited for all the amounts CRA is withholding from your pay. So it’s not all bad: you are actually paying off your tax bill, if involuntarily. Meanwhile, if you later file a tax return showing less tax owing than they’ve garnisheed, you’ll get it back.

What if I can’t pay?

If you haven’t been filing and paying your taxes for several years, the final tax bill when all the returns have been filed can be onerous. But CRA doesn’t want you to starve, and they don’t want you to go bankrupt either. You have a couple of options.

If rate of payment is too high

Sometimes CRA puts you on a payment plan that is unmanageable. Their standard policy is to require six monthly payments totalling the amount you owe. If that rate of repayment is faster than you can manage, you can apply for relief under the Taxpayer Fairness Act. There is a specific process for this but the gist is that you show your monthly income and your monthly needs, demonstrating how much (or how little) you have available for tax payments. CRA will reduce the monthly payments to something you can achieve.

If the total amount owing is too high

If you really can’t pay your bill, don’t hurry to rack up your credit cards or declare bankruptcy. A better route would be to try to get a consumer proposal. A consumer proposal is an agreement wherein you pay less than the entire tax bill, and the rest is forgiven.

Consumer proposals should be managed by a trustee in bankruptcy. A trustee in bankruptcy is legally allowed to negotiate with CRA directly. He/she attest to CRA how much you can afford to pay without going bankrupt (or homeless), and between them they will come up with a reduced amount and a payment plan.

Note that trustees are paid by a commission that is folded into the regular payments they negotiate for you. You never have to pay them up front and in fact won’t ‘feel’ the payment at all, since they’ll have negotiated a lower total payment on your behalf.

Another advantage of working with a trustee in bankruptcy is that their involvement immediately halts any actions against you with regards to your tax bill. In other words, they keep the wolves from your door by protecting you from additional penalties or frozen accounts while the agreement is being hammered out.

Conclusion

Falling behind on your taxes doesn’t make you a bad person. Canadians are generally law-abiding and don’t mind paying taxes. It’s doing the returns they hate. Fortunately, you can take it step by step and get it done, no matter how far behind you are. [2]

I have been filing people’s taxes since 2002 and have worked with hundreds of clients in this position. They’re rich or poor, single or married, a year or a decade behind; but despite their differences, when all the returns are filed every single client says the exact same thing:

“What a relief.”


[1] Except never do this. Elephants are gentle, intelligent, endangered creatures!

[2] Up to a point. You can file returns up to 10 years after the year to which they pertain. Anything older than that has to be left as it is.

Written by


Sunny Widerman, Tax Expert
personaltaxadvisors.ca

About Sunny Widerman

Sunny Widerman has been a tax preparer and advisor since 2002, with a growing clientele of freelancers, business owners and professionals. Through her firm Personal Tax Advisors, Sunny specializes in helping clients take control of their tax planning by explaining the tax issues that affect them. She focuses on a gentle, non-threatening approach to financial issues and clear, jargon-free language.