Under the voluntary disclosures program, the CRA grants relief from prosecution – and, potentially, full or partial relief from penalties and interest – to taxpayers who voluntarily disclose non-compliance.Justin Tang/The Canadian Press
Taxpayers are more likely to come forward to the Canada Revenue Agency (CRA) about unpaid taxes under the agency’s revised voluntary disclosures program (VDP).
The CRA is offering more potential relief from interest and penalties under the revised VDP, and will allow applications even when it has already alerted taxpayers to a non-compliance issue.
“This new program should, in almost every instance, make it more likely for you to recommend the VDP as an option to your clients,” says Kenneth Keung, senior advisor with Doane Grant Thornton LLP in Victoria.
Under the program, the CRA grants relief from prosecution – and, potentially, full or partial relief from penalties and interest – to taxpayers who voluntarily disclose non-compliance, such as claiming ineligible expenses or failing to file returns or report income. There’s no relief from unpaid taxes.
In September, the CRA announced it was revamping the VDP effective Oct. 1, indicating in a press release that its intention was “to make it easier for taxpayers to correct unintentional filing errors or omissions and make the program more accessible.”
The agency also released a revised, simplified VDP application form on Oct. 1.
What’s changed
As part of the changes, the CRA replaced the previous “general” and “limited” relief categories with two new relief tiers: “unprompted” for cases in which taxpayers contact the agency on their own with disclosures; and “prompted” for cases in which the CRA has contacted the taxpayer.
Under the “general” category in the previous VDP, taxpayers could receive full penalty relief and 50 per cent interest relief, but only for years before the three most recent tax years.
Under the new “unprompted” category, taxpayers can receive full penalty relief and 75 per cent interest relief for all years.
Under the previous “limited” category, generally used for cases of intentional non-compliance, a taxpayer would receive no penalty relief (except from gross negligence penalties) and no interest relief.
Under the new “prompted” category, taxpayers receive up to 100 per cent penalty relief (and full gross negligence penalty relief) and 25 per cent interest relief.
Michael Friedman, partner with McMillan LLP in Toronto, says clients considering making a VDP application under the old regime would often balk when they discovered they’d be facing interest charges equal to or higher than associated penalties.
“It was becoming an impediment to people making disclosures,” he says, especially as interest rates went up in recent years.
“It appears the CRA was responding to that market reality,” Mr. Friedman says.
Under the previous VDP rules, clients looking to address a non-compliance issue might have considered waiting to make a disclosure, so as to access 50 per cent interest relief, offered under the general category for tax years before the most recent three, says Emily Mantle, chartered professional accountant and founder of Compass CPA in Sudbury, Ont.
However, any perceived benefit from waiting to apply had to be weighed against the fact that interest continues to accrue, on a daily compounding basis, from the time of the non-compliance to when the associated overdue taxes are paid, she says.
Now, under the revised VDP, a taxpayer whose VDP application qualifies for the 75 per cent interest relief for all years (available under the “unprompted” category) has no reason to delay applying, Ms. Mantle says.
“It gets the file into the VDP stream sooner, allows the taxpayer to access the enhanced relief, and prevents further delays that would otherwise allow interest to continue accumulating until the balance is ultimately paid,” she says.
What counts as voluntary
The new program also more broadly interprets what constitutes a “voluntary” disclosure.
Under the previous rules, the CRA would not consider a VDP application to be voluntary if the agency had already taken an enforcement action. This was broadly defined and included communication from the CRA to the taxpayer.
In the revised VDP, a taxpayer who has received communication about non-compliance will still be eligible under the “prompted” stream. However, the CRA will still restrict VDP eligibility if a taxpayer is under audit or investigation, or is “egregiously or intentionally non-compliant.”
Mr. Friedman says the CRA’s broader interpretation of “voluntary” makes the revised program more “accessible and welcoming.”
However, it’s unclear how the CRA will determine, administratively, when a VDP application is no longer voluntary, he says.
In a response sent by e-mail to a question from The Globe, CRA spokesperson Nina Ioussoupova said, “for VDP purposes, a taxpayer is considered to be under audit once the CRA has notified them that an audit has been initiated. In contrast, a taxpayer who receives, for example, a letter requesting that they file an outstanding tax return could still be eligible for prompted relief under the VDP.”
VDP applications are evaluated on a case-by-case basis, Ms. Ioussoupova added. For example, if a taxpayer’s file shows that the CRA made repeated attempts – letters, calls, in-person visits – to contact them about non-compliance, the agency may deny an application.
The revised rules also now provide guidance as to how many years taxpayers must file in terms of disclosing long-standing non-compliance – the most recent 10 years for foreign-sourced income or assets, and the most recent six years for Canadian-sourced income or assets.
However, the CRA still could ask for documents from tax years outside those timeframes under the new rules.
Under the previous VDP, the CRA required taxpayers to provide complete disclosure of missing or inaccurate information for all relevant tax years.
In practice, however, where a non-compliance issue dated back more than a decade, many tax advisors would file a taxpayer’s previous 10 years of returns, disclose that the non-compliance pre-dated 10 years, and offered to provide additional documentation for previous years if the CRA requested.
Tax advisors often found the CRA didn’t ask for additional filings from years before the 10-year period. The CRA’s ability to waive penalties and interest is limited to the preceding 10 years under the Income Tax Act.
“Even though that may have been the unspoken rule from the CRA in the past, this clarity [as to required documentation] is welcome,” said Kelly Ng, partner, tax litigation and dispute resolution at KPMG Law LLP in Toronto, during a presentation at a tax conference in Toronto last month.