Coming Clean with the Tax Authorities

Although virtually no one looks forward to the task, the vast majority of Canadians do file their tax returns, and pay any taxes owed, by the applicable tax payment and filing deadlines each spring. There is, however, a significant minority of Canadians who do not file or pay on a timely basis and, for some, that’s a situation which can go on for years.

Part of the problem, of course, is that once a taxpayer is behind on his or her filing or payment of taxes, the problem snowballs. A taxpayer who has already failed to file a tax return may be reluctant to file the subsequent year’s return, for fear of bringing the matter to the attention of the tax authorities. And, of course, where taxes aren’t paid in a particular year, it’s that much more difficult to come up with enough money the next year to pay the bill covering taxes owed for two years.

The reasons why some taxpayers don’t file or pay on time are many. Some don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it is also the case that it is necessary to file in order to receive a number of income-tested tax credits and benefits, including the HST credit, the Canada child benefit, and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the Canada Revenue Agency (CRA) in order to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.

There are also a number of Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each and every instance of non-compliance simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover it.

With all of that in mind, several years ago the CRA instituted a program — the Voluntary Disclosure Program (VDP) — intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.

In 2018 changes were made to the VDP which narrowed the eligibility criteria and imposed additional conditions on participants. The requirements for participation in the VDP, and the procedure to be followed to pursue it, are now as follows.

To qualify for relief, an application must:

  • be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
  • be complete;
  • involve the application or potential application of a penalty; and
  • include information that is at least one year past due.

Applications made for disclosure under the VDP are assigned to one of two tracks — the Limited Program or the General Program, and that determination, which is made on a case-by-case basis, will affect the kind of relief provided and the extent of that relief. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance that appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:

  • the dollar amounts involved;
  • the number of years of non-compliance;
  • the sophistication of the taxpayer;
  • whether efforts were made to avoid detection through the use of offshore vehicles or other means; and
  • whether disclosure is made following a CRA statement regarding its intended specific focus of compliance or the issuance by the Agency of broad-based correspondence about a particular compliance issue.

Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.

Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief (usually 50% of the interest assessed), specifically for the years preceding the three most recent years of returns required to be filed. However, full interest charges are assessed for the three most recent years of returns required to be filed.

There is also now a requirement that taxpayers who make an application under the VDP pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement.

As well, the CRA previously offered what was termed a “no-names disclosure”. That option is no longer provided, but has been replaced by a “pre-disclosure discussion” service. That service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion is not binding on either party, and does not constitute acceptance into the VDP or preclude the Agency from initiating an audit or referring the case for criminal prosecution.

The CRA provides detailed information on its website with respect to the VDP, covering both the criteria for participation, the kind(s) of relief which may be provided, and the procedure involved in seeking that relief. All of that information can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html and https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-income-tax-overview.html.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

We can help you with Coming Clean with the Tax Authorities or any other accounting or business needs you may have. Contact us and we’ll be in touch soon.

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