The Short Answer Is ‘Yes’
Filing old late tax returns. Should you do it? I know I’m biased. I am a tax professional and I prepare tax returns for a living. Of course I’m going to tell you to file your tax returns. But bias or no, it’s actually true. There’s almost no situation where you’re not at least somewhat better off for having filed old returns.
Reason #1: It gets CRA Off Your Back (And Can Bring Your Tax Bill Down At The Same Time)
The first one may seem obvious, but if the Canada Revenue Agency is already sending you letters demanding a tax return, you should file. If you don’t file when requested to do so, they’re probably not going to put you in jail. What’s much more likely is that they’ll just file a return for you. This might not be so bad if it weren’t for the fact that they always make up the crappiest return possible. And even though the tax return is completely made up, and even though even CRA knows it’s probably not accurate, the tax bill stands – until you override it by filing your own version of the return.
Filing Your Own Version Poses No Risk
If you then go ahead and file your own version showing a better outcome, it does not make the you more likely to be audited. It’s been our experience that CRA will generally replace their version with yours – reduced tax bill and all – no questions asked.
Reason #2: CRA May Owe You Money
The law says you’re only obliged to file a tax return in Canada if you owe tax, or if the Canada Revenue Agency has specifically requested it. So what if neither of those apply to you? If you know you earned too little to owe tax, and CRA hasn’t specifically requested the return, should you file? Again: the answer is probably yes.
Most returns show either an amount owing, or a refund. Very few returns come out exactly at zero – nothing owed, nothing refundable. Instead, what tends to happen is that taxpayers who earn too little to be taxable, are usually entitled to money of some kind, usually due to benefits linked to low income. But Canada Revenue Agency doesn’t know that you’re a low or moderate income earner until you file a return.
Reason #3 – Tax Refunds
Another way that you can have money coming to you is actually having a tax refund. A tax refund is the result of having more tax set aside for a year, than your income actually requires. This is usually the case with salaried employees. The employer withholds an estimate of tax on every paycheque, but that estimate tends to be a little high. Completing a tax return calculates your actual tax liability, and you get a refund if the withholding is a little more than you actually owe; which it typically is. In a case like that, filing return will release that tax refund.
File Before The Return Is 10 Years Old
If you want to collect a tax refund, the furthest back you can file is 10 years. So if you know that there’s a tax refund waiting for you for a tax year that is 10 years ago, get that return filed before the end of the year because after the end of the year, that tax return becomes lost to you and that refund is just gone.
Beyond Money: The Emotional Benefits of Filing
All the preceding points are practical reasons to file an income tax return. But there is another angle to this, which in my experience is just as important: the psychological angle, the emotional angle. It’s sometimes implied that emotions aren’t as important as money; but actually money is only important because of the way it affects our emotions.
Unfiled tax returns are often an emotional burden. Every time you think about your unfiled returns and you feel a little bad about it, it’s draining some of your energy. It’s taking something from you.
And a big part of that emotional burden is the not knowing. When you haven’t completed tax returns to calculate your tax owing, you have no idea how bad it is.
My personal experience filing old returns for clients – no matter what the tax outcome – is that every single one of them feels an enormous sense of relief by bringing their tax filing up to date. Knowing is the first step to slaying the monster under your bed.
The Power of Knowing
Not knowing what your tax situation actually is means you can’t do anything at all. You can’t plan, you can’t make arrangements or solve the problem. You can’t do anything until you know, and you don’t know what it is until you file. Whatever your fear is, filing your overdue tax returns will make you feel better. I have never had a situation where that wasn’t the case.
If it’s weighing on you, file those old returns. Nothing is actually worse than the feeling that you’re having right now.