INTEREST & PENALTIES

The CRA charges interest on any unpaid amount and imposes penalties for specific failures. Interest is compensation for late payment; penalties punish late filing, non-reporting and misconduct. Both can sometimes be reduced through taxpayer relief or a voluntary disclosure.

INTEREST

Rate: the prescribed rate plus 4 percentage points, set quarterly. For October to December 2026, the rate on overdue tax is 7 percent per year.
Compounded daily, starting May 1 on any balance owing (even for June 15 filers).
Also charged on penalties, from the day the penalty is assessed.
Refund interest is paid on overpayments at a lower rate (5 percent for October to December 2026), starting 30 days after the later of the balance due date and the filing date.
Interest charged by the CRA is not deductible.

LATE-FILING PENALTY

5 percent of the balance owing, plus 1 percent for each full month the return is late, up to 12 months (maximum 17 percent).
Repeated late filing: if a penalty was charged in any of the three previous years and the CRA issued a demand to file, the penalty is 10 percent plus 2 percent per month, up to 20 months (maximum 50 percent).
No penalty if no tax is owing, which is why filing on time with a balance owing is better than filing late.

REPEATED FAILURE TO REPORT INCOME

Failing to report an amount of $500 or more in the current year and in any of the three previous years leads to a federal penalty equal to the lesser of 10 percent of the unreported amount and 50 percent of the difference between the understated tax and any tax withheld on that income. Provinces may add a similar penalty.

FALSE STATEMENTS OR OMISSIONS (GROSS NEGLIGENCE)

Knowingly, or with gross negligence, making a false statement or omission leads to a penalty of the greater of $100 and 50 percent of the understated tax or overstated credits. The CRA can also reassess beyond the normal three-year period in these cases.

OTHER PENALTIES

Failure to file information returns such as T1135: $25 per day up to $2,500.
Failure to report the sale of a principal residence: up to $8,000.
Third-party civil penalties for preparers and promoters.
Criminal prosecution for tax evasion, which can lead to fines of 50 to 200 percent of the tax evaded and imprisonment.

EXAMPLE

A return with a $4,000 balance owing is filed four months late. The late-filing penalty is 5% + 4 × 1% = 9% of $4,000, or $360, plus daily-compounded interest at 7 percent on both the tax and the penalty.