Canada’s income tax system is a self-reporting and self-assessing system. This is different than the tax systems of other countries where the government assesses the taxpayer and financial intermediaries, and other payors report the various income amounts to the government for purposes of assessment. This puts the onus of getting the income reported properly and the taxes assessed correctly on the taxpayer. The government receives information returns from a limited number of financial intermediaries (such as T4, T4A, T5 slips and so on), issues requests for documents or information, and conducts audits to secure the integrity of the tax system. These measures used by the government are not going to be perfect and there is a chance that people who fail to report or misreport income do not get caught for a number of years. It is because of this delay and the government’s desire to have people come forward voluntarily to save the resources of the Canada Revenue Agency (CRA), that the Voluntary Disclosures Program exists.
The Voluntary Disclosures Program has to balance the fact that most taxpayers file and pay their taxes on time and accurately with the desire to encourage non-compliant persons to come forward. In doing so, it has to provide an incentive to come forward, but make sure that the inventive does not reward taxpayers who are non-compliant for whatever reason.
What is a Self-Reporting and Self-Assessing System?
In a self-reporting system, it is the taxpayer who has to report the various sources of income and gain that the taxpayer has. This means that it is up to the taxpayer to determine what amounts the taxpayer has a right to receive or has received are taxable and what amounts are not taxable. Additionally, the taxpayer has to determine the correct character of these taxable amounts, as not all amounts are taxed the same way (for example, capital gains are only half included in income, meaning that half of a capital gain is tax free). The reason the government places this onus on the taxpayer is because it is the taxpayer, and not the government, that has the information necessary to determine the tax liability of a taxpayer. It’s true that the government receives some information about a taxpayer’s financial affairs, but it does not receive enough information to be able to get a full picture.
After self-reporting, the taxpayer then has to self-assess the taxes due to the government. This means adding up the various amounts correctly, taking any deductions or credits available, applying the correct rates, and then coming up with a balance due.
What is the Voluntary Disclosures Program?
The Voluntary Disclosures Program – often also called the tax amnesty program – is a program that gives taxpayers a chance to come forward and correct mistakes on their tax returns or report amounts that they failed to report. There are many reasons, both innocent and nefarious, why a taxpayer may not have reported or correctly reported information on a return, or even failed to file a return that was required. Whatever the reason for a taxpayer not fully meeting their tax reporting obligations, the Voluntary Disclosures Program provides both the opportunity and various incentives to come clean, be up-to-date, and start fresh.
The Voluntary Disclosures Program was amended starting March 1, 2018. The gist of the change is that the program now has two tracks – a General and a Limited program. The general Voluntary Disclosures Program offers relief from all penalties that could have been imposed, some interest relief, as well as immunity from criminal prosecution. The limited program, however, provides limited relief in certain circumstances (relief from penalties other than gross negligence penalties, no interest relief, and immunity from criminal prosecution). The limited Voluntary Disclosures Program is meant for taxpayers whose non-compliance has an element of intentional conduct. To determine whether or not to place a taxpayer in the limited or general program, the Canada Revenue Agency will consider the following factors: (1) were efforts made by the taxpayer to avoid detection by the CRA?; (2) what is the quantum, or dollar amount, involved in the non-compliance?; (3) how long has the non-compliance been going on for?; and (4) how sophisticated in the taxpayer who is non-compliant?
Not only is the financial relief in the limited program curtailed, but taxpayers are also required to give up certain rights to be accepted. Specifically, taxpayers are required to waive their right to object to the assessment resulting from the disclosure, meaning that they cannot file a Notice of Objection to the CRA’s Appeals Division. Additionally, taxpayers are also required to waive their right to appeal to the Tax Court of Canada for anything that is related to the information disclosed in the voluntary disclosure. There two rights of appeal are not waived under the General Voluntary Disclosures Program.
There are a few other limitations. For both the limited and the general program, relief is only available for the ten years preceding the most recent tax year. Even if a taxpayer’s disclosure goes back more than 10 years, relief for interest or penalties for the years earlier than the ten-year limit is simply not possible. The interest relief under the general program is also limited. Not all the interest accrued over the past ten years is forgiven. Rather, only up to half the interest owed is forgiven under the new general program.
What are the Eligibility criteria for the Voluntary Disclosures Program?
Not all disclosures by taxpayers are accepted by the CRA under the Voluntary Disclosures Program. To be accepted under either program, the disclosure has to meet some pre-conditions. To be eligible:
(a) The disclosure must be voluntary, meaning that the CRA must have no information about the taxes owed by the taxpayer (this is a complex criterion that cannot be easily summed up in a general information article such as this);
(b) The disclosure must be complete, meaning that the taxpayer has to disclose all the information for all the years where that taxpayer’s filings were incomplete or inaccurate, even if this stretches past the ten year limit for granting relief;
(c) There must be taxes owing by the taxpayer, meaning that the program does not apply to taxpayers who are owed refunds;
(d) The information must be more than one-year over-due, meaning that taxpayers can only use the program to disclose information that is at least one-year past due;
(e) The taxpayer must estimate the taxes owing from the disclosure and make payment for the taxes owing (or come up with a suitable payment arrangement or security for payment).
Taxpayers usually only get one shot at making a disclosure that meets the pre-conditions for acceptance. Given the potential complexity of the pre-conditions as well as the tax filings of the particular taxpayer, it is advisable to get the help of a Chartered Professional Accountant (CPA) who is an expert in disputes with CRA. Such a professional can make sure that you stand the best chance of getting amnesty along with the financial relief that accompanies a successful voluntary disclosure.
Why Come Forward?
There is no absolute limitation period for the CRA coming to audit or assess a taxpayer in Canada. The reality is that the CRA can go back to the dawn of your financial life and, where the conditions for a reassessment beyond the normal reassessment period are met, reassess a taxpayer for any and all years. This, coupled with the fact that failing to file your taxes or report amounts often come with significant penalties, and that the penalties and taxes owing are both subject to compound interest at a relatively high interest rate, creates large financial risks for taxpayers who haven’t fully or accurately filed their tax returns. In many cases, the penalties and interest will exceed the taxes owing. This may well result in the taxpayer losing all of their hard-earned assets and, perhaps, even having to file for bankruptcy protection. In addition to financial losses, taxpayers could face criminal tax evasion charges, adding an additional financial burden and the risk of jail time.
The Voluntary Disclosures Program provides both financial incentives as well as protection from criminal prosecution for taxpayers who successfully patriciate in the program. The CRA’s decision to grant relief is discretionary, but where a taxpayer meets the published conditions for relief, the CRA has to grant the relief advertised. The fight with the CRA often revolves around whether the conditions have been satisfied and the taxpayer is entitled to relief. Because of this, and the risks that come along with not being successful, it is important to make sure that a taxpayer uses a Chartered Professional Accountant (CPA) who is an expert in disputes with CRA.