As a follow-up to my last article on key filing deadlines for estates, this article discusses tax penalties and interest. For executors, missing a tax deadline can come with serious tax implications, notably the application of a penalty and interest.

Late Filing Penalty

Under the Income Tax Act, there are several sections dealing with the application of penalties.  Deadlines are important and there is a penalty equal to five percent (5%) of the unpaid taxes payable when a tax return is filed late plus an additional one percent (1%) for each full month after the due date to a maximum of twelve (12) months.

Failure to Properly Report Income

There is an administrative penalty that can apply to a taxpayer who fails to properly report their income. Such penalty is usually ten percent (10%) of the unreported amount.

Gross Negligence Penalty

There is a gross negligence penalty that can be assessed if there is a misrepresentation knowingly or through neglect or carelessness in making a false tax return or an omission. The penalty for gross negligence is the greater of one hundred dollars ($100) or fifty percent (50%) of the amount of tax avoided.

The onus of proof for a gross negligence penalty lies with the Crown and it is a “heavy burden.”  The determination of a gross penalty is an objective test.  It is the Crown who must prove the taxpayer knowingly misrepresented or acted with a high degree of negligence or carelessness for such penalty to apply.

In practice, it is not uncommon for the Canada Revenue Agency to assess a gross negligence penalty leaving the taxpayer to object or appeal its application. If the taxpayer fails to object or appeal, the gross negligence penalty is confirmed and owing – this can be significant to an estate (or any taxpayer).

Interest Applies

Further to a penalty being assessed, interest at the prescribed rate is also charged on any overdue balances and that interest is compounded daily. The interest is charged on both the tax debt and the penalty applied. The prescribed rate is calculated quarterly and for the period of October 1st, 2024 to December 31st, 2024, the prescribed interest is nine percent (9%).

Executor’s Liability?

Can the executor be held personally liable for a tax penalty assessment? One would assume that can be the case for a late filing penalty and depending on the facts, the executor may also be liable for the failure to properly report income (if all the information was available) or for the gross negligence penalty (as a result of its conduct).

An executor should seek professional tax advice when completing the final tax return of the deceased to avoid missing a deadline or making an error or mistake that can result in a penalty being assessed and interest being charged on the overdue balance.