CRA late filing penalty and interest: what it costs a BC business in 2026
The CRA late filing penalty is 5% of the tax you owe on the due date, plus 1% of that balance for each full month the return is late, up to 12 months. On top of the penalty, the CRA charges interest on the unpaid tax at 7% for October to December 2026, compounded daily, from the day after the balance was due.
The same structure applies to a personal return (T1, including a sole proprietor's T2125) and a corporate return (T2). The penalty is only charged on tax unpaid at the deadline. File late owing nothing and the late filing penalty is zero.
The three charges, in plain terms
1. Late filing penalty (first time). 5% of the balance owing, plus 1% per full month late, maximum 12 months, so the cap is 17%. Individuals: CRA: late-filing penalty. Corporations: CRA: corporation penalties.
2. Repeat late filing penalty. 10% of the balance owing, plus 2% per full month late, maximum 20 months, so the cap is 50%. It applies if the CRA sent a demand to file and you were charged a late filing penalty in any of the three previous years (2022, 2023 or 2024 for a 2025 T1). Same two sources.
3. Interest. Charged on unpaid tax, and on penalties once assessed, at the prescribed rate for overdue taxes, set each quarter. For October 1 to December 31, 2026 it is 7%: CRA: prescribed interest rates, Q4 2026. It compounds daily.
Deadlines that matter: a self-employed person's 2025 T1 is due June 15, 2026, but the balance was due April 30, 2026, so interest starts May 1 even on a return filed on time (CRA: filing dates). A T2 is due six months after year end; the balance is due two months after year end, or three months for most small Canadian-controlled private corporations claiming the small business deduction (CRA: balance-due day).
Worked example: a Kelowna plumber files four months late
A sole proprietor owes $12,000 on the 2025 return. The return should have been filed by June 15, 2026 and the balance paid by April 30, 2026. She files and pays on October 15, 2026.
Late filing penalty: 5% of $12,000 = $600, plus 1% × 4 full months = $480. Total penalty $1,080.
Interest on the $12,000 from May 1 to October 15 (168 days). Using the Q4 2026 rate of 7% throughout as an illustration (check the earlier 2026 quarters, since the rate can change every three months): $12,000 × ((1 + 0.07/365)^168 − 1) ≈ $390.
Interest on the penalty from June 15 to October 15: roughly $30.
Total cost of being late: about $1,500 on a $12,000 bill, or 12.5%. As a repeat late filer with a demand on record, the penalty alone would be 10% + 2% × 4 = 18%, or $2,160.
A corporation works the same way. A T2 with $20,000 unpaid, filed six months late: $1,000 + $1,200 = $2,200 penalty, plus daily compound interest from the balance-due day.
How the interest math works (no calculator needed)
Daily rate = annual prescribed rate ÷ 365. Amount owing after N days = balance × (1 + daily rate)^N. Interest is that amount minus the balance. When the quarter changes, take the new balance and continue at the new rate. That is all a "CRA interest calculator" does.
Instalment interest and penalty
Miss required instalments and the CRA charges instalment interest at the same prescribed rate, compounded daily, from each due date. If that interest is more than $1,000, there is also a penalty: half of the amount by which the instalment interest exceeds the greater of $1,000 or 25% of the interest you would have owed with no instalments at all. Individuals: CRA: instalment interest and penalty. Corporations: CRA: corporation penalties.
Rates verified on 2026-10-25.
FAQ
Does the late filing penalty apply if I owe nothing? No. It is a percentage of the balance unpaid on the due date, so a nil balance means a nil late filing penalty. Interest also only runs on unpaid amounts.
Can I reduce the penalty by paying before I file? Yes. Paying the estimated balance by the due date stops interest and sets the penalty base to zero, even if the return itself goes in late. Filing on time and paying late is the cheaper mistake; paying on time and filing late can cost nothing.
Is CRA interest tax deductible? No. Interest and penalties on income tax are not deductible for individuals or corporations.
Can penalties and interest be cancelled? The CRA can waive them under taxpayer relief if circumstances beyond your control (serious illness, disaster, CRA error) caused the delay. Relief is discretionary and limited to the ten previous calendar years. Being busy on job sites does not qualify.
Does the 7% rate apply to the whole year? No. It applies October 1 to December 31, 2026. Each quarter has its own rate on the prescribed interest rates page; check the current rate for other periods.
A trades owner should talk to an accountant as soon as a return is going to be late, before the CRA sends a demand, because the repeat penalty doubles the cost and a proper estimate paid on time removes most of it.
How Murtagh & Co. Can Help.
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Murtagh & Co. was founded by Devon Murtagh, CFA, FRM, a former trades business owner.
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