Tax is present in almost everything, from the water we drink to the properties we work hard for to someday own. People have become so familiar with tax that they can complete the filing process with their eyes closed. But, depending on the situation, it can become lengthy and complex. The consistency of payments, the source of income and the total annual earnings will tell how easy or confusing the steps are.
Sometimes, things can get out of control when we commit errors or fail to file our taxes. Whether the nonpayment or inaccuracy is due to lack of knowledge or deliberate non-compliance, penalties will apply. Fortunately, taxpayers who voluntarily disclose this information may have more favourable terms when repaying their taxes.
With voluntary disclosure, taxpayers only pay the taxes and fees determined by the program. They will not have to worry about criminal penalties and stressful audit procedures. We will take a closer look at the Voluntary Disclosure Program of the Canadian Revenue Agency.
What is a Voluntary Disclosure Program?
The Voluntary Disclosure Program (VDP) of the Canada Revenue Agency (CRA) is a relief program for inaccurate or unfiled taxes. It grants more favourable repayment terms to taxpayers and registrants who volunteer to disclose errors or omissions in their tax returns. To be eligible for the program, taxpayers must come forward before the CRA discovers inaccuracies. In fact, those that voluntarily disclose errors have lighter tax obligations than those caught by the CRA.
With the VDP, taxpayers who, either by mistake or deliberation, made inaccurate filings will not be criminally sanctioned. They will no longer have to go through the hassle of the tax audit process and other investigative procedures. Moreover, they don’t have to fear the possibility of being exposed to the public. Instead, they will simply have to repay the taxes and the lower interests determined by the program.
Both the prosecution and the relief generally available offer more convenience that entices taxpayers to come forward and comply. However, Canadians should know that the relief is only applicable to those who fail to file taxes. Moreover, the VDP is not a means for individuals or companies to get merits or lower their share of taxes.
To be fair, the agency provides more relief to those disclosing unintentional errors. Those who deliberately avoid paying taxes or unlawfully decrease their taxes are subject to scrutiny and higher interests. The VDP is not a reward to faithful taxpayers, but rather an amnesty for non-compliance. Of course, it is better to pay taxes on time instead of applying for the program.
Since March 1, 2018, the new VDP has had two tracks, or classifications, for voluntary tax disclosures. The Limited Relief Program (LRP) applies to non-compliance that has an element of intentional behaviour or to corporations with gross revenues above $250 million. The General Program (GP) applies to those who do not fit into this classification. The following factors will tell if taxpayers qualify for the LRP:
- Avoidance tendencies
- Amounts involved
- Non-compliance duration
- Taxpayer social status
What Does Voluntary Disclosure Program Eligibility Mean?
Even after taxpayers voluntarily disclose their mistakes, the CRA does not automatically grant them relief. Furthermore, the CRA does not accept and approve all VDP applications, as, under the new scheme, taxpayers’ eligibility is subject to more stringent requirements. However, and perhaps fortunately for taxpayers, the only thing that did not change is that criminal charges will not be laid.
Eligibility for the program involves the disclosure of income tax filings, excise taxes, GST/HST filings, source deductions and duties under various statutes. Canadian taxpayers must pay all taxes that are due and interest to the CRA. Relief from prosecution, or case penalty, is provided even in the new version of the program. While the GP is the best option, its requirements for approval are very strict.
Moreover, taxpayers must first pay their estimated taxes that are due before participating in the VDP. They must meet the previous requirements, which we’ll discuss in the following section, to file the disclosure and avoid penalties. Once approved, the CRA will make new estimations for the remaining payment.
The acceptance in the VDP depends on the CRA officer or the VDP agent. That’s why it’s important to seek advice from tax lawyers for detailed preparation. Planning and doing the steps with them will help meet the criteria stipulated by the CRA and maximize the chances of getting accepted into the program.
Are All Applications for the Voluntary Disclosure Program Accepted by the Canada Revenue Agency?
The Canada Revenue Agency does not accept or approve all VDP applications. In 2018, more specific and stringent policies were implemented to ensure fairness, honesty and transparency among taxpayers and registrants. In the newer version of the VDP, taxpayers and registrants must pay their estimated tax obligations before applying for the program. In other words, they must have an estimation of their tax dues and pay them first.
Once accepted, the CRA will determine how much more taxpayers have to pay, such as interest and other penalties, which depends on whether it’s the LRP or the GP. Penalties are now incurred in the LRP and, therefore, the GP is a more favourable option. The two things that separate the VDP from a CRA case investigation are criminal penalties and the tax audit processes. Also, you will avoid public exposure and potential reputational damage as a taxpayer.
Moreover, taxpayers must still comply with the old CRA requirements to ensure the acceptance of their income tax disclosures, which are the following.
- The CRA must have no knowledge about the tax dues prior to the disclosure.
- Taxpayers must disclose all inaccurate tax information.
- Taxpayers must pay for inaccuracies to the CRA.
- VDP does not apply to tax refunds.
- Taxpayers must only disclose mistakes at least one year after the filing due date.
Taxpayers must know that the decision lies with the authorized VDP agent or a CRA officer. They will check all information to decide whether the applicants comply with the requirements, which is why it would be wise to reach out to Canadian tax lawyers. They help their clients prepare all the requirements and assess all information, including the years of tax issues and payment estimation, and increase the probability of acceptance into the VDP.
Pro Tip
When you know that you will likely owe taxes and penalties will be assessed, the Voluntary Disclosure Program is definitely worth considering.
In order to ensure that your income tax process is handled smoothly, professionally, and accurately, do not hesitate to seek professional and legal help from our team of income tax experts at Rotfleisch & Samulovitch Professional Corporation.
Should You Apply for the Voluntary Disclosure Program?
The VDP provides taxpayers and registrants with benefits, or fewer sanctions, for inaccurate tax information or unfiled taxes. You must consider the VDP under the following circumstances:
- Late tax filing or failure to file tax returns in the previous year
- Inaccurate income report
- Ineligible expenses on tax returns
- Failure to pay or submit employee deductions, such as pension plans or insurance contributions
- Unreported GST/HST
- Claiming ineligible tax refunds
- Missing taxable foreign sources
- Incomplete information
For more information on VDP relief, refer to paragraph 19 of Information Circular IC00-1RS VDP. For registrant-related disclosures, view paragraph 27 of Memorandum 16-5, VDP.
How to Apply for the Voluntary Disclosure Program?
The CRA may accept applications under the income tax and GST/HST streams. Here are the things and steps to keep in mind when applying for the VDP grants relief.
Income Tax Stream
Most taxpayers may apply for the VDP under this stream. The common mistakes, however, include underreporting income, leaving information returns unreported and failing to pay or remit employee deductions or contributions. The Canadian Income Tax Act requires transparency among taxpayers and registrants. Here are the basic steps to follow to apply for VDP under the income tax stream.
- Submit the VDP Application Form, which can be downloaded from here, or write a letter that contains the same information as the application form.
- Prepare and submit all the necessary documents, such as returns, forms and schedules, along with the form or letter. These will be assessed and corrected to proceed with the application. Don't forget to include the payment for the estimated tax dues.
- If the documents are not complete, you can submit a request for an extension period within 90 days. The request should be made in writing and explain why circumstances beyond your control require you to seek an extension. For example, there could be a natural or man-made disaster within the area or a civil disturbance affecting the service of the postal company. Moreover, physical injuries and emotional or mental distress are also considered. Once allowed, be sure to complete the requirements by the set date, or the CRA will deny the application.
- Send the application online, by mail or by fax. Go to this link for more information.
- In case taxpayers become incapacitated and cannot do so personally, they can authorize a representative who will file it on their behalf. For more information, check out this link.
GST/HST Stream
GST/HST registrants, excise duty/tax licensees/registrants, excise tax refund claimants, registered exporters of softwood lumber products, air travelers registrants and carriers may apply. The GST/HST stream considers undisclosed tax liabilities, ineligible claiming of tax credits and other similar situations. For more information, check out the GST/HST Memorandum 16-5. Here are the steps to follow to apply for VDP under this stream.
- Submit the VDP Application Form, RC199, which can be downloaded from here, or write a letter that contains the same information as the application form.
- Prepare and submit all the necessary documents, such as returns, forms and schedules, along with the form or letter. These will be assessed and corrected to proceed with the application. Don't forget to include the payment for the estimated tax dues.
- If the documents are not complete, you can submit a request for an extension period within 90 days. The request should be made in writing and explain why circumstances beyond your control require you to seek an extension. For example, there could be a natural or man-made disaster within the area or a civil disturbance affecting the service of the postal company. Moreover, physical illness or injuries and emotional or mental distress are also considered. Once allowed, be sure to complete the requirements by the set date, or the CRA will deny the application.
- Send the application online, by mail or by fax. Go to this link for more information.
- If taxpayers or registrants cannot do it personally, they can authorize a representative who can file it on their behalf. For more information, check out this link.
The CRA Voluntary Disclosures Program Process
Taxpayers must pay their estimated tax dues and comply with the old policy of the CRA before making the VDP application. Since the decision lies with the CRA officer, it is wise to get a pre-disclosure discussion service with a tax lawyer. That way, taxpayers will understand how the process operates and how much information they need to prepare and disclose.
The steps in applying for the VDP under the income tax and GST/HST streams are discussed in the previous section. The form or letter, along with the required documents and payment, must be prepared and submitted within 90 days. But, taxpayers or registrants may ask for an extension depending on the validity of their explanation. They have to address it to the minister of the CRA and attach it to the documents and payment.
Once taxpayers have completed the VDP application steps under the income tax or GST/HST streams as described in the previous section, the VDP agent will assess the application. They can either accept it in the GP or LRP or deny it altogether. While the GP offers more relief than the LRP, both protect taxpayers from criminal charges and audit investigation processes. Furthermore, the reputation and identity of the individuals are safe as well and not disclosed to the public.
However, taxpayers must note that the CRA treats applications within and beyond ten years differently. Within the ten-year limitation, paragraphs 17 and 18 of the CRA circular apply. For beyond ten years, the officer will check the completeness within and beyond ten years, and therefore, taxpayers must disclose the information to have a higher acceptance rate.
Voluntary Disclosure for Foreign Assets
Taxpayers do not have to disclose and pay taxes on foreign assets. But, the income from those assets is subject to taxation. When their total value exceeds $100,000, the disclosure must be done through the T1135 Form. Meanwhile, the filing must be done through the T1134 Form for foreign businesses owned by Canadians.
The disclosure of all available information has been required since 1997 and non-compliance may lead to high penalties. Fortunately, Canadians may still make the taxpayer relief application under both streams. See paragraphs 35 and 36 to know more about the VDP application for foreign ownership.
Voluntary Disclosure Penalties
In the new version of the CRA Voluntary Disclosure Program, two classifications of applications were created. The GP and LRP aim to enhance honesty and transparency and also promote justice and fairness among non-compliant taxpayers. Therefore, incorrect tax return filings may decrease.
In the GP, relief from all penalties within the ten-year limitation period is granted, except the interest that is due, which is set by the VDP. Meanwhile, taxpayers in the LRP must shoulder penalties within the ten-year limitation period and interest. But both are free from criminal penalties and audit investigations.
Moreover, paragraph 66 of the CRA circular waives the rights of those in the LRP to appeal for reassessment. In short, once a non-compliant taxpayer is placed in the LRP, they cannot ask for reassessment except for a potential calculation error. Taxpayers cannot also appeal against the imposition of CRA penalties. Hence, taxpayers must maximize their chances to be accepted into the GP.
Consult with our Ontario Team of Tax Experts
The Voluntary Disclosure Program of the Canada Revenue Agency serves as an amnesty program for non-compliant taxpayers. While it doesn’t reward the faithful ones, it promotes improvement in the tax system, especially for those who want to change. However, keep in mind that the process might be lengthy and you’ll need to disclose all necessary tax information.
But, the newer version of the VDP appears to be more challenging for many taxpayers. Those in the LRP may not receive the relief they did before. That is why talking to a tax lawyer is necessary to better prepare documents and increase the chances of getting accepted into the General Program or appeal for reassessment.
Did you find this article helpful? For more information, reach out to Canadian Tax Amnesty. The firm provides help and professional advice for your tax problems. It has many tax experts that provide clients with quality service.