Did you forget to include income in your tax return or did not report it all?
You may have underreported your income or missed to report foreign assets, you are liable for the interest and penalties. If there is an intent to deliberately misreport your income and assets, there are additional penalties and even possible legal action including criminal prosecution.
Human beings make mistakes and realize the consequences of their mistakes sooner or later. You can still rectify errors and make your tax filings accurate even after you file your taxes. The CRA operates a program called Voluntary Disclosure Program (VDP), where you get a second chance to correct your incorrect or missing tax filings.
In this post, we will explore the nuances of VDP and find out how you can make the most of the program. There are two streams of VDP: Income tax stream and GST/HST Stream. For the purpose of this post, we shall be referring to the Income tax stream in most of the cases.
When can you apply for the Voluntary Disclosure Program (VDP):
VDP allows you to correct any discrepancies in your tax filings or file missing taxes in Canada.
You can file a VDP to-
- Correct incomplete or inaccurate information in your tax filings
- Include information or income you didn’t disclose in your past tax filings
- Rectify ineligible expenses which you claimed in the past
- Remit tax deductions at source in case of employees which you did not
- File missed information returns such as F-1135
- Include foreign sources of income that are taxable in Canada but not reported
- Correct underreported income from business or any other means
You can use VDP to correct or include any information that might attract penalties or legal actions. The information includes any income or expense that affects your taxation for the tax year.
General Vs. Limited Voluntary Disclosure Program
The VDP falls under two categories
- General Program
- Limited Program
General program: All VDPs will be treated under the General Program if the discrepancies in the filing are unintentional. The CRA will assess your VDP and determine whether your mistakes are intentional or unintentional.
In that case, you will get relief from penalties and criminal proceedings. You can also get a 50% reduction in your interest rates.
Limited program: Your VDP will be entertained under the Limited Program if the CRA spots any cases of “intentional” non-compliance. The CRA may consider various factors while evaluating an application for the Limited Program. They include-
- Attempts of avoidance of reporting foreign income
- The dollar amount of dues, expenses, or income involved
- The taxpayer’s sophistication
- CRA’s campaign for compliance
Business or corporation applications that earned gross revenues of $250 million in two of 5 preceding taxation years will be included in this program.
Please note if Canada Revenue Agency has already contacted you, have identified the discrepancies and omissions, you cannot use the Voluntary disclosure program.
Note: You may still be able to file a General VDP to correct unintentional discrepancies even if you qualify for the Limited Program.
Benefits of Voluntary Disclosure Program
Penalty Relief under VDP
You can attract heavy fines from CRA and the courts if you have discrepancies in your returns. Tax frauds are dealt very seriously by Canada, and legal action can result in heavy gross negligence penalties or criminal proceedings.
Based on your offense, you may need to pay a penalty between $1,000 and $25,000. In 2016-17, the Canadian courts imposed $10 million in fines and 50.5 years in jail term for various tax offenses.
Using VDP, you can get complete relief from paying penalties if you are simply trying to correct unintentional errors. However, if you have reported or withheld information intentionally, you might need to pay reduced penalties. But even then, your gross negligence penalties will be waived and you will be not forwarded for criminal prosecution.
Reduction of Interest
You can also get a reduction in your payable interest if your application qualifies under VDP. However, you can only get this benefit if your application is processed under the General Program (we will discuss the details in a bit).
You can get partial relief from paying interest accrued in the assessment years, predating the 3 current years of filing. A CRA minister may reduce your interest accumulated in the past 10 years based on the provisions of the Revised 10-year limitation period.
Elements of a Valid VDP Application
Your application needs to meet the following criteria to be accepted by the CRA-
The VDP must be a voluntary effort from the taxpayer. You cannot file VDP if you are knowledgeable of the enforcement action that will arise as a result of non-compliance. You also can’t apply for VDP if the CRA had already made an intervention (investigation, audits).
Your application should be complete with all the necessary information and documentation. If you have missing records, you are liable to estimate your figures for the taxation years involved. Your application should also address all the applicable financial years where inaccurate or incomplete information was filed. In order to complete the previous years’ tax returns, you might need help from professional tax services or a professional accountant in Canada.
You must be liable for paying a penalty for your discrepancies. Otherwise, you can’t apply for VDP. In other words, VDP is only for those taxpayers whose errors and omissions, whether intentional or unintentional, are expected to result in the penalties.
Penalties eligible for VDP include-
- Penalty for filing late
- Failure to remit penalty
- Installment penalty
- Gross negligence penalty
- Omission penalty
At Least One Year Past Due
The information you want to correct using VDP must be more than one year past due from the original due date. You may also include information for taxation years preceding the last taxation year.
You may also be able to include recent information, based on your circumstances.
You need to make the payment for the estimated tax you owe to the CRA along with your VDP application. If you cannot pay, you need to connect to make a payment arrangement or provide security. Absence, the payment or payment arrangement, VDP application cannot be processed.
When Not to Apply for VDP
You will not be able to take advantage of VDP if-
- Your application includes returns that don’t owe taxes or generate refunds
- The information you want to correct doesn’t attract penalties or legal action
- You use “elections” under the IC07-1R1, Taxpayer Relief Provisions
- Applications use an advance pricing methodology
- Applications treated under certain provisions of the Canada-US Treaty
- The taxpayer is bankrupt
- You request relief from interest or penalty after an assessment is issued
- If there is an enforcement action already against you
Voluntary Disclosure Program FAQ
- Can I get VDP information anonymously?
Yes, you can. You can call the Canada Revenue Agency and ask for a voluntary disclosure program. The conversations with agents are not forwarded for enforcement action against you.
- Do you have any time limit or frame for filing VDP?
You can only file one year past due information. Also, applications can only grant relief from penalty and interest for taxation years than ended within the previous ten years before the application filing calendar year.
- How do I apply for VDP?
You need to prepare all the information which needs to be filed along with the revised or missing income tax returns for the periods. Fill up form RC199 and mail it to CRA. If you have already filed previous years tax returns you might need to contact a professional tax accountant to adjust the income tax returns. Your income tax accountant can submit the forms electronically as well.
- How can I get a penalty and interest relief for wrong information in tax filing?
You can file voluntary disclosure to seek relief from interest and penalties. Please refer to the post above.
- Can you appeal against the decision of CRA if they reject my application?
Yes, you can. Information related to review can be found here.
- I did not file my T 1135 for two years. What should I do?
You can file missing T1135 under voluntary disclosure program as long as it meets the eligibility and element of a valid VDP application.
- What happens if I don’t file VDP in case of non-compliance?
Staying non-compliant can result in serious penalties including gross negligence penalties and even criminal prosecution.
- Do I need to include my foreign income in VDP?
Canada taxes its residents on worldwide income, so yes. If you have under-reported your income by omitting foreign income, you must file VDP at soonest. If any information is leaked to CRA which can cause a review or audit, you would not be able to use the Voluntary disclosure program.
Voluntary disclosure program is an opportunity for the taxpayers who want to correct their tax affairs. Further, VDP helps to protect the non-compliant taxpayers from criminal prosecution. If you are an individual or a corporation and need to correct past tax filings or file pending tax returns with CRA, you should consider the Voluntary disclosure program. CRA has many tools available to detect non-compliance. Once there is a lead on your non-compliance the window for VDP closes. Consider contacting a professional tax accountant to determine if you are eligible for VDP. VDP application might need revision to past tax filings, you are recommended to hire professional tax services to prepare tax return adjustments.
The above post is for information purposes only and users are cautioned not to make actionable decisions based on just reading one post. Voluntary disclosure can be filed by the taxpayer itself but it is always recommended to hire professional tax services for this purpose. Maroof HS CPA Professional Corporation is a CPA firm in the Greater Toronto Area and can help in the preparation of all the required returns, required workings and voluntary disclosure application to ensure higher accuracy.