Overview
Voluntary Disclosure Program (VDP) is a compliance measure that allows taxpayers to correct mistakes on their previously filed taxes such as disclosing information regarding unreported income, or to file an income tax return that should have been filed.
For example, if you realized you forgot to report foreign assets and did not submit T1135 in your previous year’s return when you should have, you can voluntarily disclose the foreign assets rather than waiting for the Canada Revenue Agency to find out themselves. Income gained from cryptocurrency trading is also a subject to tax and needs to be reported. Making a volunteer disclosure when filing your cryptocurrency taxes is a common measure to come clean and comply with Canadian tax rules.
You will still have to pay the taxes owing, plus interest that will result from incorrect filings. If Canada Revenue Agency finds out the non-compliance in your filings through CRA audit, you can be subject to tax penalties or prosecution. However, if you file a VDP application and it is accepted by CRA, you will receive prosecution relief, and in some cases penalty relief and partial interest relief.
Valid VDP application
The Voluntary Disclosure process begins by completing Form RC199. In order to be accepted by CRA, your application must meet below conditions:
- Voluntary – you must disclose before the CRA discovers non-compliance through their review.
- Complete – you must disclose all relevant taxation years where there is non-compliance in tax filings.
- Penalty – there must be penalty related to non-compliance in tax filing which is to be disclosed.
- One year past due – you generally can only submit the VDP application at least one year after filing deadline.
- Payment – you must pay estimated tax owing with the VDP application.
Income tax stream vs GST/HST steam
Effective March 1, 2018, CRA updated rules that apply to the Voluntary Disclosure Program. These changes affect disclosures under both streams of the program: income tax stream and GST/HST stream.
1. Income tax stream
Situations when you should consider applying for relief include:
- expenses claimed that were not eligible
- failure to remit source deductions for employees (CPP, EI deductions i.e.)
- failure to file an information return for reportable transactions
- failure to report income.
Under the new VDP rules, the income tax applications are processed under two categories: the general program and the limited program. The CRA will determine which track is applicable on a case-by-case basis, however it is indicated that the following factors may be considered:
- if efforts were made to avoid detection through the use of offshore vehicles or other means
- the dollar amounts involved
- the number of years of non-compliance
- the sophistication of the taxpayer.
General Program:
General Program provides relief to taxpayers who want to correct unintentional error. You would generally be relieved for criminal prosecution, penalties, and partial interest. Partial interest relief is generally 50% of the interest for years preceding the three most recent years of returns required to be filed. Full interest charges will be assessed for the three most recent years of returns required to be filed. Interest relief is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed.
Limited Program:
The Limited Program limits the level of relief for taxpayers who intentionally avoided their tax obligations. Under this new program, you would generally be relieved for prosecution. However, penalty (except for gross negligence penalty) and interest will still apply.
2. GST/HST stream
Disclosures under this stream may include:
- undisclosed liabilities related to GST/HST, excise tax, excise duty, the softwood lumber products export charge and the air travelers’ security charge
- improperly claimed input tax credits (ITC)
- over-claimed refunds or rebates
- any other amount not previously reported to the CRA.
Under the new VDP rules, the GST/HST applications would be processed under three categories: the wash transactions program, the general program, and the limited program. The CRA will determine the category on a case-by-case basis. Factors similar to income tax stream are used to categorize the appropriate VDP program.
Wash Transactions Program:
Disclosures under the Wash Transactions Program include those where a supplier has failed to charge and collect GST/HST from a registrant who is entitled to a full input tax credit (ITC). You would generally be relieved for prosecution and 100% penalty and interest.
General Program:
The General Program provides relief to taxpayers who want to correct unintentional error. You would generally be relieved for criminal prosecution, penalties, and partial interest. Partial interest relief is generally 50% of the interest for years preceding the three most recent years of returns required to be filed. Full interest charges will be assessed for the three most recent years of returns required to be filed. Interest relief is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed.
Limited Program:
The Limited Program limits the level of relief for taxpayers who intentionally avoided their tax obligations. Under this new program, you would generally be relieved for prosecution. However, penalty (except for gross negligence penalty) and interest will still apply.
Applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will typically be considered through the Limited Program.
Taxpayer Relief Program – cancel or waive penalties or interest
CRA may grant you relief from penalty or interest, if you are unable to meet your tax obligations due to following situations:
- extraordinary circumstances (i.e. natural disasters, postal strike, serious illness, serious emotional distress)
- actions of the Canada Revenue Agency (i.e. incorrect info given by CRA that caused the taxpayer to report/remit incorrect tax amounts, CRA processing errors, CRA processing delays that cause the taxpayer not meet tax obligations on time)
- inability to pay or financial hardship: this would generally relieve you of interest (in part or in full) but not penalties; and full financial disclosure including a statement of income, expenses, assets and liabilities is required
- other circumstances (to CRA’s discretion).
To access the relief provision and submit your request, we recommend you use Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest.
Making a Voluntary Disclosure or Requesting for Taxpayer Relief
If you are considering making a volunteer disclosure under the VDP or requesting a Taxpayer Relief, contact our team of chartered professional accountants in Toronto to assist you. At Triple M, CPA accountants can help you and your business to navigate the new VDP rules, complete the forms to meet conditions of a valid disclosure, deal with the CRA on your behalf, and represent your best interests.
