Unfiled Tax Returns in Canada: Penalties, VDP & Fixes

Canada’s tax system is a system of self-reporting. This feature is explicitly stated in subsection 150(1) of the Income Tax Act. This subsection requires taxpayers to file a tax return “without notice or demand for the return, for each taxation year of a taxpayer.” This means that taxpayers are required to report their own taxes honestly and on time. When taxes are not filed on time or not filed at all, there is a myriad of different issues that may arise.

For example, taxpayers who do not file their tax returns may face penalties and interest on the tax they may owe or face arbitrary assessments. Ultimately, unfiled taxes lead to uncertainty and make it difficult to manage your affairs, as one mistake in filing your taxes can lead to others.

Within the CRA, there is the Non-Filer Program (NFP) that takes measures to address unfiled taxes. This program follows a process for taxpayers that it identifies as non-filers.

This involves making initial contact that demands you file your outstanding tax returns. Under subsection 150(2) of the Income Tax Act, if the CRA makes this type of demand, there is a legal obligation to comply, or there may be adverse consequences. If no tax returns are filed, the CRA may arbitrarily assess you, impose penalties and interest on any taxes owing, or pursue criminal prosecution in serious cases.

“Canada’s self-reporting system puts the entire administrative burden on the taxpayer, so the moment you fall behind, the CRA’s tools start working against you instead of for you. An arbitrary assessment, an open-ended reassessment clock and, in the more serious cases, prosecution are all things a taxpayer can generally avoid simply by filing, even late.” (David J. Rotfleisch, Certified Specialist in Taxation and experienced Canadian tax lawyer)

The purpose of this article is to provide readers with an overview of the different aspects of filing taxes and how unfiled or late-filed taxes may have adverse consequences. In particular, the article will begin by outlining the due dates for filing taxes, who can be held liable for unfiled taxes, the consequences of unfiled tax returns, and how a taxpayer may be able to rectify or avoid these issues.

Background and Legal Context: Filing Deadlines and Liabilities for Unfiled Taxes

When You Should Be Filing Your Taxes

The deadline for filing taxes will vary depending on how you earn your income. There are four different deadlines that may apply depending on whether you are an individual, an individual who carried on business in the year, a corporation, or a trust. Section 150 of the Income Tax Act provides the deadlines for filing tax returns. These are described below.

Under subparagraph 150(1)(d)(i) of the Income Tax Act, if you are an individual, such as someone who is solely earning employment income, the deadline is on or before April 30 of every year.

If you are an individual who carried on business in the year (i.e., a self-employed person), the deadline to file a tax return is extended to June 15 under subparagraph 150(1)(d)(ii).

For a corporation, the deadline is flexible because it is based on the corporation’s year-end. The general rule under paragraph 150(1)(a) is that a corporation resident in Canada must file its taxes within six months after the end of the corporate tax year. The corporation’s taxation year is its fiscal period, which can be any 12-month period that the corporation wishes, but cannot be longer than 53 weeks.

This provides flexibility for the corporation in the sense that the time that the corporation may have to pay taxes can be tailored to fit an appropriate time for the corporation. For example, if a corporation is incorporated on January 1, 2026, and chose August 31 as its tax year-end, it will have a short year in 2026.

The corporation’s first tax year will be from January 1, 2026 (when it incorporated) to August 31, 2026 (tax year-end). Then, from September 1, 2026, to August 31, 2027, it will have its first full tax year. The deadline to file the corporation’s taxes will be six months after August 31, which will be in February of the next year.

For a trust, the deadline is generally 90 days after the end of the trust's taxation year, under paragraph 150(1)(c) of the Income Tax Act. This 90-day deadline applies to trusts generally, not only to the estate of a deceased individual discussed below.

Special Rule: Deceased Individuals

When an individual passes away, the final tax return for that person is filed. This is called the terminal return. If the person died after October of the year and before the day that would be the individual’s filing due date for the year (April 30 in most cases), then the filing due date is the later of the day the return should have been filed if the individual were alive and six months after the day of death (paragraph 150(1)(b)). If the person died between January 1 and October 31, then the terminal return is due April 30 of the year following the death.

The deceased's legal representative, such as an executor or administrator, is responsible for filing the terminal return, even where the deceased had unfiled returns from prior years outstanding at the time of death. See our guide to tax return filings on death for a fuller discussion of the terminal return and related estate filing obligations.

It is important to differentiate between the deceased and any trusts or estate that may be created upon his or her death. Specifically, once deceased, the person’s estate may be required to file tax returns. For trusts or estates, taxes must be filed within 90 days from the end of the year (paragraph 150(1)(c)).

In sum, when a person dies, there remains an obligation to file that person’s final tax return, and that obligation continues with the trust or estate that is formed upon his or her death.

Income Earned and Property Situated Abroad: Corporations and Individuals

Many Canadian taxpayers may be under the impression that earning income in a foreign country will exempt them from any tax payable in Canada. The Income Tax Act is designed so that income that is earned by a taxpayer resident in Canada is taxable in Canada. Specifically, Canadian tax applies to a taxpayer’s worldwide income.

The general rule is that foreign income earned by corporations and individuals resident in Canada is still taxable in Canada and must be reported. The exception is that a tax treaty on avoiding double taxation may provide relief and only tax the income in the country where the income is earned. The issue then is that a tax resident of Canada may have earned income only in a foreign country, like the United States, but failed to report it on his or her Canadian income tax return or failed to file a return altogether. Thus, these individuals or corporations may be left with tax returns that they were obligated to file.

What is important is the tax residence of the corporation or individual. These are nuanced and fact-specific determinations that require examination of many factors. Once residence is established, the tax obligations of that person or entity become clearer. If you have any questions about your tax residence, consult with an experienced Canadian tax lawyer to help you understand these factors and determine your filing requirements.

There are also additional filing requirements for Canadian tax residents that own specified foreign property costing more than $100,000. In these cases, Form T1135 must be filed, and the deadline to file this form is the same as that of filing your income tax return. The definition of specified foreign property is complex. As such, it is recommended that you speak with an experienced Canadian tax lawyer to understand whether the foreign property you own qualifies.

When You Do Not Need to File Tax Returns: Corporations, Individuals, and Trusts

There are circumstances where a person may not need to file any tax returns. These exceptions are found in subsection 150(1.1) of the Income Tax Act.

For individuals, if no tax is payable, then a return is not required. In practice, this would include people who have no income. However, a return is required if the individual has a taxable capital gain or disposes of capital property in the year. For non-resident individuals, a return is required if they have a taxable capital gain or dispose of taxable Canadian property in the year.

Subsection 150(1.1) applies only to trusts that meet the criteria under subsection 150(1.2). With the passing of Bill C-15, subsection 150(1.2) was amended and the previous iteration of the provision was expanded. The list below provides examples of trusts that are not required to file a tax return:

Trusts that have been in existence for less than three months,
Trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the year,
Trusts that are required under the relevant rules of professional conduct or laws of Canada or a province to hold funds for the purposes of an activity that is regulated under those rules or laws,
Trusts that are registered charities, or
Trusts that are a club, society or association described in paragraph 149(1)(l)

Corporations resident in Canada must always file tax returns with few exceptions. This is the case even if there is no tax payable. Similarly, non-resident corporations must file a return if they carried on business in Canada, had a taxable capital gain, or disposed of taxable Canadian property. This filing requirement applies even if the profits or gains realized are exempt from Canadian income tax through the operation of a tax treaty.

The exceptions for corporations resident in Canada are few. First, corporations that are registered charities are not required to file a tax return under subsection 150(1.1). Colloquially, a charity may be referred to as a not-for-profit organization. However, under the Income Tax Act, a registered charity has specific requirements to be considered as such, making registered charities distinct from not-for-profit organizations. As a result, registered charities do not have the same filing obligations as a not-for-profit, and registered charities do not pay income tax and do not have to file a tax return.

Other corporations that are exempt from filing a tax return are tax-exempt Crown corporations and Hutterite colonies.

Who Can Be Held Liable for Unfiled Taxes

Subsection 162(1) of the Income Tax Act provides for a penalty for every “person” who fails to file a tax return. A “person” is broadly defined in the Income Tax Act and includes individuals, corporations, and any entity exempt from tax. Further, it includes the “heirs, executors, liquidators of a succession, administrators or other legal representative of such a person.” This broad definition extends liability for non-compliance beyond the entity itself to those responsible for complying on its behalf.

A corporation is a separate legal entity from its directors, officers and shareholders. As an analogy, a corporation is its own person. The corporation itself is responsible for filing its taxes each year, and this responsibility cannot be delegated; the corporation remains liable for unfiled returns. A director will not, on that basis alone, be found personally liable for the corporation's income tax debts. There are situations where a director may be found liable for the tax debts of the corporation. These are beyond the scope of this article, but include unremitted payroll taxes and GST/HST.

On the other hand, estate trustees, as legal representatives, are jointly and severally liable with the taxpayer (even though the taxpayer is deceased) to perform any obligation or duty imposed under the Income Tax Act on the taxpayer (subparagraph 159(1)(a)(ii)). This includes filing income tax returns that are required by the Income Tax Act and paying all taxes owing. This means that the estate trustee may be personally liable for penalties if the deceased’s return is filed late.

The responsibility of filing taxes rests on the person and not on the accountant who prepares your tax filings. This was exemplified in Ross v The Queen, 2014 TCC 317. In this case, the taxpayer was charged the late filing penalty. The Tax Court addressed the taxpayer’s argument that she hired a company to file her income taxes and that the late filing penalty should be waived. The Court expressed the view that this was an issue between her and the tax preparers and not an issue that could be resolved by the court. As such, it may not be an adequate excuse to be relieved from the obligation to file a tax return on time.

Unfiled Taxes and Filing Taxes Late

One of the consequences of failing to file a tax return is that the CRA may apply penalties under section 162 of the Income Tax Act. Paragraph 162(1)(a) states that every person who is required under subsection 150(1) to file a tax return and fails to do so is liable to a penalty equal to 5% of the person’s tax payable that was unpaid when the return was due. An additional penalty is applicable under paragraph 162(1)(b). This penalty is 1% of the balance owing for each full month that the return was late up to 12 months.

If the person has a habit of failing to file a return, a harsher penalty may apply under subsection 162(2). This occurs when the person fails to file a tax return, a demand to file the return for the year was sent by the CRA, and a penalty was payable in respect of a return for any of the 3 preceding taxation years.

The penalty is 10% of the balance owing plus 2% of the balance owing for each full month late for up to 20 months.

Interest may also accrue on any amount that remains outstanding from taxes that you owe under section 161 of the Income Tax Act. The CRA will charge compound daily interest starting from the “balance due day”. The “balance due day” is defined under section 248 and provides the reference point for when interest begins to accrue.

For living individuals, interest begins to accrue the day after April 30. For corporations, it is either 2 months, if the corporation is a CCPC, or 3 months, if it is not a CCPC, after the end of the taxation year of the corporation.

For individuals who died after October in the year and before May in the following year, interest starts accruing on the day that is 6 months after the day of death. For trusts, it is the day after 90 days after the end of the year-end for the trust.

Interest is calculated based on the CRA’s interest rates, which can change every three months (quarterly). These interest rates can be found in section 4301 of the Income Tax Regulations. In the first quarter of 2026, the prescribed rate of interest for late taxes was 7%.

Moreover, failure to file certain prescribed forms or information returns along with a tax return may result in additional penalties. For example, under paragraph 162(7)(a) of the Income Tax Act, if a person fails to file an information return, that person will be liable to pay a penalty equal to the greater of $100 or $25 per day (up to $100) for each day that the return is late. There is a maximum penalty of $2,500. In addition, gross negligence penalties may apply if the person fails to file the form knowingly or under circumstances that amount to gross negligence. This penalty is $500 per month for each month that the return is late up to $12,000, less any penalties already levied.

For unfiled taxes, gross negligence penalties will not apply. The wording in subsection 163(2) is clear in that the making of a false statement or omission is a requirement for the application of gross negligence penalties. In Lee v The Queen, 2010 TCC 400, the taxpayer failed in his obligations to file income tax and GST returns. When assessing the imposition of gross negligence penalties, the Tax Court stated that for this type of penalty to apply, a false statement must have been made and that failure to file a return is not an omission. Thus, the gross negligence penalties were deleted. Following Lee, in Last v The Queen, 2012 TCC 352,the CRA made concessions regarding the imposition of gross negligence penalties for unfiled returns, stating that because returns were not filed, the penalties should not apply.

Criminal prosecution is also a possibility under sections 238 and 239. Subsection 238(1) states that every person who has failed to file or make a return as required under the Income Tax Act or who has failed to comply with certain subsections of the Income Tax Act is guilty of an offence and is liable on summary conviction to a fine between $1,000 and $25,000 or a fine and imprisonment up to 12 months. Section 239 deals with instances of what is commonly referred to as tax evasion.

If found guilty, the taxpayer could potentially face a fine of 50% to 200% of the taxes that would have been payable but for the evasion efforts or the fine and imprisonment for not more than 2 years. The fine is in addition to any other penalties levied by the CRA.

Failure to file taxes will not necessarily lead to a conviction under these two Income Tax Act provisions. Prosecution is usually a last resort when it comes to unfiled taxes. Specifically, only if all attempts to obtain compliance have failed will the CRA pursue criminal prosecution. While this may be the CRA’s policy, the Income Tax Act does not formally require any demands for unfiled taxes before proceeding with prosecution.

However, under section 239, a demand to file taxes may be dispensed with when there is tax evasion involved. This was the case in R v Balla, 2010 BCSC 486. The taxpayer in this case argued that a conviction for tax evasion could not be made unless there was a notice or demand to file taxes. However, the Court rejected this argument by stating that the Income Tax Act does not provide that a demand to file taxes is a precondition to prosecution. Thus, failing to file your taxes in order to evade tax can lead to a conviction under paragraph 239(1)(d) despite there being no demand from the CRA.

Criminal prosecution is a tool that is available to the CRA to enforce the Income Tax Act, but it is reserved for offences that are more serious than simply failing to file taxes. It is intended to capture instances of tax evasion (not avoidance) and serious non-compliance.

Forfeiture of Benefits and Credits

Failure to file tax returns can also be a detriment to you in terms of your eligibility for certain government programs. These range from municipal and provincial government support programs such as Rent-Geared-to-Income Housing and Ontario Disability Support Program to federal programs such as the Canada Groceries and Essential Benefit (formerly the GST/HST credit) and the Canada Child Benefit (CCB).

These programs are often income-tested, meaning the amount of income that you report on your tax returns will determine the amount of benefit you receive. In other cases, the program administrators require tax returns (i.e., notices of assessment) to verify your income. Therefore, if you do not file your tax returns, you may not be in a position to receive government benefits that you may otherwise be eligible for.

For example, for the Canada Child Benefit, the amount of money that can be received by an eligible individual is based on his or her adjusted family net income from the previous year. This requires a tax return. The CRA states that to continue receiving the CCB and related provincial and territorial payments, income tax returns must be filed every year. Spouses and common-law partners must file their tax returns as well. If the returns are filed late, then there may be a disruption in the monthly benefit. Therefore, if you wish to apply for or wish to continue receiving the CCB, the CRA requires that you file your taxes on time, every year.

Another example is the Canada Groceries and Essential Benefit (formerly known as the GST/HST credit). For this benefit, there is no application and it only requires you to file your tax return every year. The CRA checks the eligibility of taxpayers when their tax return is assessed. Therefore, if you do not file your taxes, you will be automatically disqualified from this benefit.

Issues with Tax Assessments and Reassessments: Arbitrary Assessment (subsection 152(7)) and the Normal Reassessment Period

Deadlines for Tax Assessments or Tax Reassessments

When you file your tax returns, the CRA has a deadline that must be adhered to if it wishes to reassess your tax return. This is called the “normal reassessment period,” and the rule can be found in subsection 152(3.1) of the Income Tax Act. The normal reassessment period applies to most returns, but depending on what is being reassessed, the notice period may be increased. For example, under subsection 152(3.4), the Canada Emergency Wage Subsidy (CEWS) or the Canada Emergency Rental Subsidy (CERS) are subject to an indefinite period of time where the CRA can make a determination for an amount to be deemed to be an overpayment of the benefit. Thus, the general rule is that the normal reassessment period will apply unless the Income Tax Act provides for an extended reassessment period. Additional exceptions can be found in subsection 152(4) and will be described below.

The normal reassessment period for a taxpayer that is not a mutual fund trust or a corporation other than a Canadian-controlled private corporation (CCPC) is 3 years after the earlier of the CRA sending the original notice of assessment and the day the original notification is sent stating that no tax is payable by the taxpayer for the year. In the case of a mutual fund trust or a corporation that is not a CCPC, the normal reassessment period is 4 years.

In practice, when a taxpayer files a tax return and the CRA provides a notice of assessment, the clock for tax reassessment starts when the notice of assessment is sent by the CRA. If the taxpayer received a notification from the CRA stating that there was no tax payable for that tax year before the notice of assessment was sent, then the date when the CRA sent the letter will be the date the clock starts for reassessment.

The reason that it is important to file taxes is to allow this time period to start running. In other words, there is no reassessment or assessment deadline if no initial assessment was issued. The triggering event for the time limitation to start is the issuance of an initial assessment.

Subsection 152(7) of the Income Tax Act provides the CRA the ability to arbitrarily assess a taxpayer. This means that the CRA can assess any amount of tax payable at any time based on estimates if no tax return is filed. Further, if a tax return is filed after the arbitrary assessment, then the CRA, by virtue of subsection 152(7), is not bound by the late return and the arbitrary assessment will still stand unless it is disproven by the taxpayer. Therefore, if no taxes are filed, the CRA may arbitrarily assess you for taxes owing in perpetuity. This was expressed in CRA doc 2011-039945117.

In Letendre v The Queen, 2011 TCC 577, the taxpayer was arbitrarily assessed in 2006 for the 2004 tax year. In 2010, the taxpayer filed his 2004 return, which was outside the normal reassessment period. The CRA considered the return to be a request for adjustments, which is permitted under subsection 152(4.2) of the Income Tax Act.

The reason a reassessment was not permitted by the CRA was because the 2010 return filed by the taxpayer was outside the normal reassessment period. Effectively, the only recourse available was to request an adjustment. What this case shows is that without filing a tax return, an arbitrary assessment may be issued, which will start the clock for reassessing taxes. If later you wish to file taxes for those years because the amount of tax owing would be less than what was originally assessed by the CRA, then the time limitation of the normal reassessment period still applies.

A further difficulty exists with these situations because the onus is on the taxpayer to refute the CRA’s arbitrary assessment of taxes. This is exemplified in Papouchine v The King, 2023 TCC 88. In Papouchine, the taxpayer did not file his 2009 tax return and was arbitrarily assessed by the CRA in 2016. Subsequently, he filed a 2009 tax return in 2017 claiming that the employment income that was arbitrarily assessed was business income from a sole proprietorship.

In its analysis, the Court explained that the CRA is not bound by the late-filed return and the assessment made by the CRA in 2016 would still stand. The taxpayer solely relied on the argument that the CRA should accept the late-filed return as the truth, as it was filed in good faith. This was not successful. The issue that the taxpayer faced was that there was no evidence to support his contention that the income that he earned was through a sole proprietorship as a contractor. He had no evidence of contracts, nor was there any third-party testimony.

The issue is further exacerbated because the tax year in question was about 14 years prior to the date of the hearing and 8 years prior to the filing of the late return. Since the onus is on the taxpayer to prove that the CRA’s tax assessment was incorrect, the passage of time may make it difficult to retrieve an accurate and complete record related to the relevant tax year. Similarly, because there is no time limit on when an arbitrary assessment could occur, it is onerous on the taxpayer to have to collect evidence for something that happened many years prior.

“Papouchine shows just how exposed a taxpayer can be years after an arbitrary assessment. Once the assessment is made, the onus flips entirely onto the taxpayer, and the CRA doesn’t need to prove anything further. By the time someone gets around to disputing an old assessment, the contracts, records and witnesses that could support their position have often disappeared, which is exactly why waiting rarely helps.” (David J. Rotfleisch, Certified Specialist in Taxation and experienced Canadian tax lawyer)

CRA Has Discretion to Reassess if There is a Misrepresentation

Through the operation of subsection 152(4), the CRA is able to make an assessment, reassessment or an additional assessment at any time under certain circumstances. Specifically, under subparagraph 152(4)(a)(i), the CRA has the ability to reassess a taxpayer for any return where there was neglect, carelessness, wilful default or fraud in filing a return or providing information to the CRA.

An example of the operation of subsection 152(4) is Cheng v The Queen, 2020 TCC 95. In this case, the issue was whether subparagraph 152(4)(a)(i) applied to permit the CRA to reassess the taxpayer beyond the normal reassessment period. In Cheng, the taxpayer made a misrepresentation in her tax returns by utilizing $20,478 of unused RRSP contribution room that was an error on her 2005 notice of assessment. She claimed RRSP deductions relying on the carried-forward unused contribution room from 2005.

In its analysis, the Court stated that the onus of proof is on the CRA to establish that subparagraph 152(4)(a)(i) applies. The Court found that the taxpayer made a misrepresentation in her 2005 tax return. The taxpayer argued that she was entitled to rely on the CRA’s notice of assessments that stated her unused RRSP contribution room, but the Court rejected this argument. Namely, the Court explained that the taxpayer should have known that the unused RRSP contributions were non-existent and should have contacted the CRA to rectify the error on the notice of assessment. Instead, the taxpayer took advantage of the situation, which was found to be neglectful or careless.

This case shows why it is important, not only to file your taxes on time, but also properly and honestly. If the case had been that there was no misrepresentation, fraud, neglect or carelessness, or the CRA could not prove it, then the CRA may not have been able to reassess the taxpayer beyond the normal reassessment period.

In VIEWS docs 2014-052537117, a taxpayer inquired about the CRA’s ability to reassess after the normal reassessment period. In this situation, the corporate taxpayer failed to file a tax return for a particular year and the CRA arbitrarily assessed it under subsection 152(7). Subsequent to the arbitrary assessment, the taxpayer provided the tax return for the particular year in question, but this was outside of the normal reassessment period that was triggered by the arbitrary assessment.

The question was whether the CRA would accept the late-filed return and issue a reassessment, as the late-filed return would result in more tax payable. The CRA’s position on this matter was that it has discretion to reassess under subparagraph 152(4)(a)(i) as a taxpayer’s failure to file a return is a misrepresentation. Ultimately, the CRA’s opinion is that it would be able to reassess beyond the normal reassessment period to increase the amount of tax payable because the unfiled return was a misrepresentation. The CRA cites the purpose of subsection 152(4) as a way to ensure that the CRA is able to assess the correct amount of tax payable. From the CRA’s perspective, taxpayers should not be able to be arbitrarily assessed and escape additional tax liability.

However, in recent Tax Court cases, this discretion was found to have its limits. In Deoram v The King, 2025 TCC 151, the CRA argued that the taxpayer made a misrepresentation by not filing a T5004 Form (claim for tax shelter loss or deduction). The Court stated that subparagraph 152(4)(a)(i) does not make any mention of filing prescribed forms. There are other provisions that provide for an extension of the normal reassessment period for not filing prescribed forms, but T5004 is not a form that is specifically mentioned. If Parliament intended for the failure to file a T5004 form to extend the normal reassessment period, then it would have made it clear. Therefore, aside from the filing of prescribed forms in subparagraphs 152(4)(b.2), (b.5), (b.6), (b.7), (b.8), (b.91), (b.92) and (b.93), failure to file a prescribed form may not extend the normal reassessment period.

In conclusion, filing tax returns is important as what is commonly referred to as a “limitation period” applies to restrict the CRA from reassessing tax returns after 3 or 4 years. If this is not done, you open yourself up to uncertainty and further issues for future tax years.

“The recent case of Deoram suggests that the interpretation of subsection 152(4) as a whole shows that Parliament only intended to extend the normal reassessment period in specific circumstances. In circumstances where a taxpayer fails to file an information return or a form that is not listed in subsection (4), the normal reassessment period may not be extended by the CRA.” (David J. Rotfleisch, Certified Specialist in Taxation and experienced Canadian tax lawyer)

How to Address Unfiled Taxes: Voluntary Disclosure Program

One way to address unfiled tax returns is through the Voluntary Disclosure Program (VDP). This program is a program that is intended to provide relief to taxpayers and registrants who are forthcoming with any errors or omissions in their tax filings. It is important to note that this program is not meant to give qualified applicants relief from tax. Rather, it is intended to grant relief from penalties, partial interest and criminal prosecution.

To be eligible for the VDP, you must either be a taxpayer or a registrant. A taxpayer includes individuals, employers, corporations, partnerships, and trusts. Registrants include, for example, GST/HST registrants or claimants, excise duty licensees or registrants, and persons who must report or remit an amount of tax. In addition, there are 5 conditions that must be met to be eligible. First, the application must be submitted before an audit or investigation has started against you or a related taxpayer about the information that is being disclosed.

Second, all relevant information and documentation must be included. Third, interest and/or penalties must be applicable to the information that is being disclosed. Fourth, the information that is being disclosed has to be related to a tax year or a reporting period that is one year past the filing due date. Finally, the application must include payment of the estimated taxes due or include a payment arrangement. Examples of situations that would be eligible for the VDP include:

failing to file tax returns for previous years
correcting underreported income
claiming ineligible expenses
failing to report foreign-source income that is taxable in Canada
failing to charge, collect, or report GST/HST
providing incomplete information on a tax return.

However, the VDP is not available in all circumstances. The CRA states that applications that relate to returns that result in a refund or no taxes or penalties owing will typically be ineligible. Similarly, if the application is made to alter or make an election under the Income Tax Act, then it may be ineligible. The CRA assesses applications on a case-by-case basis, but it is worth noting that some types of applications are likely to be rejected.

Effective October 1, 2025, changes have been made to the VDP. One of the main changes is the introduction of unprompted and prompted applications. Unprompted applications are applications that are made when there is no communication between the CRA and the taxpayer regarding compliance issues related to the disclosure.

Prompted applications are made after the CRA has made contact about compliance issues or when a 3^rd party source provides information to the CRA about the taxpayer’s potential involvement in tax non-compliance. As mentioned above, if an audit or investigation related to the same information that is being disclosed has already commenced, then it is likely that the application will be rejected unless it is for a completely separate issue.

The level of relief will depend on which stream the application is made under. The difference between the levels of relief is the percentage of interest that is forgiven. Unprompted applications, if accepted, receive 75% relief of applicable interest, while prompted applications only receive 25%.

Both types of applications qualify for 100% relief of penalties if accepted. The relief that the CRA can provide is not without its limits. Under subsection 220(3.1), the CRA is given the discretion to waive or cancel penalties or interest within a 10-year period. This means that the CRA can only cancel penalties or interest that applied in “any tax year that ended within the previous 10 years before the calendar year in which the application is filed.” To further clarify, the 10-year limitation period applies to the years that the interest accrued, not to the time that tax was payable.

The CRA reviews your application once it is submitted. The application can be submitted online, by fax, or by mail. Once received by the CRA, you will receive a letter acknowledging the application and confirming the effective date of disclosure. Throughout the review process, the CRA may also ask for more information. The actual application itself will require the help of an accountant to prepare the tax returns, and an experienced Canadian tax lawyer will be able to advise you on the best strategy for disclosing information to the CRA.

“The 2025 VDP changes reward taxpayers who move first. A 75% reduction in interest on an unprompted disclosure can be the difference between a manageable repayment plan and a debt that follows you for years, but that relief window narrows considerably the moment the CRA makes contact, and it disappears altogether once a formal audit or investigation is underway.” (David J. Rotfleisch, Certified Specialist in Taxation and experienced Canadian tax lawyer)

Strategic Takeaways: Unfiled Taxes Can Be Addressed Through the VDP, But Honesty and Accuracy Are Important

Whether you come forward voluntarily or the CRA identifies the issue first, the underlying obligation to file does not go away, and the cost of delay compounds. The 2025 overhaul of the VDP has made voluntary compliance considerably more attractive, extending meaningful relief even to some taxpayers who have already had contact with the CRA.

Strategically, if you have unfiled taxes, it is best practice to always report your income accurately and honestly. Cases like Cheng show how the CRA is given authority under the Income Tax Act to address specific incidents of tax non-compliance. Practically speaking, where there is non-compliance, it is likely that the CRA will find out eventually. In Cheng, the taxpayer relied on the CRA’s notice of assessments that stated how much unused RRSP contribution room was available.

Throughout the 2005 to 2015 tax years, the taxpayer claimed RRSP deductions and the corresponding notice of assessment confirmed these amounts. However, the notice of assessment issued for the 2005 tax year showed an incorrect amount of unused RRSP contribution room. So, from the 2006 to 2014 tax years, the taxpayer had been claiming deductions that were not available to her. Throughout this period, the CRA was unaware of its error, but still had recourse available to it to reassess the taxpayer even after many years had passed.

The VDP is a way to be proactive about unfiled taxes and the same principle follows: file honestly and accurately. Failure to do this may open you up to more CRA scrutiny and could have worse consequences than if you had simply incurred penalties and interest. Taxpayers with unfiled returns are best served by addressing the issue as early as possible, with the benefit of professional advice tailored to their specific circumstances.

Moreover, if you have unfiled taxes and do not wish to utilize the VDP, it is worth noting how NETFILE compares with paper filing in relation to filing a tax return. In practice, how you file back returns depends on how old they are. NETFILE only accepts returns for the current tax year and the previous ten years, so any outstanding return older than that window must be paper-filed and mailed to the CRA rather than submitted electronically.

Where you have several years of unfiled returns spanning both eligible and ineligible years, it's generally best to prepare and file the oldest year first before moving forward chronologically. Filing in order preserves carryforward amounts, such as unused RRSP contribution room, capital losses, and non-capital losses, since these figures flow from one year's return into the next and filing later years first risks having to amend them once the earlier returns are eventually processed and the CRA's records catch up. There are restrictions to using NETFILE. If you are claiming certain credits or if the tax return is for a deceased person, NETFILE cannot be used.

Pro Tax Tips: VDP Should Be Utilized As Soon as Possible

If you have unfiled tax returns, the most important step is to file them, even if you cannot pay the full balance owing or do not have any taxes owing. Filing starts the reassessment clock running and stops the CRA from assessing you arbitrarily and indefinitely under subsection 152(7). Thus, it is imperative to have the protection of the normal reassessment period to ensure some level of finality and certainty in your taxes.

Similarly, the VDP should be utilized as soon as possible. This is because the 10-year limitation period would only allow you to obtain relief for a 10-year period preceding the year of the application. This means that if you have 20 years of unfiled taxes, you may only receive relief for 10 of those years. Acting fast ensures that the years you are requesting relief are at least within the 10-year period.

Before you file, consider whether a voluntary disclosure makes sense for your situation. The CRA's updated VDP framework offers meaningful penalty and interest relief, and in many cases that relief is now available even where the CRA has already made some contact with you, provided you act before a formal audit or investigation begins.

Throughout this process, be mindful that filing overdue returns can prompt the CRA to review your broader compliance history, so it is worth approaching the process with a clear, accurate, and complete picture of your filing obligations across all relevant years. Given the amounts, deadlines, and discretion involved, taxpayers dealing with unfiled returns should consult with an experienced Canadian tax lawyer before filing or applying for relief.

FAQs: Other Limitation Periods, Breadth of Disclosure, and Taxpayer Relief

What happens if I have several years of unfiled tax returns?

Each unfiled year is treated separately for penalty and interest purposes, and penalties compound quickly if you have a history of late or missing filings under subsection 162(2). Filing all outstanding returns, ideally through the Voluntary Disclosures Program if you qualify, is generally the fastest way to limit further penalties and interest.

Can the CRA come after me indefinitely for an unfiled tax return?

Yes. The normal reassessment period only begins once the CRA issues an initial notice of assessment, so a return that is never filed is never protected by that limitation period. The CRA can arbitrarily assess unfiled years under subsection 152(7) at any time. For example, if you have an unfiled tax return for the 2000 tax year, the CRA may arbitrarily assess you for that year in 2026. Because there was no initial assessment, there is no reference point for the 3-year normal reassessment period. Thus, once the CRA sends the arbitrary assessment, the 3-year clock begins to run.

For individual or corporate tax debts, the CRA generally has 10 years from the 91^st day after a notice of assessment or reassessment is sent to start collecting a debt. This limitation period only starts once a debt is actually assessed. An unfiled return has no assessment and therefore no collections clock running. However, if 10 years elapse, the CRA will not be able to legally enforce the debt.

Do gross negligence penalties apply if I simply never filed a return?

Generally, no. Gross negligence penalties under subsection 163(2) require a false statement or omission in a return that was actually filed, and the Tax Court has confirmed that failing to file a return outright is not itself an omission for these purposes. As Lee v The Queen and Last v The Queen illustrate, the CRA cannot impose a gross negligence penalty on top of an unfiled return purely because no return was submitted; other penalties under section 162, along with the possibility of prosecution in serious cases, remain available instead.

Can I still apply for the VDP if the CRA has already contacted me?

Possibly. Prior to October 1, 2025, the VDP did not allow you to make an application if the CRA contacted you before the application was made. Under the CRA's updated VDP framework effective October 1, 2025, a "prompted" disclosure made after some CRA contact may still qualify for partial relief, provided the CRA has not yet initiated a formal audit or investigation into the specific matter and there is no serious non-compliance involved.

Does hiring an accountant protect me from late-filing penalties?

No. As the Tax Court confirmed in Ross v The Queen, the responsibility to file rests with the taxpayer, not the accountant or tax preparer. Errors or delays by a preparer are generally treated as a matter between the taxpayer and the preparer, not grounds for the CRA or the courts to waive a late-filing penalty.

If I choose to go through the VDP and I am accepted, can I still go to jail?

Failing to file is a strict liability offence that can, in serious or repeated cases, lead to prosecution under the Income Tax Act, though most non-filing situations are resolved through penalties, interest, and, where available, the Voluntary Disclosures Program rather than prosecution. The VDP specifically offers relief from potential criminal prosecution for qualifying disclosures.

What if I am not eligible for the VDP?

The CRA has discretion under the Income Tax Act to provide taxpayers with relief from penalties and interest. If you were not able to file your taxes for reasons beyond your control, then the CRA may cancel or waive penalties and interest. For example, if unfiled taxes are filed late and there is an amount owing whereby the CRA imposes penalties and interest, you may apply for relief under the taxpayer relief provisions. There is a time limitation of 10 years, so if the penalties and interest fall outside of the 10-year period, you will not qualify. Similarly, this will not provide relief from tax.

Will filing my overdue tax returns automatically trigger a CRA tax audit?

Not automatically, though filing several years of overdue returns at once does give the CRA a fresh opportunity to review your broader compliance history, and unusual or inconsistent figures across multiple years can draw closer scrutiny. This is one of the reasons taxpayers with unfiled returns are generally better served filing complete, accurate returns for all outstanding years, ideally with professional guidance, rather than filing selectively or informally. It is also worth remembering that filing a return without paying the amount owing still avoids the late-filing penalty, since that penalty attaches to the failure to file rather than to an unpaid balance.

What is the difference between a normal tax reassessment and an arbitrary assessment under subsection 152(7)?

A normal reassessment adjusts a return that a taxpayer has already filed, and it is subject to the 3- or 4-year limitation period under subsection 152(3.1). An arbitrary assessment under subsection 152(7) is different: it applies when no return has been filed at all, allowing the CRA to estimate the tax payable based on the information available to it, without being bound by the normal reassessment period. If a return is later filed, the CRA is not required to accept it, and the arbitrary assessment stands unless the taxpayer can disprove it.

Do I need to file every outstanding year to qualify for the Voluntary Disclosures Program?

Generally, yes. The CRA expects a VDP application to bring a taxpayer’s affairs fully up to date rather than address a single problem year in isolation, so an application will typically need to include all outstanding returns and correct all known errors or omissions across the relevant reporting periods. An application that only deals with the years or issues that are easiest to resolve, while leaving other known non-compliance unaddressed, risks being rejected or later reopened. Because the scope of a complete disclosure can be difficult to assess on your own, it is worth reviewing your full filing history with an experienced Canadian tax lawyer before applying.

If I catch up on unfiled returns, will I get my missed CCB payments back?

Under subsection 122.62(2) of the Income Tax Act, the CRA is given the discretion to extend the time to apply for the CCB. The CRA is only able to extend the time to a maximum of 10-years from the beginning of the month in question. Thus, under this provision, it is possible for a person who has missed out on CCB payments to retroactively apply for the benefit, but only for the previous 10 years. Again, this is under the discretion of the CRA, and it is not a requirement for the CRA to provide retroactive payments.

I have unfiled returns but can't afford to pay what I'll owe once I file; should I file anyway?

Yes. Filing and paying are separate obligations, and the penalties discussed throughout this article attach to failure to file your tax returns, not to owing money you cannot immediately pay. Once you file, you can contact the CRA to set up a payment plan. The payment plan is discussed with a CRA collections officer and it is within that officer’s discretion to decide whether to accept a payment plan. This means that payment plans cannot continue into perpetuity and must be reasonable based on your finances and circumstances. Interest continues to accrue on the outstanding balance during the arrangement, but it avoids more aggressive collection action. Aggressive collection action includes wage garnishment and registering liens on your property or seizing assets.

DISCLAIMER: This article provides broad information. It is only accurate 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 as tax advice. 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.

The Practical Guide to Unfiled Tax Returns in Canada: Deadlines, Penalties, and How to Fix Them