What is a Voluntary Disclosure?
The Canada Revenue Agency (“CRA”) provides taxpayers with the opportunity to retroactively meet their tax obligations by disclosing non-compliance through the CRA Voluntary Disclosure Program (“VDP”). For instance, if a taxpayer has failed to file a tax return or report income or offshore property, this information can be disclosed to CRA and they will provide relief from penalties, interest and criminal prosecution.
The VDP is a very reasonable method of correcting your tax matters without fear of prosecution. If a CRA voluntary disclosure application is successful, the taxpayer will be liable for the tax owing plus interest. However, financial penalties (which can be up to 50% of the tax owing) will be reduced or waived and interest will be decreased. Most importantly, the CRA will not criminally prosecute.
Participation in the program does not require in-person meetings with CRA. The entire process takes place through written correspondence and, once the background work is completed, essentially entails providing information and new or amended tax returns to CRA along with the written application. A payment plan can be arranged for the tax owing.
The purpose of the program is to invite taxpayers to come forward, disclose noncompliance, and provide extra tax revenue to the government. In turn the government saves from not having to fund additional resources to investigate, audit and reveal noncompliance. Because of this, the program is relatively flexible and the conditions for a successful application are reasonable.
A Voluntary Disclosure must be Voluntary
A key condition is that the voluntary disclosure application is voluntary. This means that the taxpayer did not, for example, submit the application after being contacted by CRA for a directly related matter. For instance, if a taxpayer has not filed for a few years and CRA issued a Request to File for those years, the taxpayer cannot apply to the VDP for those years. However, an attempt can be made to file a voluntary disclosure application for the years CRA did not request. There is case law to support this point and it is important to consult with a tax law and voluntary disclosure expert to ensure you are being advised correctly of all options within the VDP.
What can you expect from the Voluntary Disclosure Process?
We act as a intermediary and represent the client during the entire process. They do not have to communicate with CRA directly. To begin, we review our client’s facts and documents to identify and quantify any non-compliance with Canadian tax law and obligations. Once we have confirmed non-compliance, we will investigate whether or not CRA has already initiated related enforcement action. For example, this simply may be in the form of a letter from CRA regarding non-compliance or a letter from CRA advising of a upcoming CRA audit. Even if CRA has initiated related enforcement action, under certain circumstances we may still be able to proceed with the disclosure.
Effective Date of Disclosure
If the decision is made to proceed with the voluntary disclosure application we will draft an initial application to CRA advising of the facts and the pending documents to be prepared and submitted. Or, depending, we will submit the requisite tax returns with the disclosure application.
We can request up to 90-days, as per CRA policy, from the submission of the disclosure application to file the requisite tax returns. As mentioned, the VDP is relatively flexible in operation as CRA seeks to attract taxpayers to disclose. Over the years we have submitted hundreds of disclosure applications and direct experience has taught us that reasonable extension requests are accepted.
The CRA will respond with an Effective Date of Disclosure (“EDD”) letter. The EDD is normally the date of the application. The EDD is key as from that date any CRA action (e.g. from another CRA department not yet aware of the disclosure) related to the disclosed non-compliance will not invalidate the disclosure, i.e. the non-compliance was voluntarily disclosed by the EDD so the taxpayer is protected from that date.
We normally suggest that we retain an accountant, on behalf of the client, to prepare the necessary tax returns to be submitted within 90 days from the initial application, the presumed EDD.
Once the returns are completed we will review and discuss payment of the tax owing. If the entire amount owing cannot be paid at once we will work with CRA to arrange a payment plan.
If we are certain that we have met the VDP conditions, outlined below, then it is likely the voluntary disclosure will be accepted. Importantly, throughout the entire process it is not necessary that the client communicate directly with the CRA. We act as intermediary between the client and the CRA and once we receive the CRA acceptance letter the only remaining issue is paying the tax owing.
Why retain a Tax Lawyer for a VDP Application?
1. An application involves non-compliance with the law, even if unintentional. Once a Tax Lawyer is retained, the client is protected by solicitor-client privilege. This will afford a level of protection in case CRA denies the voluntary disclosure application.
2. A Tax Lawyer can retain an accountant on behalf of the client to complete the tax returns for the disclosure.
3. Experienced Tax Lawyers are intimately knowledgeable of the law regarding voluntary disclosures and the respective process. Disallowed disclosures are challenged in the courts and there is a resulting body of case law that a Tax Lawyer should be keenly aware of.
4. If the VDP application is rejected a Tax Lawyer can apply for a second-level review. If the second-level voluntary disclosure application is unsuccessful an application can be made to the Federal Court for Judicial Review of CRA’s decision. If successful, CRA will reverse its decision. An experienced Tax Lawyer has the authority, ability and knowledge to challenge the CRA in Federal Court.
VDP Tracks
The latest incarnation of the VDP involves two application “tracks”. Regardless of the differences between the two tracks, the VDP is an excellent option for disclosing intentional and unintentional tax evasion.
VDP Track 1: General Program
If a taxpayer wishes to correct an unintentional error that may attract penalties and prosecution they can apply to the General Program. It provides greater relief than the limited program on account of the taxpayer’s lack of intention. If the VDP application is accepted, penalties will be waived and the taxpayer will not be criminally prosecuted or referred to criminal prosecutions. Partial interest relief will also be provided.
VDP Track 2: Limited Program
The Limited Program provides relatively limited relief for voluntary disclosure applications that disclose non-compliance, and it appears that the behaviour of the taxpayer was intentional. For instance, the taxpayer knew they were supposed to declare their offshore property that cost more than $100,000 but did not, possibly to avoid capital gains tax on any subsequent sale.
In such a case, as long as the following conditions of a valid application are met, the taxpayer will receive relief. The taxpayer will not be referred for criminal prosecution with respect to the disclosure and will not be charged gross negligence penalties (50% of the tax owing). However, the taxpayer will still be liable for late-filing financial penalties and interest.
What are the Conditions of Eligibility for a Voluntary Disclosure?
In order to be eligible for relief under the Voluntary Disclosure Program, the VDP policy states that the application must:
a. be voluntary, which means you must submit your application before the CRA takes any enforcement action against you or anyone related to you on the same information disclosed in your application;
b. be complete, which means that you must include all relevant information and documentation (which includes all returns, forms, and schedules needed to correct the error or omission);
c. involve the application or potential application of a penalty;
d. include information that is at least one year past due; and
e. include payment of the estimated tax owing. A payment plan arrangement with CRA is possible.
Examples of the types of disclosure that are typically eligible for relief under the VDP include:
unreported or underreported income;
expenses claimed in error;
personal expenses claimed as business expenses;
failure to remit source deductions for employees (for example Canada Pension Plan / Quebec Pension Plan deductions); or
failure to file an information return (for example T1135 Foreign Income Verification Statement).
Contact us for free consultation. We will review your facts and outline the steps necessary to resolve your tax matter.