Some taxpayers may become anxious at the thought of having to reopen a filing or make amends to file back taxes with the Canada Revenue Agency.
But Chris Bodnar, chartered accountant and partner with Crawford, Smith and Swallow, explains that CRA’s Voluntary Disclosure Program can benefit someone in this situation.
“If you know that you are going to owe taxes and penalties will be assessed, the Voluntary Tax Program is worth taking advantage of. But it’s necessary that you meet all four conditions set out by CRA to qualify,” he says.
The VDP is not part of the Income Tax Act but simply a compliance measure granted by parliament to give CRA discretionary powers over the outcome of your disclosure.
The four conditions that need to be met under the VDP criteria are mandatory to use the program. If you don’t satisfy all four, you can’t file under this program.
- The disclosure must be voluntary. As Bodnar explains, “If CRA asks you for information or requests a filing before you opt to use VDP, you no longer have a voluntary status, and no longer qualify for the program.”
- Your disclosure must be complete. Include all information for all the periods being corrected. You should leave nothing out.
- A penalty must be involved. In other words, if after looking at a draft of the information you want to disclose, you find that you owe no taxes or penalties are not likely to be assessed, the VDP may not be for you.
- The information or return must be more than a year old to qualify. The VDP does not apply to current filings.
If you meet all these criteria, you may want to take advantage of the benefits that the VDP offers.
Under the VDP program, you are allowed to submit relevant information to CRA without disclosing your name. This anonymous disclosure allows the taxpayer to ascertain what CRA’s response will be and the repercussions that may ensue to the information provided.
It’s important to note that CRA is under no obligation to commit to a binding outcome. However, if you decide to proceed within 90 days by identifying yourself, and the information is complete in the eyes of CRA, the outcome should be similar to the anonymous disclosure, according to Heydary Hamilton, PC.
Avoidance of Penalties and Interest
The consequences of tax avoidance can include fines of up to $25,000.00 per charge and/or jail time up to one year per charge. There are also the penalties to consider.
For a first time offense, a late filing penalty of 5 percent plus 1 percent per month for each month the balance remains unpaid can be charged. After that, there is a 10 percent penalty levied for each outstanding balance and 2 percent per month for up to 20 months.
Interest also is attached to the outstanding balance. Using the provisions set forth in the VDP can cancel or reduce penalties, but not the taxes owed.
Reinstatement of Refunds
Another benefit of using the program is the reinstatement of benefits such as the Canada Child Benefit, GST/HST credits and RRSP carry forwards. These credits are typically assessed on your previous year’s tax return.
If you didn’t file a return in the previous year, the credits and carry forwards are not available to you. Once you disclose using the VDP program, CRA usually reinstates these tax credit programs and RRSP benefits.
References & Resources
- Chris Bodnar, CA; Crawford, Smith and Swallow; Niagara Falls, Ontario
- Canada Revenue Agency: Correct Your Tax Affairs Through the Voluntary Disclosures Program