What is the Voluntary Disclosure Program
In recent years, the CRA has taken a rather aggressive approach in recovering uncollected taxes. The Offshore Tax Informant Program awards informants 5 to 15 percent of the federal tax collected if their leads result in more than $100,000 of additional federal tax. In 2020, the CRA has updated its website to its snitch line formerly known as the “National Leads Program” to accept tips from people who want to report others that may be taking advantage of the government relief such as CERB, CESB or CEWS.
Fortunately, the Voluntary Disclosure Program (VDP) allows taxpayers to come forward and correct previous inaccurate information on a tax return or to disclose information they fail to report. In exchange, the Canada Revenue Agency (CRA) may provide full or partial penalty and interest relief and refrain from pursuing criminal charges. One thing to keep in mind is that the CRA may refuse to accept a VDP application if they find out the taxpayer has previously made an application.
Conditions of a Valid VDP Application
A VDP application must meet the following five conditions in order to be considered valid:
- It must be voluntary;
- It must be complete;
- It must involve the application or potential application of a penalty;
- It must include information that is at least one year past due; and
- It must include payment of the estimated tax owing.
A VDP application will not be considered voluntary if:
- The taxpayer was aware of or had knowledge of an “enforcement action” that has been initiated against the taxpayer or a person associated with or related to the taxpayer, or against a third party where the purpose and impact of the “enforcement action” against the third party is sufficiently linked to the present application; or
- The CRA has already received information regarding the specific taxpayer's (or a related taxpayer's).
The term “enforcement action” generally includes:
- An audit, examination, investigation or other enforcement actions conducted by the CRA or any other authority or administration such as a law enforcement agency, securities commission or federal or provincial authorities;
- Requests, demand or requirements issued by the CRA in relation to unfiled returns, unremitted tax or deductions required at source;
- Requests, demands or requirements that have been issued to other tax affairs of the taxpayer or his partners, trusts in which the taxpayer is a settlor, trustee or beneficiary or corporations associated with or related to the taxpayer; or
- Any direct contact by the CRA for any reason relating to non-compliance issues.
However, sometimes an enforcement action initiated by the CRA may not be a cause to deny a taxpayer's VDP application. One example would be a letter from the CRA to invite the taxpayer to use the VDP to correct their tax affairs.
A VDP application must include information of all relevant taxation years where there was a previous error or unreported income with respect to the taxpayer. If books and records no longer exist, the taxpayer should make all reasonable efforts to estimate the income for those years.
If under extraordinary circumstances where the taxpayer cannot submit all information related to their VDP application, he or she must make a request in writing for additional time when the application is submitted. Usually, the CRA will allow at maximum 90 days.
An application that contains minor errors or omission may still qualify if the CRA is satisfied that taxpayer has provided all available information or has made reasonable efforts to estimate income amounts related to years for which documentation is unavailable.
The VDP application must involve the application or potential application of a penalty such as a late filing, a failure to remit or omission penalties.
One year past due
The VDP application must include information related to a taxation year that is at least one year past the due date for filing. An application that includes information that relates to a taxation year that is more than 1 year and also information that is more recent may still quality.
The taxpayer must include payment of the estimated tax owing when the VDP application is submitted. If the taxpayer cannot make a full payment of the estimated tax owing, he or she may request to be considered for a payment arrangement and it must be approved by the CRA collections officials.
Whether to accept a VDP application is subject to CRA's Discretion
The CRA is not required to grant relief regarding all VDP applications. Each VDP application will be reviewed and decided based on its own merit and it is highly recommended to consult with an experienced Canadian tax lawyer to maximize your chance to be accepted.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.