What is a 'Nudge Letter'?
A nudge letter is a non-formal communication from a tax authority, such as Canada Revenue Agency, designed to prompt taxpayers to review their tax affairs and ensure compliance.
Nudge letters are not accusatory but serve as a gentle reminder that the tax authority has data suggesting potential unreported income. These letters often target specific groups, such as online sellers or crypto investors, and encourage voluntary disclosure of undeclared income to avoid penalties or interest.
Nudge letters are cost-effective for tax authorities, shifting the responsibility to taxpayers to confirm their tax status. They are crafted to leverage behavioural psychology, creating a sense of urgency without escalating to legal action. However, ignoring them can lead to formal inquiries, making prompt responses critical.
CRA uses 'Nudge Letters' to Discourage Tax Evasion
The CRA has used nudge letters as a low-cost, behavioural economics strategy to encourage tax compliance. Specific examples include CRA having sent nudge letters to Canadians who received benefits such as the Canada Emergency Response Benefit (CERB) or Canada Recovery Benefit (CRB).
These letters reminded recipients of eligibility criteria and requested supporting documentation to verify claims, aiming to ensure compliance without immediate escalation to tax audits or repayment demands. Other nudge techniques included letters and phone reminders to encourage small business tax compliance.
Meanwhile, in the U.K., His Majesty's Revenue & Customs (HMRC) also issues Nudge Letters, although their use and context are different from that of CRA.
How to Report Undisclosed Income in Canada Under the Voluntary Disclosures Program
In Canada, the CRA operates the Voluntary Disclosures Program (VDP) to encourage taxpayers, including online sellers, to correct unreported income or inaccurate tax filings.
The VDP allows individuals to disclose previously unreported income, such as earnings from platforms like Amazon, Kijiji, or Shopify, without facing prosecution or full penalties, provided the disclosure is voluntary, complete, and made before the CRA initiates a tax audit or investigation.
This last point is crucial, as receiving a nudge letter might mean that CRA already has information that indicates tax non-compliance. In other words, the CRA suspects tax evasion.
If you received a nudge letter, it is important to act fast and contact an expert Canadian tax lawyer for assistance with filing an application under the VDP. While a simple nudge letter may not disqualify one from VDP eligibility, if the CRA initiates a full tax audit or investigation into the taxpayer's affairs, this has a greater chance of disqualifying the taxpayer from VDP eligibility. Thus, it is crucial to act before the CRA does.
The CRA is increasingly obtaining data from digital platforms and international tax agreements to identify non-compliance, meaning it could just be a matter of time until one's non-compliance is discovered. Consulting a top Canadian tax lawyer is advisable to navigate the VDP's eligibility criteria and increase the chances of a successful application.
HMRC in the U.K. sent 'Nudge Letters' to Online Sellers
HMRC has launched a fresh wave of nudge letters targeting U.K. online marketplace sellers suspected of not declaring income from platforms such as eBay, Vinted, Etsy, and others. These letters, sent in early 2025, cover income earned up to the tax year ending 5 April 2023 and are based on data HMRC received from online marketplaces.
The nudge letters state: "We have information that shows you've earned income from online marketplace sales up to the tax year ending 5 April 2023. You need to tell us about this income." Recipients have 30 days to declare their income or contact HMRC.
This crackdown follows new rules effective January 2024, requiring digital platforms to report user income to HMRC, with the first reports delivered by 31 January 2025. HMRC's access to this data makes it easier to identify sellers who exceed the ยฃ1,000 trading allowance, beyond which income must be declared and taxed. Sellers classified as "traders" (those regularly selling for profit) are particularly at risk. HMRC's "Help for Hustles" campaign and online tools assist sellers in understanding their obligations.
Pro Tax Tip: Act Fast to Secure the Benefits of The Voluntary Disclosures Program
The CRA's Voluntary Disclosures Program offers significant tax relief to encourage taxpayers to correct unreported income or inaccurate filings, provided the disclosure is voluntary, complete, and made before CRA enforcement actions that would otherwise uncover the non-compliance.
Accepted VDP applications result in a variety of benefits that apply to the most recent 10 tax years, including waiver of criminal prosecution for tax evasion, relief from gross negligence penalties (up to 50% of additional tax owed), and 50% reduction of interest for tax years prior to the three most recent years, though the principle taxes owed must still be paid in full.
FAQ
What happens if I ignore a 'Nudge Letter'?
Ignoring a nudge letter risks escalating to a formal tax investigation, which could result in potential back taxes owing and resulting penalties (based on non-compliance severity) and late payment interest. If the nudge letter escalates to a tax audit, that will jeopardize your eligibility to file an application under the VDP for this unreported income and capitalize on the benefits of the VDP.
Can I use the VDP if I've received a CRA 'nudge letter'?
You may still qualify for the VDP if the nudge letter is a general prompt and not tied to a specific instance of non-compliance, but it will depend on the circumstances. It is advisable to consult with an expert Canadian tax lawyer to determine if you are still eligible for the VDP in such a case.
Disclaimer: This article provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.