If you’ve ever omitted some income from your tax return or perhaps claimed expenses that you knew were not entirely legit, you may be interested in proposed changes announced last week to the Canada Revenue Agency’s Voluntary Disclosure Program (VDP). The VDP allows taxpayers to voluntarily come forward and correct previous tax filing errors without penalty or fear of prosecution. The tax would still be owing, along with either some (or all) of the arrears interest.
Sean Kilpatrick/The Canadian PressChanges are coming to the CRA's voluntary disclosure program
The proposed changes to the VDP can be traced back to October 2016, when the House of Commons Standing Committee on Finance, in its report to the government, recommended that the CRA undertake a comprehensive review of the VDP. In December 2016, the Offshore Compliance Advisory Committee (OCAC), an independent committee composed of tax experts, presented its Report on the Voluntary Disclosures Program to the CRA, along with recommendations on how to improve the VDP so that it could be made “more effective and more fair.” The OCAC recommended that the VDP be continued but proposed tightening the criteria to be accepted into the program.
The CRA has recently completed its review of the VDP and issued a draft of newly-updated “Information Circular — IC00-1R6 — Voluntary Disclosures Program.” It also announced a 60-day online consultation period where Canadians can provide their input on the proposed changes to the VDP. The CRA will review the input received and is expected to announce formal changes to the VDP in the fall of 2017. Any changes would be effective Jan. 1, 2018.
The key proposed changes would narrow the eligibility for the VDP and place additional conditions on taxpayers who wish to apply. Perhaps the most significant policy change follows the OCAC’s first recommendation that the VDP should offer “less generous relief in certain circumstances,” meaning that major cases of non-compliance won’t get the same level of relief as they would under the current program.
Other changes include: requiring the payment of the estimated taxes owing as a condition of qualifying for the program; excluding applications from corporations with gross revenue in excess of $250 million; excluding applications that disclose income from the proceeds of crime; changing the way the amount of interest relief available is calculated; and cancelling VDP relief if it’s later discovered that a taxpayer’s VDP application was incomplete due to wilful misrepresentation.
Some examples where VDP relief may be granted include failure to report all your taxable income, claiming ineligible expenses on a tax return, failure to remit source deductions of your employees, failure to file information returns such as T4 or T5 slips, or failure to report foreign income that’s taxable in Canada.
So, let’s say you “forgot” to report some income from that offshore account or perhaps you deducted salaries paid to your spouse and kids who didn’t really do any work for your business — how would you participate under the new VDP and come clean, with minimal consequences?
Well, for starters, the relief you may be entitled to will depend upon which track the CRA assigns you to: the “general program” or the “limited program.” If you’re accepted under the general program, you’re eligible for full penalty relief and partial interest relief. The limited program would only be eligible for reduced relief.
According to the CRA, the limited program provides limited relief for applications that disclose major non-compliance, including one or more of the following situations: active efforts to avoid detection through the use of offshore vehicles or other means, large dollar amounts, multiple years of non-compliance, a sophisticated taxpayer, the disclosure is made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns, and any other circumstance in which a high degree of taxpayer fault contributed to the failure to comply.
The CRA cites the example of a taxpayer that has been transferring undeclared business income earned in Canada to an offshore bank account since 2010.
Note that just because you come forward, the CRA is not required to grant any relief and each request will be “reviewed and decided on its own merits.”
Under the general program, you won’t be charged any penalties nor will you be referred for criminal prosecution. Under the limited program, you won’t face criminal prosecution and won’t be assessed “gross negligence” penalties (which are severe) but could still be charged with other penalties.
In addition to penalty relief, if your VDP application is accepted by the CRA under the general program, you may also be granted partial relief of 50 per cent of the arrears interest owing for any years beyond the three most recent years. (Full interest charges would still be owing for the three most recent years of returns required to be filed.)
By contrast, a VDP accepted under the limited program offers no interest relief.
For your application to be valid it must meet five conditions: it must be voluntary, be complete, involve the application or potential application of a penalty, include payment of the estimated tax owing and include information that is at least one year past due. The reason for this last criteria is that the program is not meant to grant you a filing extension. For example, if your 2016 tax return was due on May 1, 2017 and you haven’t yet filed, you can’t use the VDP to get out of your late-filing penalty.
How to apply
To apply for VDP relief, use CRA Form RC199, “Voluntary Disclosures Program (VDP) Taxpayer Agreement.” On that form you would include: your name, address, postal code, telephone number, and tax identification number, whether you’ve made a previous application under the VDP, the taxation year(s) involved, the amount of income (or gain) involved, if any, the type of omission (business income, investment income, pension income, capital gain, etc.), whether the income is from a foreign source and if so, the jurisdiction(s) involved, the reason for the omission and an explanation of how the taxpayer considers that each of the five conditions for relief discussed above have been met.
The CRA is accepting comments and suggestions on the new VDP proposals by August 8, 2017 via e-mail sent to VDPCONSULTSG@cra-arc.gc.ca.