INTRODUCTION: Understanding the CRA's Voluntary Disclosures Program: Your Guide to Relief and Compliance
Between December 2022 and March 2023, the Canada Revenue Agency (CRA) introduced a series of updates to its Voluntary Disclosures Program (VDP); however, the updates are all administrative.
While the updates are necessary for enhanced enforcement of the voluntary disclosure regime, this article will focus mainly on the substantive rules of the program and its current state at the moment. Our goal is to inform Canadian taxpayers to enable them to take advantage of the program, in order to maximize relief from interest and penalties, and potentially avoid criminal prosecution, which can result in jail time.
This article provides a concise manual to readily guide Canadian taxpayers through the complex web of the CRA voluntary disclosure program.
Purpose and Scope of the CRA Voluntary Disclosure Program
The goal of the voluntary disclosure program is to enable voluntary compliance of taxpayers who are offside of their tax obligations. Such taxpayers include individuals, employers, trusts, companies, GST/HST and excise duty registrants, and any other taxpayer who has an obligation to report or remit taxes.
The Voluntary Disclosure Program does not only cover disclosures under the Income Tax Act, it covers other legislation such as the Excise Tax Act, Excise Act, 2001, Air Travellers Security Charge Act, the Softwood Lumber Products Export Charge Act, 2006, the Select Luxury Items Tax Act, the Greenhouse Gas Pollution Pricing Act, the Underused Housing Tax Act and section 94.1 of the Tax Administration Act.
The Voluntary Disclosure Program gives taxpayers the opportunity to correct errors or disclose information they previously omitted in their previous tax returns or filings to the CRA, or in cases where no tax filings were made, in exchange for interest relief, penalty waivers and avoidance of prosecution for tax evasion.
Requirements for a Valid Disclosure under the CRA Voluntary Disclosure Program
Taxpayers only obtain the benefits offered by the Voluntary Disclosure Program if their disclosure meets certain requirements. A disclosure must meet 5 criteria required by the CRA for it to be considered valid:
- It must be voluntary: Your disclosure must be made ahead of any CRA enforcement actions (i.e. tax audits, tax investigations, etc.) against you or a person connected to you.
- It must be complete: You must make full disclosure of all information and documentation relevant to your disclosure. You must include the requisite filings, i.e. unfiled tax returns, forms, etc., needed to correct the error or make the disclosure.
- It must involve the application of a penalty or potential penalty (or interests, for an application related to unreported or unpaid HST/GST).
- It must relate to information that is more than one year overdue or more than one reporting period (For GST/HST application)
- It must include payment of the estimated unpaid taxes owing or request that a plan of payment be arranged.
CRA's Voluntary Disclosure Program: Navigating the Streams for Income Tax and HST/GST Relief
The Canada Revenue Agency (CRA) processes disclosure applications through different streams—primarily based on whether the non-compliance was intentional and the degree of negligence involved.
For income taxes, the CRA may accept the taxpayer's disclosure under the general or limited streams. The general stream is the default; here, the taxpayers are typically granted penalty and partial interest relief. However, the limited stream applies where the taxpayer—or a closely related party—intentionally contributed to the non-compliance, or acted with gross negligence. Under this stream, the taxpayer will receive reduced relief. Typically, the gross negligence penalties will be waived, and the taxpayer remains responsible for the taxes owing, applicable interest, and any other penalties. Both the general and limited streams offer relief from criminal prosecution.
There are similar categorizations relating to HST/GST applications: the Wash Transactions, General Stream and Limited Stream. In the Wash Transactions category, the applicant gets full penalty and interest waiver. The General and Limited Streams follow the same criteria and provide comparable relief as those used for income tax disclosures.
It is important to note that all voluntary disclosure applications are assessed on a case-by-case basis. Each is evaluated on its own merits. However, the CRA considers several factors to determine whether the taxpayer or a closely related party acted intentionally or with gross negligence—thereby influencing which stream the application falls under. These factors include:
- The amount of money involved;
- The taxpayer's level of sophistication;
- Whether the taxpayer made immediate efforts to correct the error or omission after becoming aware of it;
- Whether the taxpayer tried to conceal the non-compliance;
- How long the non-compliance has existed; and
- Whether the disclosure was prompted by knowledge of an imminent CRA focus in that area of non-compliance.
The CRA's Pre-Disclosure Service: An Option for Cautious Self-Represented Taxpayers
The CRA offers a Pre-Disclosure Service that allows taxpayers to contact the agency anonymously to ask questions about the Voluntary Disclosure Program and discuss the specifics of their situation. These discussions are informal and non-binding—they do not limit the CRA's authority to tax audit, investigate, impose penalties, or initiate criminal tax prosecution against you. It is important to note that using this service does not guarantee acceptance into the Voluntary Disclosure Program.
Updates to the CRA Voluntary Disclosure Program.
The updates to the program are mostly administrative. The Canada Revenue Agency's Voluntary Disclosures Program now uses two new systems to handle the intake, tracking, and management of applications, as well as to generate correspondence (letters) for applicants and their authorized representatives. The Program also moved away from relying solely on internal mail, opting instead to submit various forms and returns for processing by email. For larger files, staff use a secure data transfer system that supports file sharing up to 250 MB within the CRA. Additionally, the Program is now storing and managing digital documents in a secure, restricted-access repository on the CRA's certified shared drive.
PRO TAX TIPS: Second Chances Are Rare—Use the Voluntary Disclosures Program Wisely
The VDP is not a trump card to escape prosecution and possible jail time for repeated acts that border on tax evasion. The intent behind the program is to encourage taxpayers who have made tax mistakes to come forward, correct their tax affairs, and become fully tax compliant moving forward.
It is still possible to benefit from the VDP for a subsequent instance of non-compliance, particularly if it is related to the original issue or was genuinely beyond your control. However, once you have received relief through the VDP, it is in your best interest to make every effort to remain law-abiding and tax compliant thereafter.
While the Canada Revenue Agency (CRA) may consider granting relief again, the burden will be on the taxpayer to clearly demonstrate why they qualify. Convincing the CRA of your eligibility for a second disclosure becomes more difficult, especially if the repeated non-compliance suggests a pattern rather than an isolated error.
Regardless of what your situation may be, our experienced Canadian tax lawyers can help you navigate the Voluntary Disclosures Program and present your strongest possible case to the CRA.
Frequently Asked Questions (FAQs):
What is the purpose of the CRA's Voluntary Disclosure Program (VDP)?
The VDP aims to ensure voluntary compliance of taxpayers with their tax obligations. It allows taxpayers to correct errors or disclose previously omitted information in exchange for relief from interest and penalties, and to potentially avoid criminal prosecution.
Who is eligible to use the CRA Voluntary Disclosure Program?
Eligible participants include individuals, employers, trusts, companies, GST/HST and excise duty registrants, and any other person with an obligation to report or remit taxes.
What are the disclosure streams under the VDP for HST/GST, and what kind of relief do they offer?
Relief is granted at the discretion of the CRA, and such discretion must be exercised reasonably and in accordance with the law. With that in mind, the disclosure streams for HST/GST Voluntary Disclosure Applications and the typical reliefs offered are as follows:
- Wash Transactions: Full interest and penalty waiver.
- General Stream: Full penalty relief and 50% interest waiver.
- Limited Stream: No gross negligence penalties, but will still have to pay full interest and penalties.
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.
