Tax Tip Thursday

We are going to talk about something that does not happen very often, but clearly still does happen

Fined for filing a paper return

A taxpayer is the owner of an inactive company that was fined $1,000 for filing their 2024 tax return by paper.

He did not think twice when he sent the Canada Revenue Agency a three-page, nil income tax filing by paper for his inactive film production company earlier this year. He had done it for years and never had an issue.

So, imagine his surprise when CRA sent back an acknowledgement of his business declaration… and a $1,000 fine for filing it by paper instead of electronically.

His corporation was one of nearly 5,000 inactive companies that were fined $1,000 for filing their 2024 tax return by paper, raising questions about whether a 2023 legislative change is overly broad and harsh.

The fine stems from quiet changes in the Liberals’ 2023 Budget Implementation Act. Until then, only companies with $1 million or more in revenue were compelled to file their tax returns electronically or face a fine, barring a handful of exceptions.
But with the 2023 bill, the Liberals removed the $1 million threshold, compelling most companies — including most inactive ones — to file their returns electronically or be fined $1,000 as of the 2024 tax year.
The only exceptions are insurance corporations, non-resident corporations, corporations reporting in functional currency, and tax-exempt companies such as charities, Crown corporations and pension corporations.

According to CRA data, the change appears to have come as a surprise for 11,640 companies — including 4,840 dormant ones. They were all fined $1,000 by CRA last year for still sending in a paper tax filing despite being newly ineligible.
But there are good reasons for people to keep filing on paper for dormant corporations such as his. They include speed (it’s only a three-page form), ease for the technologically challenged and the cost of upgrading old but functional IT to meet CRA’s electronic filing requirements.

For example, his computer does not hit the minimum operating system requirement to file his returns electronically, which means he would have to shell out hundreds of dollars for a new computer.
“It cost me $2 to print off three pieces of paper. I pull up my fillable PDF that I filled out last year, I change the date, I print it off, I sign it, I stick it in my envelope with my personal tax returns and off it goes,” the tax payer said.

CRA spokesperson Sylvie Branch said in a statement that the agency has no choice but to apply the maximum $1,000 fine to all contravening companies because the law does not allow for any discretion. “The legislation does not provide for exceptions related to inactive corporations or those with no revenues, expenses, or taxes to pay,” Branch wrote.

“The CRA is required to follow and administer the legislation. The penalty… is not discretionary. However, the legislation provides exceptions,” she added.

If the goal of the 2023 policy was to drastically reduce the number of corporations filing their tax returns by paper, CRA’s data suggests it’s working. The number of corporate income tax returns filed on paper from companies with under $1 million in revenue fell gradually from 235,820 in 2015 to 115,080 in 2023.

But once the exception disappeared and the $1,000 paper filing penalty applied to many of those companies as well, corporate paper filers dropped by half to just under 60,000.

In her statement, Branch said taxpayers who believe they shouldn’t have to pay the fine can apply for relief directly to the agency.

The agency has “discretion to cancel or waive penalties and interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control. These can include financial hardship, actions of the CRA such as delays, extraordinary circumstances such as illness, and other circumstances outside the taxpayer’s control,” she said.

We have had circumstances where clients come with previous year’s tax returns that were paper filed and filled out with a pen.
They are few and far between at this point, but they still happen. Unfortunately, at this point, if you are going to own a corporation and file tax returns, my suggestion is to do it electronically.

Our team can help you avoid this pitfall!  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.