What is a Voluntary Disclosure?
The Canada Revenue Agency (“CRA”) provides taxpayers with a one-time opportunity to retroactively meet their tax obligations by disclosing non-compliance through the CRA’s Voluntary Disclosures Program. 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 through the Voluntary Disclosures Program and the Canadian government will provide relief from penalties, interest and criminal prosecution.
The Voluntary Disclosures Program 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. In our experience, the program is relatively flexible and the conditions for a successful application are reasonable.
What can you expect from the Voluntary Disclosure Process?
Our Toronto Tax Lawyers act as intermediaries and represent clients throughout the entire voluntary disclosure process. Clients 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, notice of an upcoming CRA audit.
Effective Date of Disclosure
Prior to the changes to the Voluntary Disclosure Program in October of 2025, applications could be submitted with an extension request for the respective tax filings. Now, the tax filings, such as amended tax returns, must be submitted with the disclosure application.
In response to the application, the CRA will respond with an Effective Date of Disclosure letter. The Effective Date of Disclosure is normally the date of the application. It is key as from that date any CRA action related to the disclosed non-compliance (e.g. from another CRA department not yet aware of the disclosure) will not invalidate the disclosure.
If we are certain that the taxpayer’s fact meet the disclosure program’s acceptance conditions, outlined below, it is likely the application will be accepted. We act as intermediary between the client and the CRA and once the acceptance letter is issued the only remaining obligation is paying the tax and interest owing or arranging a payment plan to do so.
VDP Tracks
The latest incarnation of the Voluntary Disclosures Program, effective October 1, 2025, involves a more flexible and inviting procedure. Most importantly, the types of enforcement actions that can invalidate a Voluntary Disclosure application have been considerably narrowed. Also, the scope of relief provided has increased. Previously, a simple CRA Request to File missing tax returns was likely to prevent a taxpayer from relying upon Voluntary Disclosure relief. Currently, enforcement actions are limited to audits and investigations. In our opinion, the program is now an even better option for disclosing intentional and unintentional non-compliance.
Prompted versus Unprompted Voluntary Disclosures
As per Information Circular IC00-1R7 – Voluntary Disclosures Program (“IC00-1R7”) there are now two application types:
- Unprompted Application
Acceptance of a “unprompted application” results in 100% penalty relief and 75% interest relief.
2. Prompted Application
Acceptance of a “prompted application” results in 100% penalty relief and 25% interest relief.
Criminal Prosecution
If a taxpayer’s VDP is accepted as either prompted or unprompted, relief from criminal prosecution and gross negligence penalties will also be granted.
Broadened Determination of Voluntariness
IC00-1R7 and IC00-1R6 state that a Voluntary Disclosure application must be “voluntary” in order to be granted relief. IC00-1R7 broadens the determination of voluntariness compared to IC00-1R6. Under IC00-1R7, applications submitted after a taxpayer has been prompted to disclose information may now qualify as voluntary and be eligible for relief, whereas under IC00-1R6, such applications may not have qualified as voluntary.
However, under IC00-1R7, taxpayers who are under audit or investigation, or who have engaged in egregious non-compliance, remain ineligible for relief on the basis of voluntariness.
What are the Conditions of Eligibility for a Voluntary Disclosure?
In order to be eligible for relief under the Voluntary Disclosure Program the respective policy states that:
You must submit your application before an audit or investigation has been initiated against you or a related taxpayer about the information being disclosed;
You must include all relevant information and documentation for the required tax years or reporting periods;
Your information includes an error or omission with applicable interest charges and/or penalties;
Your information is at least one year or one reporting period past the filing due date; and
You must include payment of the estimated tax owing, or request a payment arrangement (subject to CRA approval).
Examples of the types of disclosures of non-compliance that are typically eligible for relief under the VDP include but are not limited to:
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).
Documents to Include
IC00-1R7 introduces new requirements regarding supporting documentation that were not contained in IC00-1R6. Specifically, sections 26 to 28 of IC00-1R7 state that:
The taxpayer must disclose all known errors and omissions in its tax obligations, including any arm’s length and non-arm’s length transactions or circumstances relating to the errors and omissions.
Supporting documentation (for example, returns, forms, statements, schedules) needed to correct the non-compliance for the most recent six (6) years must be included with the application. However, if the errors or omissions relate to assets or income that are located outside Canada, documentation for the most recent ten (10) years must be included.
A tax year within the above timeframes with no errors or omissions does not need to be included with the application. Additional documentation for tax years beyond the above timeframes may be requested by the CRA at its discretion.
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.
SpenceDrake Tax Law – Toronto Tax Lawyers