This article provides general information about voluntary disclosures (“VDs”) and the Canada Revenue Agency’s (the “CRA”) voluntary disclosure program (“VDP”).
The CRA has published an information circular (in this memo, the “Circular”) on VDs: please see IC00-1R6. Please also see the CRA website on VDs. The Circular and the website contain a lot of valuable information about the program. We recommend that you read these materials to familiarize yourself with how VDs work and what they can and cannot accomplish.
What follows is not meant to be a comprehensive review of VDs. Rather, it highlights certain important information of which you should be aware before making a disclosure.
What Is A Voluntary Disclosure?
To quote from the CRA website:
The Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA. Taxpayers may avoid being penalized or prosecuted, if they make a valid disclosure.
Conditions For A Valid Disclosure
The CRA takes the position that a VD for a taxpayer is valid only if all of four conditions are met.
The VD must be voluntary
For example, the taxpayer can’t make a VD and also be aware of an enforcement action by the CRA or any other tax authority against you or a third party that relates in any way to the information you are disclosing.
No one can guarantee that the CRA will consider a disclosure to be voluntary. The CRA might have in its possession information about you that, in its view, negates your ability to make a disclosure. For example, the CRA states “a leak of offshore banking or other information that names the taxpayer” will prevent the taxpayer making a voluntary disclosure. We have no way of knowing what information the CRA has about you or your tax affairs in this regard.
The VD must be complete
The taxpayer must disclose all information relating to all errors or omissions. The taxpayer must disclose all errors or omissions in all prior returns. If the VD is incomplete in any way, then the CRA could take the position that the taxpayer is liable for penalties or prosecution in respect of all errors or omissions including those that have been disclosed as part of a VD.
The CRA says that “In cases where books and records no longer exist, the taxpayer should make all reasonable efforts to estimate the income for those years.” The CRA gives the following example of the estimate required:
For example: A taxpayer opened an offshore bank account in 2000 with an initial deposit of $400,000. Books and records only exist for the years 2007 to 2015. As of January 1, 2007, the balance in the bank account was $2,500,000. In this case, the taxpayer should make all reasonable efforts to estimate all the unreported pre-tax earnings that were deposited to the account during that time, as well as the interest income that would have been earned in the years where books and records are no longer available (2000 to 2006) in order for the VDP application to be considered complete.
We cannot guarantee that the CRA will consider your disclosure to be complete. You might believe that you have disclosed to us all errors or omissions that need to be dealt with through a disclosure, but the CRA might become aware of other errors or omissions of which you were unaware that, in its view, invalidate your disclosure. In this regard, we can only suggest that, if you have any doubts about the correctness of your tax reporting for prior years, you should review those concerns with us so that we can suggest a method for dealing with any potential problems.
You must disclose errors and omissions for all years. This means that if you are aware of omissions in, say, 1996, you should disclose them. The CRA will not provide assurance that a VD will be complete or that it will not impose penalties or prosecute merely because the errors or omissions relate to years in the distant past that you believe are otherwise statute-barred.
Please also keep in mind that the CRA takes the view that a taxpayer is generally entitled to make only one VD in his or her lifetime.
The VD must relate to an error or omission where a penalty might apply (for example, a penalty for late-filing or gross negligence).
One Year Past Due
The information you are seeking to disclose must be at least one year past due. You cannot avoid a late-filing penalty for your tax return for a year, which is generally due by April 30 of the year following, by filing the return in July of the year following under the VD program. On the other hand, you can avoid late-filing penalties for such a return if it is part of a VD that covers other information that meets this condition. For example, if you have not filed returns since year X, you can make a voluntary disclosure in July, Year X+4, by filing returns for years X to X+3, and the CRA will not impose late-filing penalties for any of those years, including Year X+3.
When you submit the disclosure, you must also pay the estimated tax, interest and penalties owing as a consequence of the VD. If you can’t afford to pay everything at once, you will need to make a payment arrangement with CRA Collections.
The CRA provides relief depending on whether the disclosure is accepted under the “General Program” or the “Limited Program”. The CRA will accept a disclosure under the General Program unless it “disclose[s] non-compliance where there is an element of intentional conduct on the part of the taxpayer or a closely related party”. The CRA says that it considers the following factors when determining whether a disclosure will be subject to the Limited Program:
- efforts were made to avoid detection through the use of offshore vehicles or other means
- the dollar amounts involved
- the number of years of non-compliance
- the sophistication of the taxpayer
- the disclosure is made after an official CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to taxpayers working in a particular sector about a compliance issue).
If the CRA accepts a disclosure under the General Program, it will not refer the taxpayer for criminal prosecution and it will provide relief for late-filing and gross negligence penalties. The CRA will also waive up to 50% of the interest otherwise payable for years ending before the three most recent years for which the disclosure is made.
If the CRA accepts a disclosure under the Limited Program, it will not refer the taxpayer for criminal prosecution and it will provide relief only for gross negligence penalties. No interest relief will be provided.
Despite the foregoing, the CRA cannot provide relief for late-filing penalties or interest beyond the ten most recent calendar years. The CRA, if it accepts a disclosure that relates to years beyond the ten most recent, will still waive gross negligence penalties.
A VD by its nature entails certain risks, and we cannot guarantee that a disclosure will result in the waiver of penalties or the avoidance of prosecution.
The CRA takes the position that legal fees or accounting incurred to prepare a voluntary disclosure application are not deductible under the Income Tax Act (Canada). If, however, the CRA proposes to revise income or tax payable in connection with the VD, then fees paid to make representations against the proposal would be deductible.
Making a Disclosure with Us
For more information on making a voluntary disclosure through Loukidelis Professional Corporation, please contact us.
We regret that we cannot provide free consultations on voluntary disclosures. Our practice is to charge for the time we spend with a client to provide the advice he or she needs. We don’t provide free consultations, which might give us an incentive to convince you to follow a disclosure process that you do not need. If our advice is that you do not need to proceed with a disclosure, and you decide not to proceed, then you will owe us for the consultation and nothing more. Our aim is provide impartial advice on your circumstances.