Unfiled taxes, unreported income?? The CRA’s voluntary disclosure program is your chance!

If you are a few years behind in filing your tax filing, you are not alone. Many Canadians are late in filing. As time passes by, it becomes all the more daunting task to become compliant with tax filing.

There can be several reasons for not filing the return, including serious illness, business hardship, preoccupation with life’s other issues. Whatever is the reason, most individuals and all corporations are required to file an income tax return. Businesses registered for HST must also file HST returns as per specified frequency.

By not filing the return, you are ignoring the Canadian tax law and, the Canada Revenue Agency (CRA) may consider this to be an intentional attempt to evade taxes.

If you can’t afford to pay tax owing, it is still better to file the tax return and talk to the CRA to discuss a payment schedule, if so required.  But you will at least avoid consequences of not filing the return, which may include: –

1. Interest and penalties
2. The CRA will hold your refund and other benefits
3. Higher risk of being audited
4. Criminal prosecution

The CRA can also issue a notional/arbitrary Notice of Assessment (NOA), demanding you pay taxes, and most likely, higher than you would otherwise pay. Because in these notional NOAs the CRA assumes a high-income figure and does not consider the business expense.

What if you have not filed the tax returns for many years or your returns are incorrect??

Situation A: Don’t owe anything

If you don’t owe anything, it is just that you haven’t filed the return(s), then you don’t face any potential penalties or interest.

The main consequence is that the CRA will hold your refund and other benefits because these benefits are based on the information in the tax returns.  These benefits include Canada Child Tax benefit, HST credit, OTB, Canada Working Income Tax Benefit, etc. Not filing a return could even cause delayed payment for a spouse or common-law partner, where benefits are based on the family income.

In these cases, just backfile any delinquent years’ tax returns. Delaying the filing of returns may also be time-barred, resulting in the CRA not issuing a refund.

Situation B: You owe taxes, return not or incorrectly filed

If you owe taxes and have not filed return(s), or filed return(s) with incorrect information, the CRA offers an amnesty program. This program provides the taxpayer with an opportunity to voluntarily come forward to disclose the information and avoid penalties, interest, and potential prosecution.

Voluntary Disclosures Program:

The Voluntary Disclosures Program (VDP) allows the taxpayer to file all delinquent tax returns and disclose other information such as under/not reported income, failure to correctly report foreign assets or income, ineligible expense claimed.

To qualify for the VDP, you must meet the following criteria:

1. Be voluntary.  If the CRA reaches you before you go to the CRA, then you no longer qualify for the VDP. Therefore, you must act quickly and apply for the program, before the CRA contacts you.
2. Be complete. The disclosure must be complete, covering all tax returns/information returns that were inaccurate or incomplete.
3. Must involve a potential penalty or interest
4. Include information that is at least one year past due; and
5. Include payment of the estimated tax owing.

The Voluntary Disclosures Program is available for individuals, corporations, partnerships, trusts as well as the business registered GST/HST.

Two Tracks under Voluntary Disclosures Program

Applications under the VDP are processed under either general or limited track. Which track is approved by the CRA is based on various factors, but most importantly, if the error/omission was caused by intentional misreporting, or it was just an error. Other factors that the CRA considers include the amount involved, nature/level of knowledge of the taxpayer, etc.

General Track

The application approved under the general track may enjoy relief from all penalties, referral for prosecution, and partial interest for the years preceding the three most recent years of returns.  

Limited Track

The application approved under the limited track will be relieved from criminal prosecution and will not be applied gross negligence fee. However, other penalties and interest will still be applicable. Under the Limited Track, a taxpayer must also sign a waiver of their right to object and appeal about the specific issue disclosed. One important issue to consider is what if the CRA does not approve the VDP application. This question becomes more critical if a large amount and potentially large penalties are involved. It is good to consider all scenarios, but if a taxpayer meets the criteria of the Voluntary Disclosure program, there are only a few chances that the application would not be accepted. Furthermore, if you don’t file the return or delay it, the CRA may apply more interest, charges, and penalties. And if the CRA discovers the incorrect reporting before you disclose it, you will lose out on the chance of relief allowed under VDP.

Consult with a Tax Professional

It is very critical that the application under VDP is thoroughly prepared and submitted otherwise, the taxpayer may be subject to penalties, accrued interest. Therefore, it is recommended to obtain the service of a tax professional to safeguard your interest, acceptance in the program and mitigate any negative consequences.

In the end, whether you are late in filing for one year or even ten years, it is essential to act quickly and become compliant as soon as possible.

If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting Professional Corporation (CPA). Source Accounting is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. We serve clients from Mississauga, Toronto, Brampton, Milton, Hamilton, Oakville, and across GTA. And if you find this post helpful, please let us know in your comments.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.