Behind on Your Taxes? How Back Filing Actually Works
Missed filing a return or five? Murtagh & Co. explains how CRA back filing actually works, why arbitrary assessments cost you more, and what the Voluntary Disclosures Program can do if you come forward first.
Ignore Your Back Taxes, and CRA Will Assess Them for You. The Estimate Is Rarely in Your Favour.
Most people who fall behind on filing didn't set out to become non-filers. It's rarely one big decision, it's a missed year that turns into two, then three, until the idea of catching up feels bigger than the problem itself.
Here's the part that gets missed: CRA doesn't need your cooperation to assess you. If you don't file, CRA can issue what's called a notional or arbitrary assessment, essentially estimating what you owe based on whatever information they have (T4/T5 slips from employers or banks, prior years' filings, industry averages) and billing you accordingly. Those estimates are almost always higher than what you'd actually owe if you filed properly, because they don't include your actual deductions, credits, or business expenses. And once that assessment is issued, the balance it creates starts accumulating interest and penalties immediately, whether or not the number is accurate.
What back filing actually involves
For individuals, that usually means catching up on missed T1 personal returns, one for each year you didn't file. CRA doesn't require a specific order, but working oldest to newest keeps the numbers consistent, especially where credits or carryforward amounts from one year affect the next.
For sole proprietors, there's an extra layer. Alongside those T1s, you'll need T2125 statements of business activities for each missed year, which means reconstructing income and expenses from bank statements, invoices, and receipts if your bookkeeping lapsed along with your filing. If your business was registered for GST/HST, or should have been (the threshold is $30,000 in revenue over four consecutive calendar quarters), those returns need to be caught up too. The upside: input tax credits on business expenses aren't lost, they just can't be claimed until the returns are actually filed.
The process itself isn't complicated, it's just tedious. Gather what's available: old T4/T5 slips, bank and credit card statements, receipts. CRA's My Account portal can also pull historical slip information CRA already has on file. File the actual returns, oldest to newest, with real numbers instead of CRA's estimate. Then address what's owed, whether that means a lump sum or a payment arrangement with CRA if the balance is significant.
What it actually costs to wait
Two things grow the longer a return sits unfiled: penalties and interest. The late-filing penalty on its own is 5% of the balance owing, plus 1% for every full month you're late, up to 12 months. If CRA has already charged you a late-filing penalty in any of the previous three years and sent a formal demand to file, that penalty jumps to 10% of the balance owing plus 2% per month, up to 20 months. On top of that, arrears interest compounds daily on both the tax owing and the penalties themselves, at a rate CRA sets and adjusts every quarter. None of that requires CRA to catch you first, it applies automatically once a return is late.
Why coming forward first matters
CRA's Voluntary Disclosures Program (VDP) was significantly overhauled in October 2025, and the update actually works in most non-filers' favour. There are now two tracks, and which one applies to you comes down to what kind of contact you've already had with CRA, not simply whether you've had any contact at all. A general educational letter or routine guidance from CRA doesn't count against you, your application is still considered unprompted, and unprompted applications get the best deal: full penalty relief and 75% interest relief. What actually pushes an application into the prompted track is CRA identifying a specific issue on your file, such as a letter about a particular discrepancy, a written or verbal notice with a deadline to correct something, or information CRA received from a third party about your non-compliance. Prompted applications can still qualify for up to full penalty relief and 25% interest relief. But that protection only applies if you actually file a complete VDP application and CRA accepts it, contact from CRA on its own does nothing for you, and once CRA has opened an audit or investigation into that specific matter, VDP is no longer available for it, on either track.
That's a real change from how VDP used to work, where almost any contact from CRA could close the door on relief entirely. The gap between the two tracks, 75% versus 25% interest relief, is still substantial on a multi-year balance, so it's worth applying before CRA's contact becomes specific to your file. VDP still requires the disclosure to be voluntary and complete (all relevant years, not just the convenient ones), for the return to be at least a year past its filing due date, and for the tax owing to be paid or a payment arrangement put in place. In plain terms: applying today still beats applying next month, and applying next month still beats waiting for a letter that names a specific problem.
What happens if you don't deal with it
Beyond the arbitrary assessments and compounding interest, CRA does have the ability to pursue non-filers criminally, not just financially. A Kelowna business owner is a documented example: after a pattern of failing to file personal and business returns over several years, he was fined $12,500 and sentenced to jail time. It wasn't an isolated incident either, the penalties escalated across multiple separate convictions as the pattern continued. (Source: Castanet News, May 2016.)
That's an extreme outcome, and most people who are behind on filing never get anywhere near it. But it illustrates the direction the risk moves in: the longer unfiled returns sit, the more CRA's tools (assessments, penalties, and eventually prosecution) come into play.
How Murtagh & Co. Can Help.
At Murtagh & Co. Financial Services we work with corporations and sole proprietors across the Okanagan to catch up on unfiled returns and get back in good standing with CRA. Whether you're behind by one year or several, we help you pull together what's needed, file accurate returns instead of relying on CRA's estimate, and put a plan in place for what's owed.
As a former trades business owner, I know how easily filing can slip to the bottom of the list when you're focused on keeping the business running day to day. The goal is always to get you caught up and set up so it stays that way.
Prefer to talk it through? Book a free 30-minute call at a time that works for you, or reach out at info@murtaghco.ca. No pressure, no jargon, just a straightforward conversation about where you stand.