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Making a voluntary disclosure to the Canada Revenue Agency

Though it is obviously preferable, when it comes to taxes, filing on time and making sure the information provided to the CRA is complete and accurate (as each taxpayer must certify on the last page of his or her return), this doesn’t always happen. For any number of reasons, taxpayers may put off what everyone agrees is an unpleasant task and consequently find themselves several years in arrears with respect to filing (which is sure to only compound their difficulties). Others may have filed returns on time but have understated income or falsely inflated expenses in order to reduce the amount of tax payable. The dilemma which then arises, is whether to come clean with the tax authorities or to keep quiet and hope that the failure to file, or error or omission, is never discovered.

At the end of the day, the CRA’s goal is to have all required tax returns filed and to have all income and expenses correctly reported. However, tracking down non-filers, or those who have filed inaccurate returns, takes a great deal of time and consumes a lot of CRA resources. To assist in that process, the Agency has put in place a program to encourage Canadians who are delinquent in such ways to come forward and, effectively, “come clean”. That program is the CRA’s Voluntary Disclosure Program (VDP).  As the name implies, the Program allows taxpayers to voluntarily disclose to the CRA any past errors or omissions or failures to file when required. Where the requirements of the program are met, the CRA is authorized to cancel (or “waive”) any penalties which might otherwise be assessed against the taxpayer. It’s important to note that only penalties may be forgiven, and that the taxpayer will, notwithstanding any voluntary disclosure, continue to be liable for any outstanding taxes, plus interest charges.

The CRA imposes four conditions which must be met before a disclosure will qualify under the program. As follows:

  1. The disclosure must be truly voluntary in nature – that is, it must be initiated by the taxpayer and, in particular, must not be the result of the taxpayer’s knowledge of enforcement action about to be taken by the CRA. In other words, a taxpayer who “voluntarily” discloses past transgressions after receiving a request to file outstanding returns or even finding out that he or she is about to be audited will not qualify under the program.
  2. Any disclosure made by the taxpayer must be “complete” as the term is understood by the CRA. The taxpayer is expected to provide full and accurate reporting of all previously inaccurate, incomplete, or unreported information. It’s not possible to make selective disclosure of, for instance, one tax year while ignoring others. As well, the CRA may request documentation to verify the amounts to be disclosed. If that documentation shows that the initial disclosure contained significant errors or omissions, the disclosure will not qualify under the VDP. In such a case, the disclosed information will be processed by the CRA and the Agency will be able to apply interest and penalties to the entire outstanding amount.
  3. The voluntary disclosure by the taxpayer must involve at least one penalty. Since the point of the VDP is to forgive penalties while collecting outstanding taxes and interest, there would be no point to seeking penalty relief where no penalties are involved. In such cases, the relevant information should simply be disclosed to the CRA which will then process it and assess any taxes and interest owed.
  4. Finally, the taxpayer’s disclosure must generally include information which is at least one year past its due. In other words, a disclosure could not normally be made in respect of a 2015 income tax return (which was due April 30, 2016) until May of 2017. The CRA will, in some circumstances, accept a disclosure of information which is less than one year past due but, however, such disclosure cannot be used by the taxpayer simply to avoid penalties. For instance, a taxpayer who failed to get his or her 2015 return in and taxes paid by April 30, 2016, cannot now make a “voluntary disclosure” simply in order to avoid the late-filing penalty which would otherwise be assessed.

Finally, a taxpayer who is considering making a voluntary disclosure (and whose situation meets the four criteria required by the CRA, as outlined above) can “test the waters”, to a degree, before deciding to make a full disclosure. The CRA will accept a “no-name” disclosure from a taxpayer using the same form as that used by a taxpayer making a full disclosure. While the taxpayer is not required to provide his or her name or address, the CRA does require that the first three characters of the taxpayer’s postal code be disclosed so that the disclosure form can be sent to the correct tax centre for processing. The CRA can, at the taxpayer’s request, consider the information provided and can then advise the taxpayer on the possible tax implications, based on the information provided. It’s then up to the taxpayer to determine whether to proceed with a full disclosure. The CRA’s policy with respect to such no-name disclosures requires the taxpayer who makes a no-name disclosure to provide identifying information within 90 calendar days from the effective date of disclosure, in order to “complete” the disclosure. During the 90-day period, the taxpayer is protected from prosecution and from the application of penalties. However, if at the end of the 90 day period the identity of the taxpayer remains unknown, the voluntary disclosure file will be closed without further contact from the CRA, and no extension of the 90-day period will be allowed.

No one likes paying taxes, and paying back taxes, plus interest, is even more unpalatable. However, for taxpayers who find themselves in a position where an investigation or audit by the CRA into their affairs would likely result in the payment of taxes, plus interest, plus penalties, or even a prosecution, the Voluntary Disclosure Program offers a way to “come clean” without the risk of prosecution, and without the often onerous penalties which can be levied by the tax authorities.