What happens if CRA discovers I have unreported income?
If CRA determines during an audit that you did not report income, it will reassess you for the taxes owing on that income, plus interest. Interest runs from the date the tax was originally due, which can mean years of compound interest on top of the tax itself.
On top of interest, CRA can impose civil penalties for unreported income. A common penalty for repeated failure to report income is 10% of the amount that was unreported (20% if CRA previously issued a penalty for unreporting in the preceding three years). In cases of gross negligence or intentional concealment, the gross negligence penalty is 50% of the taxes owing on the unreported amount. Criminal prosecution for tax evasion is rare but possible when there is clear evidence of deliberate fraud.
If you realize you have unreported income before CRA contacts you, the Voluntary Disclosures Program (VDP) lets you come forward, pay the taxes and interest, and generally avoid penalties and prosecution. The VDP window closes once CRA has begun examining your file. A tax lawyer can help you assess whether the VDP is available and guide the application.
Key takeaways
- Unreported income results in taxes owing plus compound interest from the original due date.
- Repeat failures to report income attract a 10% (or 20%) penalty on the unreported amount.
- The gross negligence penalty can reach 50% of the taxes on the hidden amount.
- The Voluntary Disclosures Program may eliminate penalties if you come forward before CRA contacts you.