The voluntary disclosure process (VDP) is a program provided by the Canadian Revenue Agency (CRA) that allows taxpayers to file unfiled or late tax returns and disclose previously unreported income, overstated deductions or credits, or other errors in their tax filings without penalties (aside from interest, more details below.)
By doing so, the VDP provides relief to taxpayers who voluntarily come forward and disclose their mistakes and unreported information and encourages compliance with Canadian tax laws by offering something of a “tax amnesty.”
How does the VDP work? What relief does it provide? Who qualifies for the Program? When is it appropriate to apply?
You can learn general information regarding these questions in this post; however, if you’ve made reporting errors on previous tax returns or have unfiled returns, reach out to one of the leading tax experts at Faris CPA in Toronto for personalized advice on if the voluntary disclosure process is right for you, how to approach it and for guidance on reducing your individual, employer, partnership, trust or corporate tax expense.
A Closer Look at the Canada Revenue Agency’s Voluntary Disclosure Program
Taxpayers and filers who willingly correct mistakes or gaps in their tax returns before the CRA learns of or approaches them about it may receive prosecution relief, as well as, in some instances, penalty relief and partial interest relief from the costs they would otherwise have to pay under the VDP.
You would still, however, have to pay the taxes owing, plus interest – in part or in full, depending on the CRA’s decision.
Common scenarios that the VDP is meant to address include:
- The filing of a tax report for a prior year is now past due.
- On a previously submitted tax return, income was either underreported or not reported at all.
- Unallowable expenses were reported on a tax return.
- Source payments from employees weren’t filed (for example, pension plan or employment insurance deductions.)
- Necessary forms were not submitted. (for example, Form T1135, Foreign Income Verification Statement.)
- On a previously submitted tax return, income from overseas sources that is taxable in Canada was not disclosed.
- A business did not charge, collect, file or remit GST/HST.
- Ineligible GST/HST input tax credits, refunds, or reimbursements were reported.
Since unfiled and misreported returns must be filed as quickly as possible, the VDP is often a helpful way to reduce or avoid the automatic penalties.
Generally speaking, there is a 10-year limitation period for which relief under the VDP can apply; however, you may still be eligible for interest relief from interest accrued during the previous 10 years on returns older than the 10-year limitation period. Also, returns over 10 years old must still be filed, and the CRA has the discretion to accept such a VDP application.
Eligibility for CRA’s Voluntary Disclosure Process
Eligibility for the VDP is assessed on a case-by-case basis, but there are minimum criteria for eligibility. To be considered for acceptance to the VDP, an application must be:
- The taxpayer’s outstanding taxes must be unknown to the CRA.
- The taxpayer must provide full disclosure of all tax details for all tax years for which the submissions were incorrect.
- For a taxpayer who owes taxes and faces penalties.
- For returns that are at least one year past due.
To apply to the VDP, The CRA recommends that you complete and submit a Form RC199, Voluntary Disclosures Program (VDP) Application.
Taxpayers also have the option to apply for the VDP by sending a letter with the same information requested on the form. The letter must include:
- The information requested in sections 1 and 2 of the Form RC199.
- If applicable to your situation, The information requested in sections 3 to 6 of Form RC199, if applicable.
- A statement that you, and your representative (if applicable), have read and agreed to the Taxpayer Declaration in Section 7 of Form RC199.
You should always consult with voluntary disclosure experts before applying to the VDP to confirm that it’s your best course of action and to increase the likelihood of acceptance.
Programs Within CRA’s VDP
At a high level, the VDP consists of two programs, one for income tax and one for GST/HST.
VDP for GST/HST Misfilings
There are three streams under this program for businesses that need to correct GST/HST reporting and remittance errors:
- The Wash Program is used for transactions where the proper GST/HST amount was not remitted on a taxable supply by the supplier, and the recipient, who is a registrant, would have been entitled to claim a full input tax credit (ITC) if the tax had been applied correctly.
- The General Program can provide relief for applications based on non-compliance due to error.
- The Limited Program is reserved for instances of intentional non-compliance.
Applicants may qualify for 100% penalty relief under the Wash and General programs. Under the Limited Program, registrants may avoid a gross negligence penalty even if it is warranted. Click here for more information on the CRA’s VDP for GST/HST.
The Voluntary Disclosure Process for Income Tax in Canada
There are two tracks in the VDP for income tax:
- The General Program for taxpayers to voluntarily fix reporting errors and missed filings. Acceptance into this program is more desirable as it allows taxpayers to avoid penalty and prosecution and may provide interest relief.
- The Limited Program is used for taxpayers who have intentionally not paid their full tax obligations. While the Limited Program allows taxpayers to avoid criminal prosecution and gross negligence fines, they may still be charged with other applicable penalties and are not eligible for interest relief.
The CRA considers several factors when deciding whether to allow a taxpayer to disclose under the General Program or if they must do so in the Limited Program, including:
- If the applicant made efforts to avoid detection.
- The amount of taxes owed.
- The sophistication of the taxpayer.
Even if the CRA finds that one or more factors may indicate intentional tax avoidance, a taxpayer should not be automatically disqualified from the General Program. A professional representative can help in this regard.
Disputing a CRA VDP Decision
If you are unhappy with the CRA’s decision regarding your acceptance into the VDP, a particular program or the relief (or lack of) you’re granted, you can ask for an administrative review. If your application is denied after the second administrative review, you can apply to the Federal Court for a judicial review.
Reach out to us for more information regarding the VDP, or check out our voluntary disclosure program guide.