Voluntary Disclosure

If you have not filed all of your income tax, GST or other tax returns, or have filed them incorrectly by claiming ineligible expenses or failing to report all of the income you received, the following information may be of interest to you.

The Canada Revenue Agency (CRA) has a program that is designed to encourage taxpayers to come forward voluntarily to correct previous omissions in their dealings with the CRA. The program is called the Voluntary Disclosure Program (VDP). If the CRA accepts a disclosure under the VDP, the taxpayer will still have to pay the taxes and related interest charges, but will not incur the penalties or possible prosecution to which he or she would otherwise be subject.

The VDP received significant press recently when it was disclosed that former Prime Minister Brian Mulroney had used the program to report payments that he had received in a previous year and failed to report as income. Some of the features of the VDP from which Mr. Mulroney was reported to have benefited are no longer available, but the main purpose and benefit of the program remain.

To be accepted under the VDP, a valid disclosure must meet the following four conditions:

• It must be voluntary, which means that the submission must be made before the CRA or any other authority has initiated contact with the taxpayer.
• It must be complete and accurate. If full disclosure is not provided, the penalties may not be waived.
• It must involve a penalty. A late filing penalty is the most common, but this could also include discretionary penalties for omissions or gross negligence.
• It must include information that is at least one year past due.

A submission under the VDP must be made in writing and must be mailed or faxed to the CRA tax service office that has jurisdiction over the area in which the taxpayer resides. This can be done using Form RC199 or by a letter containing similar information as is required by Form RC199. The information to be submitted includes such things as name and address of the taxpayer, disclosure of the reason for the submission, and an explanation of how the four conditions for a valid disclosure (noted above) have been met. The date that the CRA receives the written submission becomes the effective date of disclosure. From this date forward, provided that the submission is determined to be a valid disclosure, the taxpayer is granted protection against penalties and possible prosecution regarding the issues identified in the disclosure. It is therefore important to make the submission as soon as possible; waiting could result in the CRA initiating contact, rendering the taxpayer ineligible for the program.

There may be circumstances in which the taxpayer cannot submit all of the information or documentation immediately. The CRA generally will provide additional time of up to 90 days after the effective date of disclosure in which to complete the submission. If the information is not provided within the required time period, the CRA may commence action and the submission would not be a valid disclosure, and penalties and possible prosecution may result.

The CRA will review the submission and determine if the four conditions have been met for a valid disclosure, and will then assess the tax and interest owing.

The submission can be made on a "named" or on a "no-name" basis. A no-name submission is made by a representative of the taxpayer with the taxpayer's identity withheld initially. In such cases, the taxpayer may be undecided as to whether to proceed with the disclosure. Informal, non-binding discussions are undertaken with a VDP officer to provide the taxpayer with a better understanding of the possible tax consequences of his or her situation and the relief available under the VDP. The taxpayer will then have to decide either to come forth on a named basis or not to proceed with the submission, in which case he or she would remain at risk of the CRA discovering the omission and applying the related penalties and possible prosecution. If the taxpayer decides to come forth on a named basis, his or her identity must be provided to the CRA within 90 days of the effective date of disclosure or the file will be closed.

The tax system has become extremely complex and it is not uncommon for taxpayers to make inadvertent errors or to miss filing an information return. The returns required for reporting foreign assets, subcontractor payments made in the construction industry, and non-profit information returns are common examples. When filed late, these forms carry penalties of up to $2,500 per year, but if filed under the VDP the penalties can be waived. 

If you become aware of an omission in your dealings with the CRA, contact your Collins Barrow representative to determine if the Voluntary Disclosure Program can help you avoid the possible penalties.

Bob Boser is a Tax Partner in the Red Deer office of Collins Barrow.