New T4 filing penalties next year

Rules also apply to other information returns

Beginning next year, the Canada Revenue Agency (CRA) will levy new penalties against businesses that fail to file T4 information returns over the Internet when they have more than 50 T4 returns to file for a calendar year.

The new penalty rules will also apply to more than 20 other information returns, including NR4s, T4As and T4A-NRs.

The amount of the penalty will depend on the number of information returns of one type an organization is required to file with the CRA through Internet File Transfer, using extensible mark-up language (XML). For 51 to 250 returns, the penalty will be $250.

For 251 to 500 returns, the penalty will rise to $500. For 501 to 2,500 returns, the CRA can levy a penalty of $1,500. For more than 2,500 returns, the penalty will be $2,500.

"The CRA will be in a position to assess the mandatory electronic filing penalty on 2015 information returns that are processed in 2016," says spokesperson Magali Deussing.

The federal government first proposed the new penalty structure in its 2009 budget. At the time, it was expected the penalties would apply as of January 2010 when the government lowered the threshold for mandatory electronic reporting of certain information returns from 500 to 50. Employers below the threshold can to choose to file over the Internet or on paper.

Although the government amended the Income Tax Act in 2009 to include the new penalty structure, it did not revise regulations under the act to officially change the mandatory electronic reporting threshold from 500 to 50. The CRA said it would not assess penalties until the regulations were amended — they were published in the July 1, 2015 Canada Gazette Part II.

The CRA says it wanted to give filers, especially small businesses, time to get used to the new threshold and penalties.

But Internet filing is now so common, the CRA says, it should not be a problem for most businesses.

"Currently, 96 per cent of information slips are filed electronically; therefore, most filers will not be assessed a penalty," says Deussing.

The agency says even small businesses are becomingly increasingly likely to use the Internet to file information returns. Of the roughly 45,000 information returns it received from small businesses that fell within the 51- to 100-slip range for the 2012 tax year, more than 43,000 were submitted using the Internet. This indicates "over 95 per cent of the small business sector is voluntarily complying within the new requirements," it says.

The agency admits that businesses that do not yet file online may face some costs related to buying software to convert existing files to a format that they can send to the CRA over the Internet. It estimates the maximum annualized cost would be about $131 per small business.

However, the CRA says it can provide any filer with a way to file an unlimited number of prescribed information returns over the Internet for free, using its Internet File Transfer (XML) or Web Forms service.

The agency also says it chose the Internet over other electronic means, such as CDs and DVDs, for submitting returns because "it offers the most flexibility and low-cost options for all users." In addition, the agency says it is giving filers the choice of software to use for converting files for Internet transmission instead of mandating a specific one.

"The amendments do not prescribe the type of software to be used for the data conversion in order to allow businesses the greatest flexibility in choosing tools that best meet their needs."

Filers who are penalized for not submitting the returns electronically when required because their location in Canada prevents them from having Internet access can apply to have their penalties waived under the taxpayer relief provisions of the Income Tax Act, the CRA says.

While some employers may not be happy to hear there are new penalties coming, the CRA says the new penalty structure will be fairer for businesses than the current one. It says the existing penalty is "excessive where a large number of the same type of information return is filed."

Under the existing penalty, businesses that do not file an information return electronically when required to do so could be liable for a penalty of $2,500 for a first offence.

The agency says the current penalty is especially onerous when a business has a large number of the same type of information return to file because neither the Income Tax Act nor its regulations define the term "information return." As a result, both individual slips and related summary form are included in the definition.

"Although the individual slips and the related summary are filed together, each individual slip is considered to be a separate information return. Therefore, the existing penalty applies to each individual information return not filed in the manner required," the CRA writes in the Canada Gazette.

During the drafting of regulations to support the new penalty structure, the CRA says the CPA asked it to define the term "information return" in the Income Tax Act Regulations, but the CRA declined to do so.

"(S)ince this is a generic term that is used extensively in both the Act and Regulations, it is not suitable to define this term in the Regulations," the agency says.

This is the second graduated penalty system the CRA has implemented for employers filing information returns. In 2010, it introduced new penalties for failing to file T4, T4A, T4A-NR and NR4 information returns or distribute them to employees by the due date. The penalties are the greater of $100 or:

• $10 per day if the employer is required to file no more than 50 returns, to a maximum of $1,000

• $15 per day if the employer is required to file between 51 and 500 returns, to a maximum of $1,500

• $25 per day if the employer is required to file between 501 and 2,500 returns, to a maximum of $2,500

• $50 per day if the employer is required to file between 2,501 and 10,000 returns, to a maximum of $5,000

• $75 per day if the employer is required to file more than 10,000 returns, to a maximum of $7,500.

For small businesses, the agency applies a late-filing penalty of $100 or the following, whichever is greater:

• A flat penalty of $100 for employers filing one to five information returns.

• $5 per day if the employer is filing six to 10 information returns, to a maximum of $500.

• $10 per day if the employer is filing 11 to 50 returns, to a maximum of $1,000.

U.S. penalties

Canada is not the only country that applies graduated penalties for failing to file electronically when required. In the United States, the Internal Revenue Service (IRS) uses a graduated penalty structure based on the number of days late that an employer files its W-2 forms, which report wages paid and taxes withheld from an employee in a given year.

Employers have to submit the forms electronically to the Social Security Administration if they file at least 250 W-2 or W-2c forms.

If correctly filed within 30 days after the due date, the penalty is $30 per W-2, to a maximum of $250,000 per year (or $75,000 for small businesses). If the employer files the correct forms more than 30 days after the due date but by Aug. 1, the penalty is $60 per W-2, to a maximum of $500,000 a year ($200,000 for small businesses).

The IRS will fine employers who file the correct form after Aug. 1 or who do not file the form electronically at all $100 per W-2, to a maximum of $1.5 million per year ($500,000 for small businesses).

Within Canada, Revenu Québec is expected to levy similar penalties against employers that fail to file RL-1 slips electronically when they have more than 50 such forms to file. In 2009, the Quebec government announced it would harmonize its tax rules with the new federal penalties once they became law.

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