The Canadian income tax system relies on selfreporting, which means the system relies on taxpayers to disclose accurate complete information and comply with the rules. While the Canada Revenue Agency (CRA) has programs in place to catch nonreporters and it reserves the right to audit what a taxpayer reports, it simply cannot audit everyone.
When the CRA discovers an individual has failed to report income, it will reassess and calculate the taxes owing, and add penalties for non-compliance and interest from the date the income tax liability arose. The CRA can also bring criminal charges and subsequent prosecution.
Where a taxpayer has failed to report income in a previous taxation year, he or she may decide that it would be better to come clean rather than continue to take the risk of the failure to report. For these individuals, the Canadian government has established a formal process referred to as the Voluntary Disclosure Program (VDP). The VDP provides taxpayers with a process through which disclosures may be made to correct inaccurate or incomplete information. For example, a taxpayer may disclose unreported income, a claim for ineligible expenses, or unremitted source deductions, Goods and Services Tax (GST) or Harmonized Sales Tax (HST).
If the individual completes the voluntary disclosure, he or she will be liable for the income tax liability plus interest due since the liability arose. The advantage of disclosure is that the individual is able to avoid the application of penalties for non-disclosure, which amount to 50% of the income tax liability not disclosed.
Under the rules of the VDP, a valid disclosure must meet four conditions. In general terms, the disclosure must:
- be voluntary,
- be complete,
- involve a situation where there is the potential application of a penalty, and
- relate to something more than one year overdue (unless it relates to correcting something filed in the past year).
The concept that the disclosure is “voluntary” means that that the individual must be under no undue influence to come forward, such as having knowledge of a pending audit or enforcement action by the CRA. In terms of being “complete”, this means that everything must be disclosed with appropriate documentation. The individual cannot pick and choose which items are disclosed. In addition to complete disclosure, the individual must provide additional information as requested by the CRA. The “potential of a penalty” ensures that only those situations that risk a penalty are disclosed under the program. This is reasonable given that the benefit of the program is the waiving of the associated income tax penalty. The last criterion relates to information being “more than one year overdue”. By requiring that the information relate to something at least one year old, it ensures that the issue does not generally fall within the current filing period.
If the individual does not meet all four of the criteria in the disclosure process, the CRA will inform the individual of its decision and probably proceed to assess. If the CRA does not accept the disclosure as filed, the individual may request a second review of the file by contacting the Director of the Tax Services Office. Finally, the individual may seek relief through the judicial review process. It is advisable that individuals seek legal counsel when first considering this type of disclosure to better understand what is involved, to assess the risks and to benefit from the legal guidance.
Disclosures under the VDP can go beyond simply an income tax liability related to an individual; they can include disclosures by a corporation, partnership or trust and relate to not only income tax but also to GST or HST.
The voluntary disclosure program can be of tremendous value as it can allow a taxpayer to reveal a past indiscretion related to a tax filing (or lack thereof) without the fear of prosecution. Sometimes information was hidden due to lack of knowledge and sometimes because of lack of cash flow to pay the taxes: either way, the disclosure program can be helpful.
E.O. & E.
This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.
The Institute is the professional organization that administers and promotes the CLU and the CHS designations in Canada.
The articles and comments are not intended to provide legal, accounting or other device in individual circumstances. Seek professional assistance before acting upon information included in this publication.
Advocis*, the Institute for advanced financial education.
(The Institue”), CLU, CHS, FHF.C and APA are trademarks of the financial advisors Association of Canada (TFAAC).
The institute is a wholly-owned subsidiary of Advocis. Copywrite TFAAC. All rights reserved. Unauthorized reproduction of any images or content without permission is prohibited.
Copywrite ISSN 0382-7038
Contributors to this edition:
James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.