Canada’s tax system is a self-assessing and self-reporting one, in which taxpayers are expected (and required) to provide the tax authorities with an annual summary of their income and any deductions and tax credits claimable, along with payment of any tax amount owed. Although no one really likes doing their taxes, or paying those taxes, the vast majority of Canadians nonetheless do file their returns on time, and pay up. For a significant minority, however, completing and filing the return is something that just doesn’t get done. Sometimes the cause is just procrastination, while in other cases, a taxpayer is worried that there will be a large balance owing and he or she avoids completing and filing the return for that reason.
Of course, once a taxpayer fails to file an annual return, that taxpayer is in a quandary which only gets worse over time. Filing a return in a subsequent tax year will surely draw the attention of the tax authorities to the year or years in which a return wasn’t filed. Worse, if there was a balance of taxes owed, that amount can only have gotten larger with the addition of interest charges and it’s likely that penalties will levied as well. Consequently, a failure to file, for whatever reason, tends to become an ongoing, multi-year problem.
Taxpayers who find themselves in a situation in which they have failed to file a return in a previous year (or who have filed a return or returns in which they failed to report income or claimed deductions or credits to which they were not entitled) do have a option other than just hoping that their failings never come to light. The Canada Revenue Agency (CRA) offers an administrative program which allows such taxpayers to “come clean” with respect to past errors or omissions, pay any back taxes owed (plus interest) while avoiding the imposition of penalties or, in the worst-case scenario, prosecution. That option is the CRA’s Voluntary Disclosure Program.
The CRA will accept a voluntary disclosure and provide relief with respect to a wide range of taxpayer errors and omissions, including the following:
- failure to fulfill obligations under the tax legislation;
- failure to report taxable income received;
- claiming of ineligible expenses on the tax return;
- failure to remit employees’ source deductions;
- failure to report an amount of GST/HST (which may include undisclosed liabilities or improperly claimed refunds or rebates or unpaid tax or net tax from a previous reporting period);
- failure to file information returns; or
- failure to report foreign-sourced income that is taxable in Canada.
There are also situations in which a voluntary disclosure cannot be made, but relatively few of those would relevant to most individual taxpayers. Individual taxpayers cannot make a voluntary disclosure with respect to bankruptcy returns or with respect to income tax returns with no taxes owing or refunds expected.
Most taxpayers are understandably nervous about taking the initiative to come clean with the CRA about past transgressions. For those taxpayers, the CRA provides the option of an anonymous or “no-name” disclosure which, in effect, allows the taxpayer to test the waters. In a no-name disclosure, the taxpayer provides the information which would usually be made available to the CRA in a voluntary disclosure, except for his or her identity. (The taxpayer must, however, provide the first three characters of his or her postal code.) Following the no-name disclosure, a VDP officer from the CRA can confirm that there is nothing set out in the information provided that may immediately disqualify the taxpayer from further consideration under the VDP. If all the required information for a complete disclosure, except for the identity of the taxpayer, has been submitted, the CRA can also, upon request, review the information provided and advise on the possible tax implications of the disclosure.
After a no-name disclosure is made, the taxpayer has 90 days to provide his or her identity. If the taxpayer decides not to disclose that identity, the file is closed. If, based on the discussions which have taken place with the CRA, the taxpayer decides to provide identifying information and continue with the disclosure, the CRA will make a decision on the submission and inform the taxpayer of that decision.
Whether the initial contact with the CRA is on a no-names basis or not, there are four conditions which the CRA imposes before it will consider a disclosure to be eligible for the VDP.
- The disclosure made must be truly voluntary, meaning that it must take place before the taxpayer is aware of any compliance or enforcement action which the CRA is taking against him or her, including a simple “Request to File” an outstanding return or returns. That restriction also applies where the taxpayer is aware of compliance or enforcement action taken against another person (like the taxpayer’s spouse or an unrelated third party) which is related to the information the taxpayer is disclosing.
- The disclosure must involve the application of a penalty. Since the purpose of the VDP is to allow a taxpayer to come forward and pay outstanding taxes plus interest, while still avoiding the imposition of penalties, it would make no sense to go through the VDP where no penalties are involved.
- Any information to be disclosed must be at least one year overdue.
- The CRA will consider a voluntary disclosure only where the taxpayer provides full information on all outstanding errors or omissions — specifically, as described by the Agency, “[t]he taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer is associated.” The CRA is not interested in receiving disclosures in respect of only some but not all taxation years or only some but not all errors or omissions made on prior year returns.
Making a voluntary disclosure to the CRA is a significant step, particularly where the disclosures affect multiple taxation years, or significant sums of money are involved. However, the availability of the “no-name” disclosure process does allow taxpayers to get a sense of what their liabilities might be before they take the step of identifying themselves to the tax authorities. And, as the late filing or other penalties which can be imposed by the CRA can be substantial, the opportunity to avoid the imposition of such penalties can itself serve as an incentive to come forward.
