The CRA Voluntary Disclosure Program: Everything There Is To Know in 2020
What is the CRA Voluntary Disclosure Program? What must I know about it & take into consideration?
The tax regime in Canada is predicated on a system that expects taxpayers to be fully honest in their tax filings. However, we know that all too often individuals and businesses do misrepresent information on their tax return in order to avoid their full tax obligation. Other times, inaccurate tax filings are due to error. Fortunately, the CRA Voluntary Disclosure Program allows individuals and businesses to correct any misinformation on their tax returns voluntarily and without facing any penalty.
Penalties for Non-Disclosure
The Government of Canada is committed to cracking down on tax evasion and aggressive tax avoidance measures to ensure that the tax system is fair for all Canadians. The penalties for tax avoidance when discovered by the CRA can be severe. These include fines of up to $25,000 per charge and/or jail time for up to a year per charge. Other penalties can also be levied, depending on whether it is a first time offense and the length of time the tax remains outstanding.
Late Filing Penalties
For a first time offense, a late filing penalty is 5 percent plus 1 percent per month for each month the balance remains unpaid. Other late filings can be charged with a 10-percent penalty and a 2 percent per month charge for up to 20 months.
Gross negligence penalties can be up to 50% of the estimated tax that is owed. Interest is generally compounded at 6% daily.
What is the Voluntary Disclosures Program (VDP)?
The Voluntary Tax Disclosure Program is a tax amnesty program that provides the taxpayer with the opportunity to avoid tax penalties, interest, and prosecution by voluntarily disclosing inaccurate or incomplete information, or disclose information not previously reported in their income tax filings. Eligibility for the Voluntary Disclosure Program includes unreported income, unfiled tax returns, disclosures for excise taxes, income tax filings, source deductions, duties under various statutes and GST/HST filings.
Examples of what a taxpayer may not have reported are:
- Under-reported income
- Expenses claimed that were not eligible
- Failure to disclose foreign assets
- Failure to disclose foreign income
- Unfiled tax returns
What Conditions Must Be Met for the Voluntary Disclosures Program?
Taxpayers (including individuals, employers, corporations, partnerships, or trusts) can make an application to the Voluntary Disclosures Program (VDP). However, certain conditions must be met to qualify for the program.
To qualify for relief, the application must:
- be voluntary. If the CRA has asked for information or discovers information from a third party, then you no longer qualify for the VDP. If the CRA has sent you a letter in the mail regarding your returns or you at all have information that the CRA may be close to discovering your incorrect information, you are disqualified from entering the program;
- be complete. You must include information related to all years that you believe that taxes are owing. If the CRA discovers additional years where taxes are owing, you will no longer qualify for relief for the years that were disclosed;
- must involve a potential penalty or interest;
- include information that is at least one reporting period past due; and
- include payment of the estimated tax owing.
Three Tracks: GST/HST, General, & Limited
Track One: GST/HST Wash Transactions
Category 1 specifically provides relief for applications involving GST/HST wash transactions that are eligible for a reduction of penalty and interest. Wash transactions occurs when a taxable supply (other than a supply taxable at 0%) is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a GST/HST registrant, who would have been entitled to claim a full input tax credit (ITC) if the tax had been applied correctly.
General or Limited? Which Program Will You Be Processed In?
Where the taxes payable do not involve GST/HST wash transactions, an applicant who applies for the Voluntary Disclosure Program is processed either in a general or limited program. Which track the applicant enters depends on a number of factors, the most salient being whether the applicant acted out of intentional misconduct or whether it was an error.
Other factors that determine which track an applicant is processed include:
- the dollar amount involved;
- the number of years of non-compliance;
- the sophistication of the taxpayer/applicant; and
- whether efforts were made to avoid detection through the use of offshore vehicles and other means
The differences between the limited and general tracks relate to the extent of relief in the penalties and interest that may be forthcoming. However, as mentioned earlier, there can be no relief provided in the amount of taxes that must be paid as far as the principal tax owed.
For those whose misconduct was the result of an error, he/she may enjoy relief from all penalties, referral for prosecution, and partial interest for interest that accrued during the previoius 10 calendar years before the end of the reporting period in which the application was filed. preceding the three most recent years of returns. Generally speaking, interest relief is 50% of the interest that accrued during the previous 10 calendar years before the end of the reporting period in which the application is filed.
The Limited Program provides limited relief—that is, while the applicant will not be referred for criminal prosecution and will not be charged gross negligence fees—he/she will still be charged other penalties and interest as applicable. Under the Limited Program, participants will also have to sign a waiver of their right to object and appeal in relation to the specific issue disclosed.
Generally, applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.
The differences in the consequences associated with the Limited and General Tracks:
|General Program||Limited Program|
|Penalties||No||No gross negligence penalties, but other penalties will apply|
|Interest Relief||For the years preceding the three most recent years of returns. Full interest is still applicable for the three most recent years of returns.||No|
Penalty Relief Under the Voluntary Disclosure Program
The Voluntary Disclosure Program allows an individual to come forward and correct their previously incorrect filed return by replacing it with correct information, without facing the penalties or interest that would otherwise apply.
The amount of penalty relief depends on which program you will be processed in. For the GST/HST wash transactions and the General Program, there is 100% penalty relief. For the Limited program, there is no gross negigence peanlty but other penlaties will apply. Penalty relief will only apply to penalties the apply within 10 years before the reporting period in which the VDP application was filed.
Track One: GST/HST Wash Transactions: 100% Penalty Relief
Track Two: General Program: 100% Penalty Relief
Track Three: Limited Program: No gross negligence penalties, but other penalites will apply.
Interest Relief Under the Voluntary Disclosure Program
The amount of interest relief depends on which program you will be processed in. For GST/HST wash transactions, there is 100% interest relief. For the general program, there is 50% interest relief. For the limited program, there is no interest relief whatsover. Interest relief is limited to the interest that accrued during the previous 10 calendar years before the end of the reporting period in which the application is filed.
Track One: GST/HST Wash Transactions: 100% Interest Relief
Track Two: General Program: 50% Interest Relief
Track Three: Limited Program: No Interest Relief
In addition to penalty and interest relief as explained above, if a VDP application is accepted by the CRA, the registrant will not be referred for criminal prosecution with respect to the disclosure.
Why You Need a Tax Lawyer
It is imperative that those who apply to the Voluntary Disclosure Program are accepted into the program since penalties and accrued interest will be levied otherwise. For this reason, it is important to obtain the services of a tax lawyer to prepare your voluntary disclosure application to ensure both your acceptance into the program and to mitigate any consequences for non-disclosure.
A voluntary disclosure is a legal procedure so it’s best carried out under solicitor client privilege through a Canadian tax lawyer. Our expert Canadian tax lawyers can provide detailed preparation and submissions to the VDP. We go through each criterion to ensure that all the tests are met to the satisfaction of the CRA VDP to maximize our clients’ chances of being accepted into the General Program.
You work hard for your money. Kalfa Law works hard for you to keep it.
- be voluntary. If the CRA has asked for information or discovers information from a third party, then you no longer qualify for the VDP. If the CRA has sent you a letter in the mail regarding your returns or you at all have information that the CRA may be close to discovering your incorrect information, you are disqualified from entering the program.
- be complete. You must include information related to all years that you believe that taxes are owing. If the CRA discovers additional years where taxes are owing, you will no longer qualify for relief for the years that were disclosed.
- must involve a potential penalty or interest
- include information that is at least one year past due for income tax applications; and
- include payment of the estimated tax owing.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
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