The Canada Revenue Agency (CRA) refers to the Voluntary Disclosures Program (VDP) as a second chance to correct your taxes. The program has both income tax and GST/HST streams.
Income tax stream
VDP applications in the income tax stream may cover:
omitted or underreported income
expenses claimed in error
failure to remit source deductions
failure to file an information return
For an application to be accepted, one condition is that it must be voluntary. In other words, you must have disclosed the error before the CRA has taken any enforcement action or been informed – for example, through a leak of offshore financial information – that you did not comply with its regulations.
Other guidelines to note are that the application must:
involve a penalty that may be applied
include information that is at least one year past due
include the payment of the estimated tax due
The VDP was changed after March 1, 2018 to create two separate programs: a General Program and a Limited Program.
The General Program is for unintentional errors. If the CRA accepts your application, you will not be charged penalties or face criminal prosecution. You will be required to pay full interest on amounts due for the three most recent years, but you may be granted partial relief of interest for the years before then.
The Limited Program applies to those who intentionally avoided their tax obligations. If the CRA accepts your application, you will not be charged gross negligence penalties or be referred for criminal prosecution. However, you will have to pay other penalties and all interest as required.
The other factors that affect which of the two programs your application will be considered for include whether you made efforts to avoid detection (such as through offshore vehicles, recalling our earlier example), the number of years you did not comply and amounts involved, and how sophisticated the CRA perceives you to be – to what degree do you appear to have made efforts to “work the system” to your benefit? For example, you may be denied acceptance into the Limited Program if you only disclosed the error after the CRA announced that it would be focusing its compliance efforts on an area that applied to your situation.
Generally, taxpayers are allowed to avail themselves of the VDP only once.
The GST/HST stream includes three programs: Wash Transactions, General and Limited.
Wash Transactions Program
The Wash Transactions Program applies when the supplier failed to charge and collect the GST/HST from a registrant who is entitled to a full input tax credit. This program may provide full relief from interest and penalties.
As with the income tax stream, the General Program applies to those who want to correct unintentional errors. If the CRA accepts your application, you will not be referred for criminal prosecution or charged penalties and may be eligible for relief of 50 per cent of the applicable interest.
The Limited Program provides limited relief for those who intentionally avoided their tax obligations. If the CRA accepts your application, you will not be referred for criminal prosecution or charged gross negligence penalties, but there is no relief from other penalties or interest.
In considering whether there was an intention to avoid tax obligations, the CRA asks these questions about a case:
Was the GST/HST collected, but just not remitted?
Did the taxpayer make efforts to avoid detection?
Was there deliberate or wilful default or carelessness that amounted to gross negligence?
Similar to the income tax stream, the CRA also decides on which program applies to you based on the number of years you did not comply and amounts involved, how sophisticated they perceive you to be and how quickly you acted to correct their non-compliance.
And again, you may be denied acceptance into the Limited Program if you only disclosed an error after the CRA has announced that it will be focusing its compliance efforts on an area that applied to your situation.
Typically, this program will automatically apply to applications by large corporations with more than $250 million in revenue in two of their last five taxation years.
Recent court cases
Under section 220(3.1) of the Income Tax Act, the CRA can waive or cancel any part of the penalties or interest otherwise payable within a ten-year limit from the relevant taxation year. It had been the CRA’s common practice not to reach beyond the period covered by the VDP to reassess any prior years’ tax returns, but there seems to be a shift to a more aggressive approach, as noted in the Gaultier v. Canada (National Revenue) (2017 FC 1173) case.
The taxpayer in this case had transferred $300,000 to a Bahamian bank in 1978. Many years later, he wanted to set his affairs in order so as not to pass on his tax problems to his heirs, and made an application to the VDP for 2005 – 2014, within the normal ten-year period for which interest and penalties could be waived.
The CRA accepted the application and provided relief from penalties and interest for those taxation years, but they also used the information from the VDP application to reassess taxation years going back to 1980, since they considered that the taxpayer’s inability to provide support for the initial transfer of the funds was a misrepresentation attributable to neglect, carelessness, wilful default or fraud.
This gave them the authority to assess taxation years beyond the normal limitation period. Penalties and interest were assessed on the unreported income and failure to file information returns for the relevant years. Gaultier’s request for judicial review of CRA’s application of a discretionary policy to reassess years prior to those covered by the VDP was denied.
Even good intentions may have consequences – so be diligent
Given the proliferation of tax information exchange agreements with countries that are considered to be tax havens in recent years, this tightening of the VDP program may become increasingly common.
Another recent court case dealt with the requirement for individuals to file a T1135 information return if they have specified foreign property worth more than $100,000. The penalties for failing to file this return are $50 per day to a maximum of $2,500 for each property, with additional gross negligence penalties possible.
In the case of Moore v. The Queen (2019 TCC 141) the taxpayer received shares in the U.S. parent company of his employer through an employer-sponsored share purchase plan. In 2016, the taxpayer realized that the cost of these shares had passed the $100,000 limit during 2015, and that he should have filed the T1135 for 2015. Unaware of the VDP, he completed the T1135 for both 2015 and 2016 and sent a letter to the CRA to inform them of his mistake. The CRA charged him the $2,500 penalty for late-filing the 2015 return.
In ruling on this case, the judge noted that the taxpayer had been diligent in reporting the employment benefit and the income from these shares in his tax return for both years in question, and thereafter. The judge further noted that the guidance contained in the 2015 Income Tax Guide was not clear about what was included in specified foreign property, or about the VDP application being the only way one could seek relief from penalties. In this case, the taxpayer was able to use a due diligence defence and the judge noted the unclear administrative guidance from the CRA. However, if you discover inadvertent mistakes on your prior tax returns, be sure to file the RC199 VDP Application Form without delay.
In conclusion, the VDP provides many benefits for those who need to “correct their taxes” – relief from prosecution and penalties, and potential reduction in interest. It can also provide peace of mind. Mistakes in the application process can be costly though. If in doubt, consult with legal and accounting professionals.
To learn more about the VDP, see: www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html
This article is reprinted from the newsletter BUSINESS MATTERS with the permission of CPA Canada. BUSINESS MATTERS is a bimonthly newsletter prepared by the CPA Canada for the clients of its members.
BUSINESS MATTERS deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
Richard Fulcher, CPA, CA – Author; Patricia Adamson, M.A., M.I.St. – CPA Canada Editor.