When to Use CRA Voluntary Disclosure Program?

In the complex world of taxes, mistakes can happen. Whether it's a simple oversight or a deliberate omission, the consequences of inaccurate tax filings can be daunting. However, the Canada Revenue Agency (CRA) offers a solution through its Voluntary Disclosure Program. This program allows taxpayers to correct their past tax errors without facing criminal prosecution and in some cases, penalties. In this article, we will explore the benefits, eligibility criteria, and other important aspects of the Voluntary Disclosure Program.

What is the Voluntary Disclosure Program?

The Voluntary Disclosure Program, commonly known as VDP, is a program offered by the Canada Revenue Agency to allow taxpayers to correct errors or omissions in their tax returns. This program is designed to encourage taxpayers to come forward voluntarily and rectify their mistakes, providing prosecution relief and in certain cases, penalty and interest relief.

Benefits of the Voluntary Disclosure Program

Participating in the Voluntary Disclosure Program can offer several benefits to taxpayers. Firstly, as mentioned above, it provides relief from penalties that would typically apply to errors for failing to file or filing incorrectly or other omissions. This can result in significant savings for taxpayers who may have otherwise faced substantial penalties.

Secondly, the VDP allows taxpayers to correct their tax filings and become compliant with the tax laws. By voluntarily coming forward and rectifying their errors, taxpayers can avoid the stress and uncertainty of potential CRA audits or investigations. It provides an opportunity to start with a clean slate and ensure future tax compliance.

Additionally, under the VDP, taxpayers may be eligible for some interest relief on the taxes owing. The relief is typically half of the total interest owed, providing further financial benefits to participants.

Furthermore, by participating in the Voluntary Disclosure Program, taxpayers can avoid criminal prosecution related to the disclosed information. The CRA agrees not to pursue criminal charges for the disclosed tax matters, providing peace of mind and legal protection.

However, it should be noted that the purpose of the program is not to grant taxpayers an opportunity to avoid paying the taxes they owe but rather to offer relief for mistakes that would likely attract a penalty. As such, CRA offers a higher level of relief to those who are correcting an error that is made unintentionally rather than to taxpayers who intentionally avoid paying their tax obligations. The VDP is available for various types of tax disclosures, including income taxes, import duties, GST/HST, excise taxes, and source deductions.

Limited Relief vs. General Relief (Changes as of March 1, 2018)

On March 1, 2018, the CRA modified its policies to narrow the eligibility and to ensure taxpayers who were intentionally avoiding their tax obligations are not provided relief under the VDP. Hence the CRA introduced two streams: Limited Relief and General Relief. These streams determine the level of tax relief available to taxpayers based on their specific circumstances. Let's explore the key differences between the two streams:

• Limited Relief: The Limited Relief stream is reserved for taxpayers, where CRA has reason to believe that the non-compliance was a result of the taxpayers intentionally avoiding their tax obligations. Under this stream, taxpayers are eligible for relief from criminal prosecution charges and gross negligence penalties. However, there is no interest relief or other penalty relief beyond gross negligence penalties.
• General Relief: The General Relief stream applies to all other taxpayers who do not fall within the Limited Relief category. This stream offers relief from penalties, including gross negligence penalties, and provides some interest relief on taxes. The interest relief is typically half of the total interest owed.

Once you file the application, which program the taxpayer qualifies under depends on a number of factors set out by the CRA such as the dollar amounts involved, the number of years of non-compliance, the sophistication of the taxpayer, and how long it ultimately took the taxpayer to correct their error.

Tax Situations That Can Benefit From Applying

The Voluntary Disclosure Program can be used to correct errors under a wide range of tax situations. Some common examples include where, a taxpayer:

• failed to report taxable income accurately,
• claimed ineligible expenses on a tax return,
• did not file tax returns for previous years,
• did not report income from foreign sources that is taxable in Canada on the tax return, and
• did not file required information returns, such as the Foreign Income Verification Statement (Form T1135).

These errors can occur due to various reasons, such as oversight, misunderstanding of tax laws, or intentional non-compliance. In many cases, if a taxpayer hasn't filed for the previous year or several previous years, filing a form or return late can result in an automatic penalty. In those cases, it is beneficial to go through the VDP to seek relief on some penalties and interest.

Eligibility for the Voluntary Disclosure Program

To be eligible for the Voluntary Disclosure Program, certain criteria must be met. The CRA under the new Voluntary Disclosure Program sets out the following five conditions:

1. The disclosure must be voluntary, meaning that the CRA should have no prior knowledge of the tax issue being disclosed.
2. The disclosure must be complete, including all relevant information for the tax years affected by the error or omission. It is crucial to provide accurate facts and documentation to support the disclosure.
3. The taxpayer must owe taxes as a result of inaccurate or missing tax filings. The VDP does not apply to situations where a taxpayer is eligible for tax refunds.
4. The tax returns being disclosed must be at least one year past the filing due date, unless part of a broader disclosure for older years.
5. The taxpayer is required to estimate and pay the tax owing upfront as part of the disclosure process.

It is important to note that the CRA has the discretion to accept or reject voluntary disclosures. Therefore, it is essential to ensure that all eligibility criteria are met and that the disclosure is prepared accurately and thoroughly.

Seeking Professionals: Lawyers and Accountants

While taxpayers can prepare and submit their voluntary disclosure applications independently, it is advisable to seek professional assistance, especially in complex cases. Lawyers and tax accountants can provide valuable guidance throughout the process and ensure that the application meets the requirements of the CRA.

In straightforward cases, where no significant sums or complex issues are involved, a chartered professional accountant (CPA) can handle the VDP application on behalf of the taxpayer. However, in cases where significant amounts or risks are at stake, involving an experienced lawyer specialized in tax disputes can be beneficial. The lawyer can act as the primary adviser, communicate with the CRA, and engage the CPA to prepare the necessary filings.

It is important to involve professionals early in the process to assess the eligibility for the program, evaluate the potential risks and benefits, and provide strategic advice to ensure a successful outcome.

Conclusion

The Canada Revenue Agency's Voluntary Disclosure Program offers taxpayers a lifeline to rectify their tax errors and omissions. By voluntarily coming forward and correcting their past tax filings, taxpayers can avoid penalties, criminal prosecution, and the stress of potential audits or investigations. The program provides relief from penalties, interest, and potential legal consequences, allowing taxpayers to start fresh and ensure compliance with the tax laws. However, it is important to meet the eligibility criteria, prepare a comprehensive disclosure, and consider involving professionals to navigate the complexities of the process. By taking advantage of the Voluntary Disclosure Program, taxpayers can correct their tax mistakes and enjoy peace of mind in their tax affairs.

If you are looking for an accountant in Hamilton for professional guidance on submitting your application under the CRA's voluntary disclosure program, contact us today. We are a full-service accounting firm in Hamilton that have experienced tax accountants that can ensure your disclosure is handled correctly.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.