The Canadian tax system is based on the principles of voluntary compliance and self-assessment. Where an error or omission has been made in reporting to the Canada Revenue Agency (CRA), a taxpayer may, under certain circumstances, be permitted to come forward and report the error or omission for potential relief from penalties, interest and criminal prosecution.
An examination of interest and penalties for noncompliance quickly reveals the benefits of the Voluntary Disclosure Program. For example, late or deficient payments currently accrue interest at a rate of 5% compounded daily. Penalties such as the “False Statements or Omissions Penalty” can be as high as 50% of the understated tax and/or the overstated credits related to the false statement or omission.
Possible circumstances which may qualify for VDP relief include:
- Failure to report taxable income you received;
- Incorrectly reporting your taxable income;
- Claiming ineligible expenses on your tax return;
- Failure to remit your employees’ source deductions;
- Failure to report an amount of GST/HST (which may include undisclosed liabilities or improperly claimed refunds or rebates or unpaid tax or net tax from a previous reporting period);
- Failure to file information returns; or
- Failure to report foreign-sourced income that is taxable in Canada.
Taxpayers interested in utilizing the Voluntary Disclosure Program must keep in mind the four conditions that must be satisfied in order for a disclosure to be accepted by the CRA.
- First, the disclosure must be voluntary. This means that the taxpayer must disclose the error or omission to the CRA before any enforcement activity has been initiated. Enforcement activity includes any audit, investigation or collection activity under any program line administered by the CRA or other federal and provincial tax administrations.
- Second, the disclosure must involve a penalty. If no penalty would be imposed on the information in the disclosure, a VDP is not necessary.
- Third, the disclosure must include information that is at least one year overdue.
- Finally, the information in the disclosure must be complete. A disclosure is considered complete if it provides a full and accurate account of all previously inaccurate, incomplete or unreported information.
The Voluntary Disclosure Program is a final chance for taxpayers to come forward and the CRA stipulates relief on the condition that taxpayers reveal all past errors and omissions. Failure to meet any one of the VDP conditions results in the rejection of the VDP application and ineligibility for relief.
It is important to note that voluntary disclosure to the CRA carries significant risk. In the event a taxpayer’s VDP application is rejected for failing to meet the four required conditions, the CRA will proceed to audit the taxpayer based on the information disclosed in the voluntary disclosure.
Taxpayers who are uncertain whether they qualify for voluntary disclosure may present their disclosure to the CRA on an anonymous basis. The no-name procedure allows taxpayers to determine whether the proposed disclosure will be accepted by the CRA. Depending on the CRA’s decision, the taxpayer may choose to come forward with a named disclosure or walk away altogether.
The Voluntary Disclosure Program is a second chance opportunity for taxpayers to disclose tax noncompliance. Given the excessive interest and penalties that can apply on errors and omissions, a voluntary disclosure can be incredibly helpful in reducing the overall tax liability. However a voluntary disclosure is not something to be taken lightly and can carry serious repercussions if handled incorrectly. Taxpayers are strongly encouraged to seek expert advice when considering a voluntary disclosure application.
For more information, or to find about more about conditions and qualifying for VDP, please contact Tax Solutions Canada today at 1-888-868-1400.