November 2010 - The Bulletin Magazine

TAX TIPS CONTINUED
for each late month, to a maximum of 20 months. This
higher penalty would only be charged if the taxpayer has
also received a formal demand to file from the CRA.
If you file your return late because of circumstances
beyond your control, CRA may waive or cancel the latefiling
penalty they have charged you. If this happens,
complete Form RC4288, Request for Taxpayer Relief,
and mail it to CRA. Only requests relating to tax years
ending in any of the 10 calendar years before the year
you make the request will be considered. For example, a
request made in 2010 must relate to the 2000 or a
subsequent tax year to be considered.
If the taxpayer fails to pay the required amount of tax on
time, even if his or her return was filed on time, he or
she will be subject to arrears interest. The interest, which
is not tax deductible, is compounded daily and charged
at the CRA prescribed rate plus an additional four per
cent. The rate (changes quarterly) indicated below is in
effect from July 1, 2010 to September 30, 2010.
Income tax
• The interest rate charged on overdue taxes, Canada
Pension Plan contributions, and Employment Insurance
premiums will be 5%.
• The interest rate paid to corporate taxpayers on
overpayments will be 1%.
• The interest rate paid to non corporate taxpayers will
be 3%.
• The interest rate used to calculate taxable benefits for
employees and shareholders from interest-free and lowinterest
loans will be 1%.
The technical interpretation
In a technical interpretation (2005-0119721E5), the
CRA was asked to comment, in light of the legislation,
whether various penalties, fines and interest imposed by
various taxing statutes are deductible.
Penalties: The CRA responded that, under the new
legislation, no deduction is permitted for any fines and
penalties other than those specifically prescribed by the
tax regulations. Currently, only three penalties are
prescribed:
• the penalty for late payment of GST,
• the penalty for late payment of duties, and
• the penalty for the late remittance of the September
11 Air Travellers Security Charge.
Interest: The new non-deductibility rule does not,
however, generally apply to the deductibility of interest.
That being said, the Income Tax Act has its own specific
rule introduced in 1989 that specifically prohibits
interest on unpaid income taxes to be deductible. This
may be contrasted with the Excise Tax Act (which
imposes the GST), which does not contain a similar
provision and thus interest owing on late GST
remittance would be tax deductible.
With respect to interest on provincial taxes owing, the
CRA stated that such interest would also not be
deductible in computing income.
Finally, the CRA confirmed that any interest assessed
under the Canada Pension Plan Act or Employment
Insurance Act due to an untimely remittance of an
employer source deduction would be deductible in
computing business income.
Bookkeepers should set up separate accounts for
deductible and non-deductible interest and penalties.
Ian Hawkins is the principal of Mount
Albert Tax Company located next to
the Post Office on Centre Street,
Mount Albert.
26 The Bulletin | NOVEMBER 2010 www.TheBulletinMagazine.com