What if You Haven’t Filed Taxes for Years? Finding Resolution With the CRA Voluntary Disclosure Program
Have you failed to file your income tax returns, GST/HST returns or corporate T2 returns for several years? There are a number of reasons that one may not have filed taxes: Perhaps you or a loved one was preoccupied with dealing with a life-threatening illness, preventing you from filing. Other reasons may involve suffering business hardship. Whatever the reason, if an individual or corporation received income in a taxation year, you have an obligation to file.
As a resident of Canada receiving taxable income, you are obligated to file an annual T1 Income Tax Return each year. Canadian Corporations have an obligation to file annual T2 Income Tax Return. In some cases, Partnerships and Not-For-Profit Corporations must file annual Information Returns. Businesses who are registered for HST must file remittances each month, quarterly or year depending on the size of the business.
Many individuals or corporations are not up-to-date with their Income Tax Returns or GST Remittances.
If you have several years of outstanding returns, the CRA could issue an arbitrary Notice of Assessment, which often demands that you pay taxes on false earnings. These types of assessments typically require you to pay more tax than you would have paid had you filed a return. This is because in notionally assessing you, the CRA imputes the highest earnings figure and does not consider business expenses to offset business income or input tax Credits to offset GST/HST owed.
You may also face late filing penalties. If you owe taxes and did not file your income tax return on time, the CRA will charge you a late filing penalty of 5% of the income tax owing for that year plus 1% of your balance owing for each full month your return is late, for a maximum of 12 months. Repeated late filing penalties increase the penalty rate to 10% for that year plus 2% per additional month.
What to Do to Correct Unfiled Returns
If the CRA has not contacted you regarding your late filings, you may be eligible for the Voluntary Disclosure Program, which would allow the CRA to waive some or all of the penalties and some of the interest levied. If you are eligible for the program, we will prepare and submit this application for you.
Next, we will prepare the outstanding returns. If you have been notionally or arbitrarily assessed, we will replace the false figures with actual amounts, which will substantially lower the income tax or GST/HST that you owe. If you have not been notionally assessed, we will prepare and coordinate the fresh filing of your returns, including personal income tax returns, corporate income tax returns, GST/HST returns, and payroll remittances.
What is the Voluntary Disclosures Program (VDP)?
The Voluntary Tax Disclosure Program provides the taxpayer with the opportunity to voluntarily report unreported income or to disclose inaccurate or incomplete information.
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
The Benefits of the Voluntary Disclosure Program
The Voluntary Disclosure Program allows an individual to come forward, even after many years of failing to file a tax return. The VDP also allows individuals and corporations to correct previously incorrect filing, without facing any penalties or interest.
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 year past due for income tax applications; and
- include payment of the estimated tax owing.
Two Tracks: General and Limited
When an applicant fills out a Voluntary Disclosure application, he/she 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.
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.
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 the years preceding the three most recent years of returns. *Generally speaking, interest relief for the years preceding the three most recent years of returns is 50% of the interest applied for those years.
Please see table below for the differences in the consequences related to 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|
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.
There is a remedy for failing to file your tax return, even when many years have transpired. However, it should be noted that the voluntary disclosure program may be utilized by a taxpayer only once in their lifetime (barring any other exceptional circumstances).
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.
Why you Need a Tax Lawyer
If you have not filed your T1 Income Tax Return, T2 Income Tax Return or GST/HST returns for yourself or your corporation, contact our firm for assistance today. We’ll obtain the ideal outcome for you and seek the elimination of penalties and reduction of interest that would otherwise be levied to you if you filed on your own.
With years of experience in corporate and tax law, Kalfa Law is your premier partner for all your tax needs in becoming up-to-date with your tax filing obligations and minimizing penalties through amnesty applications. Contact us today.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019