How are late fees calculated on Personal Income Tax Owing’s?
Should you owe tax after the completion of your income tax return, the due date for your remittance is traditionally April 30th. If you do not make a payment by this due date, the tax owing will be subject to a series of late penalty fees, graduated interest rates, and monthly interest rates until it is paid in full.
What are all the penalties applied?
- On May 1st, an automatic 5% penalty is applied to the total tax owing.
- Starting May 1st, going forward every day, an annual interest rate of 6% is compounded daily. This is a daily compound rate of approximately 1.64%
- Starting May 31st, a 1% late penalty is added to the total amount as of May 31st due to being one month late in paying your tax owing. This repeats on June 30th, July 31st, Aug 31, Sep 30, so forth for a total of 12 months from May 1st.
- Example: Tax owing, $10, 000 – no payment made until May 31st of the same year
- Tax Owing on May 1st: $10, 672.20 to account for the initial 5% late penalty fee and 1.64% daily interest on the original $10, 000 tax owing amount.
- Tax Owing on May 2nd: $10, 847.22 to account for the daily interest rate of 1.64% on $10, 664.
- Tax Owing on May 3rd: $11, 025.12 to account for 1.64% compound interest on $10, 847.22
- Tax Owing on May 4th: $11, 205.93 to account for 1.64% compound interest on $11, 025.12
- Tax Owing on May 30st: $17, 105.33 to account for all the compounding interest since May 4th
- Tax Owing on May 31st: $17, 559.52 to account for the compounding interest, and the 1% late fee that is added at the end of each month you still have tax owing to the government.
As you can see, the compounding interest adds fast, and the monthly penalty of 1% also impacts the tax owing significantly. There it is highly advisable to pay your tax owing amounts on time to prevent it from spiralling out of control.
If you need assistance with late income tax filing or want consultation on your personal tax planning, reach out today for a consultation.