The Voluntary Disclosure Program (“VDP”) allows taxpayers to disclose incomplete or inaccurate information regarding their previous income tax filings in exchange for relief from criminal prosecution, penalties and interest. While the taxpayer is still left paying the tax, they can save significant amounts of penalties and interest, while relieving themselves of the stress of being found out by the CRA.
In this article, we outline common issues that taxpayers resolve through the VDP, requirements for a valid disclosure, and the two-track system the CRA applies to disclosures. Given what is at stake, taxpayers should consider retaining a tax dispute lawyer to advise them and assist with their disclosure.
Common Issues Addressed Through the VDP
Under subsection 220(3.1) if the Income Tax Act (“ITA”), the Minister has broad powers to cancel penalties and interest. Taxpayers commonly use the VDP to disclose the following errors:
- Failing to report taxable income
- Failing to disclose foreign property by filing the T1135 form
- Claiming ineligible expenses
- Failing to remit employee source deductions
Taxpayers can also make a disclosure under the Excise Tax Act, such as for unreported GST/HST liabilities or over-claimed input tax credits.
Requirements for a Valid Disclosure
- Must be voluntary: The CRA will not accept a disclosure from a taxpayer after the CRA has already started auditing or reviewing the taxpayer’s tax returns. CRA would consider such a disclosure to be involuntary, inferring that the only reason the taxpayer came forward was because they knew they were going to get caught.
This can be a significant concern for taxpayers with undisclosed foreign assets. Canada has agreements with many countries whereby foreign governments have committed to provide CRA with information about Canadians who hold assets in their country. This includes information regarding partnerships, corporations and trusts. If the CRA acquires information about a taxpayer’s assets, before that taxpayer files a disclosure, the VDP is no longer available and the taxpayer will be left paying the full penalties and interest.
- Must be complete: The application must accurately disclose all relevant facts and information relating to the taxpayers’ previous inaccurate, incomplete or unreported tax filings. If a taxpayer does not have the records to determine how much income they had for a certain period, they must make a reasonable effort to accurately estimate the income for that period.
Unfortunately, CRA can only waive penalties and interest for the most recent ten years. This raises significant issues for taxpayers considering making a voluntary disclosure of filing errors that extent more than ten years in the past.
- Must relate to an actual or potential penalty
- Must include information relating to a tax year that is at least one-year in the past
- Must provide payment of estimated tax owing or propose payment arrangements
If you file a disclosure and CRA deems any of the above requirements unsatisfied, they may use the information you provided to assess you the tax and charge full penalties and interest.
Two Track System
If the CRA decides a disclosure is valid, they will place it in one of two “tracks”. These tracks are:
- General Track: Intended for unintentional errors and minor tax filing discrepancies. The CRA will waive the penalties and typically reduce the interest they charge by 50%.
- Limited Track: Intended for cases involving major non-compliance. Under this program, the taxpayer will not receive gross negligence penalties or be referred for criminal prosecution. The Taxpayer remains responsible, however, for paying full interest and other penalties (such as late filing fees).
The CRA considers the Limited Track for cases involving offshore accounts, overseas investments to avoid paying Canadian tax, large outstanding amounts owing, and taxpayers with a history of extended non-compliance.
CRA auditors also consider the following criteria for the Limited Track:
- Whether the taxpayer tried to avoid detection by using offshore vehicles
- The number of years of non-compliance
- The taxpayer’s level of sophistication
- Whether the taxpayer made the disclosure only after the CRA made a statement in the media regarding a particular area of focus or after the taxpayer received a generic letter from the CRA about a compliance issue for a specific sector.
How We Can Help
The VDP is a valuable means of allowing taxpayers to rectify past reporting errors, minimize the financial consequences, and eliminate the stress that comes from fearing getting found out by the CRA. But the requirements for a valid disclosure and the two track system make disclosures uncertain and increase the risks associated with filing a disclosure.
At HazloLaw – Business Lawyers, we have extensive experience helping taxpayers determine the full extent of their options and put their best foot forward when disclosing to the CRA. We often work in collaboration with our clients’ accountants to provide comprehensive advice. If you believe you may have filed previous tax returns incorrectly, please contact us to discuss your options.
Dean Blachford, Tax Litigation Lawyer, HazloLaw-Business Lawyers
Leslie Robinson, Law Student