The Importance of reporting ALL income from information slips
Many people assume that if they fail to include an information slip with their income tax return, the Canada Revenue Agency ("CRA") will simply adjust the return to report the income and adjust the income tax accordingly.This is half correct!The other half of the equation is a little known penalty the CRA imposes for repeated failure to report income. This penalty arises when an income slip is not added in your tax return two times in a three year period.
This penalty consists of a 10% Federal, and 10% Provincial amounts. Whereas some penalties are applied against the uncalculated tax, this penalty is applied to the unreported income. If you voluntarily tell CRA about an amount you forgot to report, they may waive this penalty.
For Example, John filed his 2008 tax return early and hadn't received all of his T slips yet. After he filed, he received a T5 slip reporting $3.50 in interest income and didn't bother to request an adjustment because he thought the amount was trivial. The CRA then reassessed his return later to include the unreported income with no further issues. When John filed his tax return in 2010 however, he had forgotten about and then failed to report $2000 of RRSP monies he had withdrawn for his RRSP when he was tight for cash earlier in the year. When the CRA reassessed his 2010 return to include the unreported income, John was charged a $400.00 penalty, $200.00 Federal and $200.00 Provincial for repeated failure to report income plus interest.This effectively taxed his current income at over 60% due to his negligence in reporting $3.50 two years earlier! Another scarier way to look at it, is tax at over 10,000% on the original $3.50!
The moral of the story is that no matter how trivial, always report income included on income tax information slips.