Owing Penalties in Both Countries: How the CRA's and IRS's Penalties Stack, What Each Program Waives, and the Order to Approach Them

Tax paid to one country is credited by the other; penalties are not. A cross-border taxpayer with an omission on both sides faces two independent penalty systems, each with its own rates, its own information-return penalties, its own interest, and its own disclosure program, and nothing on one side reduces anything on the other. The CRA's late-filing penalty is a percentage of the balance owing; the IRS's is a percentage of the unpaid tax; the CRA's T1135 penalty is per day; the IRS's Form 8938 penalty is per form; the CRA's gross negligence penalty is 50% of the understatement; the IRS's accuracy penalty is 20% (40% for undisclosed foreign assets). Each country's disclosure program waives its own penalties on its own conditions, and the conditions on both sides require that the agency has not already made contact. The taxpayer with two problems solves them as one project with two submissions.

Key takeaways

• No cross-crediting. Penalties and interest in one country are not creditable, deductible, or otherwise recognized in the other. Canada does not allow a deduction for US penalties; the US does not allow one for Canadian penalties.
• The stacks, for a common omission (unreported US brokerage income by a Canadian resident who is also a US person): Canada: late-filing penalty on the balance (if the T1 was late), T1135 penalties ($2,500 a year), arrears interest, and potentially a gross negligence penalty (50%); US: failure-to-file and failure-to-pay penalties (if no return), the accuracy penalty (20% or 40%), Form 8938 ($10,000 a year), FBAR (about $16,000 a year non-willful), interest.
• What each program waives: the CRA's VDP waives Canadian penalties (all of them, on a valid disclosure) and relieves part of the Canadian interest; the IRS's streamlined program waives US penalties for the covered years (all of them on the foreign track; all but the 5% on the domestic track). Neither touches the other country's penalties.
• The conditions are parallel: both require that the agency has not contacted the taxpayer about the matter; both require completeness; both require non-willful (or, for the CRA, non-fraudulent) conduct.
• Sequence: prepare both; file both within the same week; do not file one and wait.
• After assessment: the CRA's taxpayer relief and the IRS's reasonable-cause abatement are the fallbacks on each side, each on its own standard.

How the stacks build

Canada. For a year with an omission: if the T1 was filed on time but omitted income, no late-filing penalty, but arrears interest on the additional tax from April 30, and a possible gross negligence penalty (50% of the understated tax) where the CRA finds the omission was knowing or grossly negligent; a T1135 penalty of $25 a day to $2,500 for each year the form was required and not filed; a T1134 penalty if a foreign affiliate was unreported; and, on a late-filed T1, the late-filing penalty of 5% plus 1% a month (10% plus 2% for a repeat). Interest compounds daily at the prescribed rate plus 4%.

United States. For a year with an omission: if the 1040 was filed on time but omitted income, no failure-to-file penalty, but the accuracy-related penalty of 20% of the underpayment (40% for an underpayment attributable to undisclosed foreign financial assets), interest from April 15, Form 8938 ($10,000 per year), Form 3520 (up to 25% of a gift or 35% of trust amounts), Form 5471 ($10,000 per year), Form 8621 (open statute), and the FBAR (non-willful up to about $16,000 per year; willful far more). On an unfiled 1040, the failure-to-file penalty (5% a month to 25%) and failure-to-pay (0.5% a month) apply to the tax.

The two stacks are computed separately, on the same omission, and both are owed.

What each program waives

CRA VDP. On a valid disclosure (voluntary, complete, involving a penalty, at least one year past due): all penalties for the disclosed years, including late-filing, gross negligence, T1135, T1134, and NR4 penalties; partial interest relief (greater for unprompted applications under the 2025 rules); no criminal referral. The tax is assessed.

IRS streamlined. On a valid submission (non-willful; the track's conditions; no contact): all penalties for the covered three return years and six FBAR years (foreign track), or all except the 5% miscellaneous offshore penalty (domestic track). The tax and interest are paid.

Neither program affects the other country's penalties. A CRA VDP does not reduce a US Form 8938 penalty; a streamlined submission does not reduce a T1135 penalty.

The parallel conditions

Both programs require that the agency has not already contacted the taxpayer about the matter (the CRA: no enforcement action related to the disclosure; the IRS: no examination and, in practice, no notice about the foreign accounts). Both require completeness (the CRA: all years and issues; the IRS: all income and forms for the covered years). Both exclude willful or fraudulent conduct from the full relief (the CRA's program still accepts fraud disclosures with reduced relief in some cases; the IRS's streamlined program does not, and the VDP is the willful route).

Because the agencies share information, a submission on one side that is processed before the other is filed can produce the contact that closes the other program. The sequencing rule: both submissions prepared together and filed in the same week.

After assessment

Where a penalty has already been assessed on one side (the taxpayer filed late without a program; the agency found the omission), the fallbacks are each country's discretionary relief: the CRA's taxpayer relief provisions (Form RC4288; circumstances beyond control, CRA action, hardship, other) and the IRS's reasonable-cause abatement (a written statement showing ordinary business care) or first-time abatement (for failure-to-file and failure-to-pay only). Each is decided on its own standard; a successful CRA relief request has no bearing on the IRS's decision, and vice versa, though the facts (a preparer's omission; a serious illness) are the same facts.

Worked example

A US citizen in Toronto filed Canadian T1s on time but omitted $15,000 a year of income from a US brokerage account for five years, and never filed a T1135; she has never filed a US return.

• Canadian stack (no program). Additional tax on the omitted income (about $7,000 a year) with arrears interest; a possible gross negligence penalty ($3,500 a year); T1135 penalties ($2,500 a year for five years). Roughly $30,000 of penalties and interest across the years.
• US stack (no program). Three unfiled 1040s (the IRS's three-year policy under streamlined; six otherwise): failure-to-file and failure-to-pay on any tax (the foreign tax credit covers her salary; the US brokerage income is US-source and taxable in the US, a few thousand a year); Form 8938 ($10,000 a year); FBAR (about $16,000 a year); accuracy penalties. Roughly $80,000 of penalties across the years.
• With both programs. CRA VDP (unprompted): the tax and partial interest; no penalties. IRS SFOP: three returns, six FBARs, the tax on the brokerage income and interest; no penalties. Both filed the same week.
• Coordination. The US tax on the brokerage income for the three overlapping years is the foreign tax credit on the corresponding Canadian amended returns; the T1135s cover the account; the FBARs cover her Canadian accounts; the narratives match.

Official sources

Effective October 1, 2025, the CRA's Voluntary Disclosures Program grants an "unprompted" application general relief — "75% relief of the applicable interest" and "100% relief of the applicable penalties" — and a "prompted" application partial relief — "25% relief of the applicable interest" and "up to 100% relief of the applicable penalties"; in both cases the tax owing must be paid. — Canada Revenue Agency, Voluntary Disclosures Program, https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/voluntary-disclosures-program/changes-vdp.html

The IRS states that a US citizen or lawful permanent resident meets the non-residency requirement where, "in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed," the individual "did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days." Eligible taxpayers "will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties." — Internal Revenue Service, U.S. Taxpayers Residing Outside the United States, https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states

The CRA states that for penalties it "will consider a request only if it relates to a tax year or fiscal period ending in any of the 10 calendar years before the year in which you make a request," and the same ten-year window applies to interest; the request is made on Form RC4288 under the taxpayer relief provisions (Information Circular IC07-1R1). — Canada Revenue Agency, Cancel or waive penalties and interest, https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/cancel-waive-penalties-interest.html

The IRS states that the failure-to-file penalty "is 5% of the tax due... for each month or partial month the return is late" and "accrues up to a maximum of 25%," and that when both penalties apply "the failure to file penalty is reduced by the amount of the failure to pay penalty (0.5% for each month)." — Internal Revenue Service, Failure to File Penalty, https://www.irs.gov/payments/failure-to-file-penalty

Practitioner note

Two countries, two penalty stacks, and no bridge between them. The programs are the bridge, one on each side, and both have the same first condition: get there before the agency does. We build both submissions from one set of facts and file them together, because a disclosure on one side that lands first is the letter that closes the other.

See also: For the full picture of what each agency charges, see late-filing penalties on both sides of the border, and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the coordinated two-country disclosure with both penalty waivers, and the relief requests on each side where assessment has already occurred. See cross-border pricing or book a call.