Lifesaver: While resolving back tax issues, make sure to keep filing and paying your current taxes on time. This will both ensure that you don’t incur additional fines and will give you more credibility when you start paying down your older bills. In some cases, the tax agency may even be willing to remove your most recent fines since you have been staying current with your tax debts.

      3.2c Canadian tax consequences

      In Canada, if you haven’t filed or paid your employees’ payroll taxes — that is, money that comes out of the employees’ paychecks to pay income tax, Canadian Pension Plan (CPP), and Employment Insurance (EI) — and have only been paying the employees their after-tax salaries, you may end up paying a penalty.

      It won’t take long before Canada Revenue Agency (CRA) sends you a letter indicating that the payroll taxes have not been filed. This may seem like an easy letter to ignore; however, if you choose to ignore your taxes and not file, you will have a big problem.

      CRA may assess a penalty of 10 percent of the required amount you failed to deduct for income tax, CPP, and EI. If you fail to file again in a calendar year, CRA may apply a 20 percent penalty, especially if you knowingly made the decision to not deduct the payroll taxes. You could also be fined $1,000 to $25,000 or be imprisoned for up to a year.

      3.2d Relief for penalties and interest on taxes in Canada

      If you realize that your business is already behind on taxes, there are ways to resolve a back tax issue without losing control of the situation. The best way to start is to work with a reputable accountant immediately to determine your business’s debt and options. Allowing a professional accountant to examine the situation may result in better options than if you try to resolve the situation alone. Although you will have to pay for your accountant’s time, the recommendations he or she provides may save you more money than what you spent.

You may be able to have your penalties and interest waived or cancelled in the following situations:^[4]

      • Extraordinary circumstance, which means something out of your control prevented you from paying your taxes on time (e.g., flood, fire, postal strike, serious accident or illness, or death in the immediate family).

      • Inability to pay or a financial hardship. In this case, if accumulated interest causes prolonged financial hardship to the point that basic necessities cannot be provided such as medical help, food, transportation, or shelter.

      • Actions by the Canadian Revenue Agency (CRA), such as processing delays that prevent a taxpayer being informed in a timely manner about an amount owing, errors in information given to the public that caused errors in the taxes filed, incorrect information provided to tax payers, errors in processing, delays in providing information, or delays in completing an audit.

      If you fall into any of these categories, you may be able to get relief. You or your accountant can write to the CRA and ask that your penalties and interest be waived or cancelled. In some circumstances you may still have to pay the interest, but the CRA will reduce the amount.

      3.3 Prevent tax problems in the future

      The easiest way to prevent tax problems in the future is to always file and pay your taxes on time. If you are like many small-business owners, the management overhead of a business is often very time-consuming. Mundane tasks, such as paying taxes, can easily be forgotten when the business is busy. To ensure that you are staying on top of your taxes, set up a regular schedule for payments. If possible, outsource the work to a bookkeeper or an accounting service. Although the cost of these services may seem expensive, these vendors typically guarantee on-time, accurate filings. Since the cost of late payments is so significant, if you think you could be late even once throughout the year, you may save more money by hiring an outside vendor than you would by trying to file all of your taxes yourself.