As just about everyone knows, individual income tax returns for the 2016 tax year should have been filed, by most Canadians, and any tax balance owed must've been paid by all individual Canadians, on or before May 1, 2017. And, most Canadians do file that return, and pay any tax balance owed, on or before the deadline.
As of April 24, 2017, the Canada Revenue Agency (CRA) had received just over 18 million individual income tax returns for the 2016 tax year. There are, however, a significant minority of Canadians who don’t file a return, or pay taxes owed (or both) by the annual deadline.
The reasons for that are as varied as the individuals involved. In some cases, taxpayers are unable to pay a tax balance owing by the deadline and they think (wrongly) that there’s no point to filing a return where taxes owed can’t be paid. They may even think that they can fly “under the radar” and escape at least the immediate notice of the tax authorities by not filing the return.
In other cases, it is just procrastination – virtually no one actually likes completing their tax return, especially where there’s the possibility of a tax bill to be paid once that return is done.
One of the difficulties resulting from a failure to file a return or pay taxes owed is that it is a problem which tends to compound itself. Once the taxpayer is in arrears of filing or payment obligations, it becomes more difficult to file and pay in subsequent years, as such filing will certainly bring the previous default to light.
Taxpayers who are in arrears with respect to their filing and/or payment obligations may envision charges of tax evasion, fines, and even incarceration for their previous defaults. The CRA, on the other hand, obviously wants taxpayers to file and pay on time, but would rather not incur time and costs to chase down delinquent taxpayers, especially where the amounts involved are relatively small.
The CRA’s solution to that problem is its Voluntary Disclosure Program (VDP), which allows taxpayers who are in default of their filing or payment obligations to come forward and set things right. The incentive for taxpayers to do so is that while all taxes owed will have to be paid, along with accrued interest, no fines will be levied and no criminal charges will be brought.
For taxpayers who want to get out from under their self-imposed tax problems, however they came about, and to get a fresh start, it’s generally a good deal.
The range of taxpayer errors and omissions for which the CRA will accept a voluntary disclosure is quite broad, and includes errors, omissions, or defaults made relating to the following:
- failing to fulfill tax filing and payment obligations;
- failing to report taxable income received;
- claiming ineligible expenses on the tax return;
- failing to remit employees’ payroll deductions;
- failing to report an amount of GST/HST (including undisclosed liabilities or improperly claimed refunds or rebates, unpaid tax, or net tax from a previous reporting period);
- failing to file required information returns; and
- failing to report foreign income that is taxable in Canada.
There is a much shorter list of taxpayer circumstances for which a voluntary disclosure under the VDP cannot be made, but those won’t apply to most taxpayers.
A VDP application can’t be made for bankruptcy returns, income tax returns with no taxes owing or with refunds expected, or taxpayer elections (in which the taxpayer chooses to have a particular tax provision apply).
Generally speaking, in order for a VDP application to be made, four circumstances must be present. The disclosure must be completely voluntary (meaning that it can't be made after the CRA has already taken compliance action of any kind against the taxpayer, or the taxpayer is aware that such compliance or enforcement action will be taken) and must be complete – any VDP application must be in respect of all tax years where filing or payment is in arrears or an error or omission has been made, not just some of those years. In addition, the taxpayer making the disclosure must be liable to a penalty and the information to be disclosed must be at least one year overdue, but must also relate to tax years which ended within the previous 10 calendar years.
That one-year requirement means that taxpayers who are now late in filing their return for 2016 can’t apply to the VDP in respect of that return. The best advice for taxpayers who haven’t yet filed or paid for 2016 is to file and pay as soon as possible. Where the taxpayer can’t pay taxes owed, in full or in part, he or she should contact the CRA to make arrangements to pay such amounts over time. A taxpayer who hasn’t filed for 2016 and one or more previous years, can still make a VDP application in respect of any or all of those previous years within the last decade.
That application can be made in one of three ways – through the CRA’s My Account service on its website, by fax, or by regular mail. The form used for disclosures is Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, which is available on the CRA website. Where the completed form is faxed or sent by mail, the destination address and fax number is as follows:
Voluntary Disclosures Program
Shawinigan-Sud National Verification and Collections Centre
4695 Shawinigan-Sud Boulevard
Shawinigan QC G9P 5H9
Fax: 1-888-452-8994
The CRA now handles all VDP matters through this one centralized office. It previously provided VDP fax service through one of its B.C. offices, but that service was discontinued in February 2017.
Once the CRA has received the taxpayer’s VDP application, it will review that application and respond in writing with its decision. A notice of assessment or reassessment will then be issued to the taxpayer setting out the decision and amounts owed by that taxpayer.
It’s also possible that the CRA, in the course of reviewing the VDP application, will have need of further information. That request for information will be made by means of a letter to the taxpayer, and that letter will provide both a reference number for the application and a telephone number which the taxpayer can call.
Taxpayers are understandably somewhat nervous about disclosing past tax transgressions to the tax authorities. One of the better features of the VDP program is that it gives taxpayers the right to make a “no-names” disclosure, in which all of the relevant information, excepting the taxpayer’s personal identifying information, is provided to the CRA. Once the CRA has reviewed the initial information provided by the taxpayer, it will provide a preliminary determination of whether the taxpayer’s situation qualifies for a VDP application (that is, whether the conditions outlined above are met and there is nothing in the taxpayer’s situation which would disqualify him or her from making a VDP application) and provide its opinion on the possible tax implications of the disclosure. If the taxpayer’s situation does qualify for a VDP application, then the taxpayer has 90 days in which to provide his or her personal identifying information and proceed with that VDP application. If the taxpayer doesn’t do so, the file is closed. If the taxpayer decides that he or she wishes to go forward with the voluntary disclosure, then the matter proceeds in the same way as outlined above for a “named” disclosure.
“Coming clean” with the tax authorities where tax is owing or returns haven’t been filed as required is a difficult decision to make, and the financial cost, depending on the circumstances, can be significant. However, the cost of not coming forward can be greater. Where tax is owed to the CRA it charges, by law, interest at higher than commercial rates, and such interest is compounded daily (meaning that every day interest is charged on the previous day’s interest). As well, where penalties are levied, interest is charged on unpaid penalty amounts. Making a voluntary disclosure and coming to a resolution with the CRA will allow the taxpayer to avoid both the penalties and the interest which would have accrued on such penalties, and to stop the interest clock running on the amount of any unpaid taxes.
