How can being late be more costly than being wrong?
There are trade offs in taxes. Being wrong (filing on time but not having all the information to file 100% correct) can be a trade off you have to make versus filing late when all the information is assembled.
Tax is full of trade offs. Many times people don’t realize there is a trade off available to them. They think they must do a certain thing or file a tax return a certain way. When in fact there are options. Knowing your options is critical to long term tax reduction.
Here is what we consider a classic example:
Let’s say your business has a Goods and Services Tax (GST) return due today. You do not have all the information to complete it correctly. Maybe an invoice you know that should be printed and sent to the client is missing. There is some GST on that invoice. Or maybe you know you are missing some expenses and the GST on those expenses. You also know that it is impossible today to get that information in time to meet the filing deadline. The people that have that information are away or just not responding to your questions.
Here is the formula for this example:
Cost of Late > Cost of Correction
What costs more? Missing an amount of GST that should be reported and remitted today or filing the return tomorrow or next week?
The answer might surprise you. The penalty for filing late is calculated on the whole amount of GST due and is usually 1% of the amount owing plus 25% of the 1% penalty times the number of months the return is late. The penalty for amending a return is calculated on the amendment amount and actually can be zero if the Canada Revenue Agency (CRA) does not ask you for details on the amendment. The cost of filing late calculated on the whole amount will usually be larger than the cost of making a correction for the late information.
If you want to discuss the real world “formula” of tax costs you should avoid, please contact Grant Gilmour.