Do you have unreported income? The Voluntary Disclosure Program may be able help you avoid CRA penalty charges. Keep reading to find out how…
Voluntary Disclosure Program
Due to Canada’s independent tax filing system, taxpayers must have a good understanding of their tax filing responsibilities. The Canada Revenue Agency’s (CRA’s) tax filing requirements vary depending on the whether the taxpayer is an individual, sole-proprietorship, partnership, trust, corporation, etc. Considering that many taxpayers may have different and multiple tax filing deadlines, it is not uncommon for taxpayers to mistakenly miss filing deadlines.
These honest mistakes can lead to large and unexpected interest charges and late filing penalties. It is precisely for this reason that the CRA administers the Voluntary Disclosure Program (VDP). The VDP allows taxpayers to come forward to correct previous errors and omissions in their dealings with the CRA.
Who can file a VDP?
Any taxpayer can make a disclosure under the VDP.
You can be an individual, business,trust, resident or non-resident, employer or payer. If the disclosure qualifies as a valid VDP, you will only pay the taxes you owe plus interest, and you will avoid any penalties and prosecution relating
to non-compliance with tax laws.
What qualifies as a valid VDP?
A valid disclosure must meet all of the following four conditions:
• it must be voluntary (i.e.: you should not have been notified by the CRA about outstanding tax responsibilities);
• it must involve an actual or potential penalty;
• it must involve information that is at least one year overdue; and
• it must be complete (i.e.: include all relevant information to support your disclosure submission).
Failure to provide required information may result in processing delays. Further, the CRA will deny your voluntary disclosure if it determines that any of the four conditions have not been met.
Named Disclosure vs. No-name Disclosure
Under a named disclosure, the identification of the taxpayer is stated on the VDP submission.
Under a no-name disclosure, the taxpayer does not disclose personal identification information. This option is attractive to taxpayers who are unsure whether they want to proceed with the disclosure. By disclosing all relevant facts and information surrounding the disclosure on a no-name basis, the taxpayer enters into preliminary discussions with the CRA about their situation. This allows them to better understand the risks involved in remaining non-compliant and the relief available under the VDP. Please note that these discussions are informal, non-binding, and general in nature. Following a preliminary ruling by the CRA, the taxpayer will have 90 days to provide their identity or the file will be closed.
How far back can I file under the VDP?
As noted above, one of the criteria for a valid disclosure is completeness. So all unreported information from all tax years must be disclosed under the VDP.
However, the Minister’s ability to grant relief is limited to 10 years before the calendar year in which the submission is filed. For example, if you file a VDP on December 31, 2014, relief is only available for the 2004 and subsequent tax years.
This can be a dilemma for taxpayers who have unreported income dating back to more than 10 years. Does the taxpayer disclose unreported information from all tax years and risk being denied relief for tax years outside the limitation period? Or do you disclose only 10 years of undisclosed information and risk having your VDP denied as your disclosure is incomplete?
There is no obvious answer in this situation. We strongly recommend you consult a tax expert for guidance on such matters.
Is there any relief for tax years outside the VDP’s 10 year limitation period?
Following recent court rulings and amendments to the Income Tax Act (ITA), it was determined that the CRA can collect a federal tax debt for 10 years after it is assessed. This amendment is effective starting on May 2014. Therefore, if you were assessed for a tax year, the CRA can collect debts relating to that tax year for only 10 years. After this 10 year period, the federal tax debt becomes uncollectible.
This provides relief for individuals looking to file VDP’s for tax years older than 10 years. Starting on May 2014, taxpayers can disclose all information and be shielded from facing penalties and interest for tax years not covered by the VDP’s 10 year limitation period.
What happens after I file the VDP?
Once a VDP has been initiated, this may lead to an investigation into other accounts the taxpayer has with the CRA. If you have multiple accounts (i.e. personal tax and corporate tax) with the CRA, you must ensure all errors and omissions are fully disclosed to avoid penalties and prosecution.
If the CRA reviews your VDP and denies the relief request, you can request a second administrative review, which will be carried out by a VDP officer not involved in the first review and decision. Further, if you feel the decision was unreasonable and unfair, you have thirty days from the date the decision was communicated to apply to the Federal Court for a judicial review of the final decision.
The Canadian tax system can be complex and ultimately places tax filing responsibilities on the taxpayers. As such, it is not uncommon for taxpayers to accidentally make errors or omit information. The penalties for non-compliance can be significant but can be avoided by filing under the Voluntary Disclosure Program. Contact you accountant for guidance and assistance in filing the VDP.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.