What is the CRA Voluntary Disclosure Program? What must I know about it & take into consideration?
The tax regime in Canada is predicated on a system that expects taxpayers to be fully honest in their tax filings. However, we know that all too often individuals and businesses do misrepresent information on their tax return in order to avoid their full tax obligation. Other times, inaccurate tax filings are due to error. Fortunately, the CRA Voluntary Disclosure Program allows individuals and businesses to correct any misinformation on their tax returns voluntarily and without facing any penalty.
Penalties for Non-Disclosure
The Government of Canada is committed to cracking down on tax evasion and aggressive tax avoidance measures to ensure that the tax system is fair for all Canadians. The penalties for tax avoidance when discovered by the CRA can be severe. These include fines of up to $25,000 per charge and/or jail time for up to a year per charge. Other penalties can also be levied, depending on whether it is a first time offense and the length of time the tax remains outstanding.
For a first time offense, a late filing penalty is 5 percent plus 1 percent per month for each month the balance remains unpaid. Other late filings can be charged with a 10-percent penalty and a 2 percent per month charge for up to 20 months.
Gross negligence penalties can be up to 50% of the estimated tax that is owed. Interest is generally compounded at 6% daily.
What is the Voluntary Disclosures Program (VDP)?
The Voluntary Tax Disclosure Program provides the taxpayer with the opportunity to voluntarily disclose inaccurate or incomplete information, or disclose information not previously reported in their income tax filings.
Examples of what a taxpayer may not have reported are:
- Under-reported income
- Expenses claimed that were not eligible
- Failure to disclose foreign assets
- Failure to disclose foreign income
- Unfiled tax returns
The Benefits of the Voluntary Disclosure Program
The Voluntary Disclosure Program allows an individual to come forward and correct their previously incorrect filed return by replacing it with correct information, without facing any penalties or interest.
What Conditions Must Be Met for the Voluntary Disclosures Program?
Taxpayers (including individuals, employers, corporations, partnerships, or trusts) can make an application to the Voluntary Disclosures Program (VDP). However, certain conditions must be met to qualify for the program.
To qualify for relief, the application must:
- be voluntary. If the CRA has asked for information or discovers information from a third party, then you no longer qualify for the VDP. If the CRA has sent you a letter in the mail regarding your returns or you at all have information that the CRA may be close to discovering your incorrect information, you are disqualified from entering the program.
- be complete. You must include information related to all years that you believe that taxes are owing. If the CRA discovers additional years where taxes are owing, you will no longer qualify for relief for the years that were disclosed.
- must involve a potential penalty or interest
- include information that is at least one year past due for income tax applications; and
- include payment of the estimated tax owing.
Two Tracks: General and Limited
When an applicant fills out a Voluntary Disclosure application, he/she is processed either in a general or limited program. Which track the applicant enters depends on a number of factors, the most salient being whether the applicant acted out of intentional misconduct or whether it was an error.
Other factors that determine which track an applicant is processed include:
- the dollar amount involved;
- the number of years of non-compliance;
- the sophistication of the taxpayer/applicant; and
- whether efforts were made to avoid detection through the use of offshore vehicles and other means
The differences between the limited and general tracks relate to the extent of relief in the penalties and interest that may be forthcoming. However, as mentioned earlier, there can be no relief provided in the amount of taxes that must be paid as far as the principal tax owed.
The Limited Program provides limited relief—that is, while the applicant will not be referred for criminal prosecution and will not be charged gross negligence fees—he/she will still be charged other penalties and interest as applicable. Under the Limited Program, participants will also have to sign a waiver of their right to object and appeal in relation to the specific issue disclosed.
For those whose misconduct was the result of an error, he/she may enjoy relief from all penalties, referral for prosecution, and partial interest for the years preceding the three most recent years of returns. *Generally speaking, interest relief for the years preceding the three most recent years of returns is 50% of the interest applied for those years.
Please see table below for the differences in the consequences related to the Limited and General Tracks:
|General Program||Limited Program|
|Penalties||No||No gross negligence penalties, but other penalties will apply|
|Interest Relief||For the years preceding the three most recent years of returns. Full interest is still applicable for the three most recent years of returns.||No|
Generally, applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.
The voluntary disclosure program may be utilized by a taxpayer only once in their lifetime (barring any other exceptional circumstances).
It is imperative that those who apply to the Voluntary Disclosure Program are accepted into the program since penalties and accrued interest will be levied otherwise. For this reason, it is important to obtain the services of a tax lawyer to prepare your voluntary disclosure application to ensure both your acceptance into the program and to mitigate any consequences for non-disclosure.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019