What is the Voluntary Disclosure Program
Taxpayers in Canada are supposed to file their tax returns accurately and timely, otherwise there may be interest and penalties or even criminal prosecutions depending on the situation. If a taxpayer fails to do so, he is not entirely out of luck. The Voluntary Disclosure Program (known as “VDP”) is designed to be a second chance granted by the Canada Revenue Agency (CRA) for a taxpayer to correct their previous errors or disclose information not previously reported. If a VDP application is accepted, a taxpayer will be eligible for relief from prosecution and in some cases from penalties that they would otherwise be subject to under the legislation. However, the CRA is not required to grant relief to all VDP applications and is guided by principles of procedural fairness when exercising its own discretion. Therefore, it is highly recommended for a taxpayer to consult with an experienced Canadian tax lawyer to maximize his or her chance of acceptance.
When to file a Voluntary Disclosure Application
The VDP is designed to allow taxpayers to correct their previous errors or unfiled returns. The followings are some typical situations where a taxpayer may want to take advantage of the VDP:
- A late filed or unfiled tax return;
- Unreported income on a previously filed tax return;
- Wrong expenses were claimed on a previous return;
- Unsubmitted employee source deductions on a previous return;
- Unreported foreign assets such as T1135 form;
- Ineligible GST/HST input tax credits that was previously claimed.
Conditions of a Valid Voluntary Disclosure Application
For a VDP application to be accepted, it must meet the following conditions:
- The application must be voluntary. That means a taxpayer must initiate the process before the CRA contacts him for potential tax problems.
- The information provided by the application must be complete. Therefore, a taxpayer must disclose all tax information related to all relevant tax years and it cannot be a partial disclosure.
- It must involve the application or potential application of a penalty.
- It must include information that is at least one year past due. If your tax return is less than a year due, you can simply file it although you may need to pay a late-filing fee.
- It must include payment of the estimated tax owing.
Two programs regarding VDP
The CRA used to allow no-name VDP applications, however this is no longer the case. In March 2018, the CRA made significant changes to the VDP to differentiate those who want to correct unintentional errors from those who attempt to intentionally avoid their tax obligations. A VDP application will fall under two categories:
- The General Program.
- Penalty relief: Taxpayers will not be charged penalties and will not be referred for criminal prosecution with respect to the disclosure.
- Interest relief: The CRA may grant partial relief in the application of interest against a taxpayer in respect of assessments for years preceding the three most recent years of returns required to be filed subject to a 10-year limitation. Generally, this interest relief will be 50% of the applicable interest for those periods. However, full interest charges will be assessed for the three most recent years of returns required to be filed.
- The Limited Program. These are applications where there is an
element of intentional conduct on the part of the taxpayer or a
closely related party, or for corporations with a gross revenue
exceeding $250 million.
- Penalty relief: taxpayers will not be referred for criminal prosecution with respect to the disclosure and will not be charged gross negligence penalties where the facts establish that the taxpayer is liable for such penalties. However, taxpayers will be charged other penalties as applicable.
- Interest relief: no interest relief will be provided under this program.
In comparison, the General Program is more favourable for a taxpayer. Moreover, taxpayers under the Limited Program will have to waive their rights to file the Notice of Objection to the CRA's Appeals division as well as their rights to appeal to the Tax Court of Canada except for calculation errors or issues other than those disclosed under the VDP. The General Program, on the other hand, still allows taxpayers to file a Notice of Objection or appeal to the Tax Court of Canada.
Limitation period regarding CRA's discretion for relief of interest and penalties
The CRA's ability to grant penalty relief is limited to any penalty that could apply to any taxation year that ended within the previous 10 years before the calendar year in which the application is filed. Regarding interest relief, the CRA's ability is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed.
What to do if your VDP application is denied
There is no right of objection under the Income Tax Act for a taxpayer to dispute the CRA's discretionary decision regarding the VDP. However, a taxpayer may request in writing for the CRA to reconsider the original decision if he or she believes the CRA has not exercised discretion in a fair and reasonable manner. Another avenue for a taxpayer is to make an application to the Federal Court for a judicial review within 30 days from the date the notification of the VDP decision was communicated to the taxpayer.
According the CRA, whether an application will fall under the General Program or the Limited Program will be made on a case-by-case basis. The CRA may consider a number of factors, including but not limited to:
- The dollar amounts involved;
- The number of years of non-compliance; and
- The sophistication of the taxpayer.
At Barrett tax law, we have extensive experience in helping clients draft VDP applications and we will go through each criterion to ensure your application will fall under the General Program.
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.