You are sipping summer cocktails with your neighbour when he tells you about
his offshore investments. "The returns have been outstanding and the best thing
is the taxman will never know!"
That may be true, but if uncovered by the Canada Revenue Agency, unreported
income, particularly undisclosed foreign assets, can land you in a heap of
trouble. Financial and even criminal prosecution might await. The good news is
that it is not too late to recover from past tax sins or omissions.
Under the Voluntary Disclosures Program, if you fess up to your tax failings
in past years you can avoid penalties and even criminal prosecution. You are
still on the hook for the taxes owing plus interest, but that is still much
cheaper than paying penalties on top of what you owe.
Not only is your neighbour, as a Canadian resident, taxed on his worldwide
income in Canada, he must also disclose his foreign holdings if they total more
Assuming that your neighbour has been filing returns each year so that
late-filing penalties are not applicable, the penalties for knowingly not
reporting income range from 10% of the unreported income to 50% of the tax owing
on the unreported income.
For the most egregious cases, where a taxpayer is charged with tax evasion,
the penalty can be up to 200% of the tax evaded and up to five years in jail.
There are additional penalties for failing to disclose your foreign holdings
on Form T1135 -- the Foreign Income Verification Statement. The penalties are
severe, from $25 per day to a maximum of $2,500. If you knowingly fail to file
the form, the penalty jumps to $500 for each month the form is not filed, to a
maximum of 24 months. Beyond that period, an additional penalty of 5% of the
cost of the property may be charged.
To avoid these penalties under the voluntary disclosure program, you must
meet four conditions: First, the disclosure must be voluntary and must be
initiated by the taxpayer before he or she is aware of any audit, investigation
or other enforcement action commenced by the CRA.
Second, the disclosure must be complete and fully disclose all previously
inaccurate, incomplete or unreported information.
Third, the tax "sin" you are disclosing must have been something for which
you would have been penalized if you didn't disclose it voluntarily
Finally, the disclosure must generally be at least one year past the due date
for the taxes owed. In other words, if you haven't yet filed your 2006 tax
return, you can't use the Voluntary Disclosures Program to avoid a penalty for
your late-filed return.
The program appears to working. For the fiscal year ending March 31, 2006
(the most recent year for which statistics are available), the CRA reported that
it processed more than 7,300 voluntary disclosures, which brought in revenues of
- Jamie Golombek, CA, CPA, CFP, CLU, TEP, is vice-president,
taxation and estate planning, at AIM Trimark Investments in Toronto.