CRA Penalties & Interest: Complete Guide
Every CRA penalty and interest charge in one place. Late-filing, gross negligence, information return penalties, HST, payroll, foreign reporting, transfer pricing, interest rates, how penalties are calculated, taxpayer relief options and how to avoid them. Written by a licensed Ontario CPA.
How CRA Penalties Work
CRA penalties are automatic. They are not discretionary, not negotiable at the auditor level and not waived simply because you did not know about them. When a filing deadline is missed, an information return is not submitted or a false statement is made on a tax return, CRA's system calculates the penalty and adds it to your account. Interest begins accruing immediately on both the original tax owing and the penalty itself.
Understanding CRA penalties is essential because the penalty is often more expensive than the underlying tax. A $10,000 balance owing filed one year late generates a $2,200 late-filing penalty (5% + 12 months at 1% each) plus approximately $800 in compound interest at the current prescribed rate. The penalty-plus-interest cost of $3,000 represents 30% of the original tax, and it compounds every day the balance remains unpaid.
This guide covers every major CRA penalty, the interest calculation, worked dollar examples, your relief options and the checklist that prevents penalties entirely.
Complete CRA Penalty Reference Table
Income Tax Penalties (T1 and T2)
| Penalty | Section | Rate or Amount | When It Applies |
|---|---|---|---|
| Late-filing penalty (first offence) | 162(1) | 5% of balance owing + 1% per month (max 12 months) = max 17% | T1 or T2 filed after the deadline with a balance owing |
| Repeated late-filing penalty | 162(2) | 10% of balance owing + 2% per month (max 20 months) = max 50% | Filed late when the prior year was also filed late and a demand to file was issued |
| Failure to file on demand | 162(7) | $25 per day (min $100, max $2,500) | CRA issues a formal demand to file and you do not comply |
| Gross negligence penalty | 163(2) | 50% of the understated tax or overstated credit | Knowingly or under circumstances amounting to gross negligence, making a false statement or omission |
| Third-party civil penalty (advisors) | 163.2 | 50% of the tax benefit from the false statement (min $1,000) | Tax preparers, advisors or promoters who make or participate in false statements |
| Failure to report income | 163(1) | Federal: 10% of unreported amount (T1 only, if occurred twice in 4 years) | Income slip (T4, T5, T3, T5008) not reported on your return for the second time in a 4-year period |
Information Return Penalties
| Penalty | Section | Rate or Amount | When It Applies |
|---|---|---|---|
| T4, T4A, T5 summary late filing | 162(7) | $25 per day (min $100, max $2,500 per return) | Information return not filed by the deadline (typically Feb 28) |
| T5018 (construction subcontractor payments) | 162(7) | $25 per day per statement (min $100, max $2,500 per statement) | Each T5018 statement is penalized separately. A GC with 20 sub-trades = $50,000+ exposure per year |
| T1134 (foreign affiliate reporting) | 162(7) / 162(10) | $25 per day (max $2,500 per return; $12,000 if 24+ months late) | Foreign affiliate information return not filed on time |
| T1135 (foreign property disclosure) | 162(7) / 162(10) | $25 per day (max $2,500 per year; up to $25,000 for knowingly non-filing) | Foreign property exceeding $100,000 not disclosed. Penalty per year of non-filing. |
GST/HST Penalties
| Penalty | Section | Rate or Amount | When It Applies |
|---|---|---|---|
| GST/HST late filing (first offence) | 280.1(1) | 1% of balance owing + 0.25% per month (max 12 months) | GST/HST return filed after the deadline with a net tax owing |
| GST/HST late filing (repeated) | 280.1(2) | Assessed on demand, higher rates apply | Repeated late GST/HST filing after a demand is issued |
| GST/HST failure to register | 280 | Penalty based on HST that should have been collected but was not | Business exceeding $30,000 in revenue that did not register for HST when required |
| GST/HST false statement or omission | 285 | 50% of the net tax understated or ITC overstated | Equivalent to the income tax gross negligence penalty, applied to HST returns |
Payroll and Source Deduction Penalties
| Penalty | Section | Rate or Amount | When It Applies |
|---|---|---|---|
| Failure to remit source deductions (first offence) | 227(9) | 3% if 1-3 days late, 5% if 4-5 days, 7% if 6-7 days, 10% if 7+ days or not remitted | CPP, EI and income tax source deductions not remitted by the deadline |
| Repeated failure to remit | 227(9.5) | 20% of the unremitted amount | Second or subsequent failure within the same calendar year |
| Director liability for source deductions | 227.1 | Directors are personally liable for unremitted payroll source deductions | If the corporation fails to remit, CRA can assess directors personally. No corporate veil protection. |
Other Penalties
| Penalty | Section | Rate or Amount | When It Applies |
|---|---|---|---|
| Transfer pricing penalty | 247(3) | 10% of the transfer pricing adjustment | Intercompany transactions with non-resident related parties not at arm's length without contemporaneous documentation |
| Failure to keep adequate records | 238(1) | $1,000 to $25,000 fine and/or up to 12 months imprisonment | Failure to maintain books and records as required under Section 230 |
| Obstruction of audit | 238(1) | $1,000 to $25,000 fine and/or up to 12 months imprisonment | Refusing to provide records, obstructing an auditor, destroying records |
| Tax evasion (criminal) | 239(1) | 50% to 200% of tax evaded + up to 2 years imprisonment | Deliberately and knowingly evading tax. This is a criminal charge prosecuted by the Public Prosecution Service of Canada. |
CRA Interest Rates and How Interest Is Calculated
| Interest Type | Current Rate (2026) | How It Is Calculated |
|---|---|---|
| Interest on balance owing (income tax, HST, payroll) | 8% per year | Compounded daily from the original filing deadline, not from the date of reassessment |
| Interest on overdue instalments | 8% per year | Calculated from the instalment due date to the filing deadline or payment date, whichever is earlier |
| Interest CRA pays on refunds | 6% per year | CRA pays interest on refunds starting 30 days after the later of the filing date or the filing deadline |
| Interest on penalties | 8% per year | CRA charges interest on the penalty itself, compounded daily from the date the penalty is assessed |
Interest Runs From the Original Filing Deadline: This is the most misunderstood aspect of CRA penalties. If CRA audits your 2023 tax year and issues a reassessment in 2026, interest on the additional tax runs from the original 2023 filing deadline (June 15, 2024 for self-employed, April 30, 2024 for others), not from the 2026 reassessment date. That means two full years of 8% compound interest accumulates before you even receive the Notice of Reassessment. On a $20,000 reassessment, the interest alone is approximately $3,400.
Worked Dollar Examples: How CRA Penalties Add Up
| Scenario | Penalty Calculation | Interest (approx.) | Total Cost |
|---|---|---|---|
| $10,000 T2 balance, filed 6 months late (first offence) | $500 (5%) + $600 (1% x 6 months) = $1,100 | $400 | $1,500 |
| $10,000 T2 balance, filed 12 months late (first offence) | $500 (5%) + $1,200 (1% x 12 months) = $1,700 | $800 | $2,500 |
| $10,000 T2 balance, filed 12 months late (repeated) | $1,000 (10%) + $2,400 (2% x 12 months) = $3,400 | $800 | $4,200 |
| $50,000 gross negligence (Section 163(2)) | $25,000 (50% of understated tax) | $8,500 (over 2 years from filing date) | $33,500 |
| T5018 non-filing, 20 sub-trades, 1 year late | $50,000 ($2,500 per statement x 20) | N/A (penalty only) | $50,000 |
| T1135 non-filing, 3 years | $7,500 ($2,500 x 3 years) | $900 | $8,400 |
| $15,000 payroll not remitted, 10+ days late (first offence) | $1,500 (10%) | $200 | $1,700 |
| $15,000 payroll not remitted (second time same year) | $3,000 (20%) | $200 | $3,200 |
How to Get CRA Penalties and Interest Reduced or Waived
| Relief Option | What It Covers | How to Apply | Success Factors |
|---|---|---|---|
| Taxpayer Relief Application (RC4288) | Cancellation or reduction of penalties and interest within the past 10 calendar years | Submit Form RC4288 with supporting documentation to your tax centre | Extraordinary circumstances: serious illness, natural disaster, CRA error, postal disruption, financial hardship. Voluntary compliance history matters. |
| Voluntary Disclosure Program (VDP) | Reduced or eliminated penalties for unreported income, unfiled returns or incorrect claims. You come to CRA before they come to you. | Submit a VDP application through CRA's online portal or by mail | Disclosure must be voluntary (CRA not already investigating), complete (all years, all amounts), involve a penalty, and be at least one year overdue. |
| Instalment payment arrangement | Does not reduce the amount owing but prevents collections action (wage garnishment, bank freeze, property lien) | Call CRA Collections at 1-888-863-8657 or request through CRA My Account | CRA accepts most reasonable payment proposals. Minimum payment is typically the balance divided by 12 months. Interest continues during the arrangement. |
| Notice of Objection | Disputes the underlying tax assessment (not the penalty itself, but if the tax is reduced, the penalty recalculates) | File within 90 days of the Notice of Assessment or Reassessment | The objection is reviewed by a CRA Appeals officer independent of the original assessment. If you win the tax argument, the penalty automatically reduces. |
Voluntary Disclosure Can Eliminate Most Penalties: If you have unreported income, unfiled returns or incorrect claims from prior years, the VDP allows you to correct the record with significantly reduced penalties. Under the General Program stream, CRA typically grants relief from gross negligence penalties and prosecution referral. Under the Limited Program stream (cases involving deliberate avoidance), partial relief may be available. The key requirement is that you must come forward before CRA contacts you. Once CRA sends a letter, the VDP door closes for those years. Book Free Consultation →
How to Avoid CRA Penalties: 12-Point Compliance Checklist
- File T1 personal returns by April 30 (June 15 for self-employed, but balance owing is still due April 30)
- File T2 corporate returns within 6 months of fiscal year-end. Pay any balance owing within 2 months (3 months for CCPCs with prior-year income under $500,000)
- File GST/HST returns by the deadline for your reporting period (monthly, quarterly or annual)
- Remit payroll source deductions by the 15th of the month following the pay period (or by the due date for your remitter frequency)
- File T4, T4A and T5 information returns by the last day of February
- File T5018 subcontractor payment statements within 6 months of fiscal year-end (construction industry)
- File T1135 foreign property disclosure by the income tax filing deadline if specified foreign property exceeds $100,000
- File T1134 foreign affiliate information returns within 10 months of fiscal year-end
- Keep adequate books and records as required by Section 230 (receipts, bank statements, reconciliations, for 6 years)
- Pay quarterly instalments by March 15, June 15, September 15 and December 15 to avoid instalment interest
- Respond to CRA requests and proposal letters within the stated deadline (typically 30 days)
- Engage a CPA to prepare and review all returns before filing, ensuring accuracy prevents gross negligence exposure
Director Liability: When CRA Penalties Become Personal
Under Section 227.1 of the Income Tax Act, directors of a corporation are jointly and severally liable for the corporation's failure to remit payroll source deductions (CPP, EI and income tax withheld from employee pay), HST net tax and certain other trust amounts. This means CRA can assess directors personally for the corporation's unremitted amounts, plus the associated penalties and interest.
Director liability is one of the most serious risks for small business owners. The corporate veil does not protect you from unremitted trust amounts. If your corporation collects HST from customers and does not remit it to CRA, or withholds payroll taxes from employees and does not remit them, CRA can freeze your personal bank accounts, garnish your wages from other employment, register a lien on your personal property and collect directly from you.
The Two-Year Director Liability Window: CRA can assess a director for unremitted amounts within two years of the date the director ceases to be a director (resignation or removal). Simply resigning from a dissolved corporation does not immediately end the risk. If the corporation had unremitted source deductions at the time of dissolution, CRA has two years from the date of resignation to pursue the director personally. The only defence is the "due diligence" defence under Section 227.1(3), which requires proof that the director took reasonable steps to ensure remittances were made.
Frequently Asked Questions: CRA Penalties & Interest
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