What Happens When You Underpay?
Balance Due
If your tax return shows you owe money, the CRA will send you a Notice of Assessment (NOA) outlining the balance.
You’ll need to pay this amount by the payment deadline, typically April 30 for most taxpayers.
Interest Charges
Interest starts accruing on the unpaid balance the day after the payment deadline.
The CRA charges compound daily interest, meaning the longer you delay payment, the more you’ll owe.
Penalties
If you file late and owe taxes, the CRA will charge a late-filing penalty of 5% of the balance owing, plus 1% for each month late (up to a maximum of 12 months).
Repeated late filing can result in higher penalties.
What to Do If You Underpaid
Pay Your Balance
Make a payment as soon as possible to reduce interest charges.
Use one of the CRA’s payment options, such as online banking, pre-authorized debit, or My Payment.
Set Up a Payment Plan
If you can’t pay the full amount immediately, contact the CRA to set up a payment arrangement.
While you’ll still incur interest, this ensures you avoid further penalties and maintain good standing with the CRA.
Review and Adjust Withholdings
If you consistently underpay, consider adjusting your tax withholdings (via Form TD1) or pre-paying installments if you’re self-employed.
How to Avoid Future Underpayments
Track Your Income: If your income fluctuates (e.g., self-employment or investments), keep a running estimate of your tax obligations.
Use Tax Software: Tools like CloudTax can help you calculate and file accurate returns.
Review Your Deductions: Ensure your employer or financial institution withholds enough tax during the year.
Consider Installment Payments: The CRA may require you to pay taxes quarterly if you frequently owe large balances.
Why This Matters
Underpaying your taxes can be stressful, but understanding your options and acting quickly helps minimize penalties and interest.