Did you forget to include income in your tax return or did not report it at 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.
What is CRA Voluntary Disclosure Program (VDP)?
Human beings make mistakes and realize the consequences of their mistakes sooner or later. When it comes to taxes, a lot of people make mistakes or sometimes intentionally omissions or misreporting. If you are one of those people, there is a possibility to come on the right side of the Canadian tax system.
The CRA operates a program called Voluntary Disclosure Program (VDP), where you get a second chance to correct your incorrect or missed tax filings. Of course, the CRA VDP program comes with some caveats.
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 CRA 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):
CRA 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 T-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. When you file a VDP Application, you do not have the option to choose between General or Limited program.
- General Program
- Limited 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 prosecution. You can also get a 50% reduction in your interest charges.
If there is an element of intentional non-compliance, your VDP application moves to Limited Program.
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.
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 offence, 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 offences.
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, you can get protection from criminal prosecution and gross negligence penalties.
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.
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
A VDP 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. Further, you cannot apply for VDP if the CRA had already made an intervention (investigation, audits).
You can also not make a VDP application if you are aware of someone else who is under audit or investigation and it can lead to you.
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. You must attach all supporting documents, adjustment requests and information returns.
The “completion” requirement makes a VDP application a bit trickier for the taxpayers. What documents need to be attached or what is an appropriate supporting document is one of the key challenges taxpayers face. To overcome this, it is recommended to use a professional accountant who has experience in VDP Applications.
You must have the potential of 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, result in penalties.
Penalties eligible for VDP include-
- Penalty for filing late
- Failure to remit the 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. For example, you cannot correct errors and omissions of 2019 tax returns in 2020 since it is not past year due. 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.
If you select the “payment arrangement” option on the VDP application, it makes your VDP application compliant with the tax payment requirement.
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 or someone you know can lead to 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. If you are not comfortable sharing your information with CRA agents, you can contact us for a quick consultation on your case.
Is there 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 CRA Voluntary disclosure program?
Start with brief research. Contact a professional tax accountant or tax lawyer, if the amounts involved are substantial. Gather all the information you have and start preparing your application.
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, attach all the required documents and send it CRA. You can send the application either by mail or electronically.
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 an application under the voluntary disclosure program to seek relief from interest and penalties. Your application must meet the 5 conditions of the CRA Voluntary disclosure program. If it does not meet requirements, your application does not qualify under VDP. As an alternative, you can still file for Taxpayer relief from penalties and interest application.
Can you appeal against the decision of CRA if they reject my application?
If your application is rejected, you can file for an appeal. Information related to the 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 the voluntary disclosure program as long as it meets the eligibility requirements and all the five conditions 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 cannot use the Voluntary disclosure program.
Do I need to hire an accountant or a lawyer for the VDP application?
Not necessarily! If you have a straight forward case of error or omission, and the dollar amounts are not substantial, you can still file your own VDP application. If there are significant non-compliance and substantial taxes, you must contact an accountant or a lawyer. Hiring a professional accountant adds an extra layer of comfort that your VDP application is complete.
This is important to note that an unsuccessful VDP application discloses omissions and errors anyways. As a result, there is no protection from gross negligence or potential criminal prosecution.
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 relief under voluntary disclosure programs or not. VDP application might need revision to past tax filings.
The above post is for information purposes only and users are cautioned not to make actionable decisions based on this post alone.
Voluntary disclosure can be filed by the taxpayer itself but it is always recommended to hire a professional accountant who has dealt with voluntary disclosures. 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.