The Canada Revenue Agency's (CRA) Voluntary Disclosures Program (VDP) is intended to promote voluntary compliance with the accounting for, and payment of duty and taxes provisions under the Customs Act, Customs Tariff, Income Tax Act, and Excise Tax Act (GST/HST). The VDP encourages clients to come forward and correct deficiencies to comply with their legal obligations. It is a fairness program that is aimed at providing taxpayers with an opportunity to correct past omissions, and making themselves tax compliant.
Taxpayers can make disclosures to correct inaccurate or incomplete information, or to disclose information not previously reported. For example, clients may not have met their tax obligations if they claimed ineligible expenses, failed to remit source deductions or GST/HST, or did not file the correct accounting information.
Two other frequent problem areas for taxpayers are offshore funds and failing to file information returns. We often encounter clients who have offshore investments that have not been reported for Canadian tax purposes. Sometimes these accounts have been inherited and the previous holder did not report the income to the CRA. We can assist you in making the necessary disclosures and, often, limit the number of years for which taxes will have to be paid. Once this process is completed, the funds can be brought into Canada with impunity.
Although an individual taxpayer, as opposed to a corporation, has no obligation to file a tax return if there is no tax owing, unless specifically requested to file by the CRA, there are a number of information returns that must be filed regardless of taxes owing. The most common are information returns regarding foreign assets. Although there is no tax component to this filing, there is a penalty of $2,500 per year for non-filing.
Taxpayers who make a valid voluntary disclosure will have to pay the taxes and duties owing, plus interest. In this situation, the CRA can provide relief from penalties and prosecution that would otherwise be imposed under the acts listed above.
On June 9th, 2017, the Minister announced proposed changes to the VDP. There is a 60-day consultation period and the changes will be introduced in the fall of 2017.
Proposed Changes to the VDP
Under the proposed changes, the VDP will have two tracks for income tax disclosures:
The first track is a General Program. If accepted under the VDP, these applications will be eligible for penalty relief and partial interest relief.
The second track is a Limited Program. Applications that disclose major non-compliance will be processed under this Limited Program and if accepted, will receive reduced relief under the VDP. The determination of whether an application should be processed under the Limited Program will be made on a case by case basis.
Penalty Relief
Under the General Program, the taxpayer will not be charged penalties or referred for criminal prosecution with respect to the disclosure (i.e. for tax offences).
Under the Limited Program, the taxpayer will not be referred for criminal prosecution with respect to the disclosure (i.e. for tax offences) and will not be charged a gross negligence penalty even where the facts establish that the taxpayer is liable for such a penalty. However, the taxpayer will be charged other penalties as applicable.
Interest Relief
If a VDP application is accepted by the CRA under the General Program, the Minister may grant partial relief from interest charges. There is no reduction of interest for the most recent 3 years, but the taxpayer can get a 50% reduction of interest for prior years.
Under the Limited Program, no interest relief will be provided.
Significant Problems with the Proposed Changes
There are two changes that are particularly problematic.
10 Year Limitation
Under the Income Tax Act, the CRA does not have the ability to forgive or reduce interest or penalties beyond 10 years. BUT, in order to make a valid Voluntary Disclosure, the information must include ALL relevant tax years.
So, if a taxpayer makes a disclosure of unreported income for the last 20 years, the CRA can only give interest and penalty relief for 10 years. And, failure to disclose the previous years can invalidate the disclosure.
Payment of Tax
The taxpayer must include payment of the estimated tax owing with their VDP application. When the taxpayer does not have the ability to make payment of the estimated tax owing, a payment arrangement supported by adequate security may be considered in extraordinary circumstances with approval from CRA Collections officials. In these circumstances, the taxpayer must make full disclosure and provide evidence of income, expenses, assets, and liabilities supporting the inability to make payment in full.
Some of us are old enough to remember when it was necessary to pay all taxes assessed in order to file a Notice of Objection. That was a significant bar to many taxpayers’ ability to object to a tax assessment. The requirement to pay the estimated taxes may be a bar to the making of a VDP application for many.
Don’t Delay
In view of the significant changes that will be introduced in the fall, it is crucial not to delay in filing a VDP application if your circumstances warrant it.
If you need assistance with the VDP get in touch without delay.
I hope you enjoy the summer.