What does a Demand to File letter look like?
A Demand to File letter, usually referred to simply as a Demand letter, is a request for a tax return from the Canada Revenue Agency (CRA).
CRA sends out demand letters for returns that
- Have not been filed
- Are likely to have tax owing
CRA doesn’t send out demand letters for every return that has not been filed. In fact there is no legal requirement to file a personal income tax return, unless there is tax owing. So CRA doesn’t bother pursuing unfiled returns if they believe the taxpayer has no tax owing or a refund coming.
Of course, if you don’t prepare your return, you don’t know if you owe tax – and technically neither does the Canada Revenue Agency. So what makes them perk up and start asking for a return?
CRA has all your slips
Payers in Canada – employers paying salaries, banks paying interest, investments paying dividends or capital gains – send out income slips to taxpayers in the form of T4s, T5s, T3s etc. Taxpayers use these slips to complete their tax returns.
But what some don’t realize is that a copy of every slip is supposed to be sent by the payer to the CRA at the same time. So CRA is aware of much of your income even if you don’t file a tax return. For income where there is some tax withheld at source, e.g. your salary, CRA can also see the withheld tax with regard to that income. CRA is therefore able to make a general guess at whether you’d owe tax or not, were you to complete your return.
If you haven’t file and CRA’s basic information on file suggests you might owe, you’ll eventually receive a Demand letter.
Yes, you’ll probably owe tax
Given the way CRA decides whom to send Demand letters to, it’s predictable that most people who receive them will end up owing tax if and when they file.
But it’s not 100% certain!
Remember that CRA is basing their guess on whether or not you owe, on the materials they have on hand, i.e., your slips. But there are other factors that can bring your taxes down or even generate a refund in some case, that CRA can’t see just by looking at your slips.
Five (or Six) Reasons To File Your Late Tax Returns
A loss on your self-employment
For example, CRA can see some of the income you earned through self-employment, if your payers issued a T4A slip. But they can’t see your business expenses until you file a return. If your expenses are high enough, they can cancel out or even exceed your income, creating a business loss. That can reduce or even eliminate a tax bill.
Business Deductions: The Reasonable Expectation of Profit
Deducting business-use-of-home expenses
Claiming RRSP contributions
RRSP contributions can also reduce your taxes. You may have made RRSP contributions in the year that CRA isn’t aware of.
Sheltering An Income Spike With RRSP Contributions
No, you’re not in trouble
Understandably, most people have an automatic stress response to a letter from the CRA. And yes, a Demand letter requires action: you must file a return, or have CRA file one for you.
But other than the fact that CRA is missing information (a tax return) that they want, you’re not really in trouble.
Yes, chances are you’ll have a tax bill. And if it does turn out you owe tax, you’ll also be levied a late-filing penalty and some interest. But when you file the return CRA is demanding, that return is no more likely to be audited than any other tax return.
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