The Voluntary Disclosures Program falls under taxpayer relief provisions.
A Voluntary Disclosures Program (“VDP”) application is an application whereby a taxpayer can file returns or elections that are past due or amend returns already filed and receive more preferential treatment if program’s conditions are met, than they would if filed through the normal channels.
Currently there are two separate programs within the VDP process, which depending on which stream the taxpayer is accepted into, and each stream offers a different set of benefits.
The General Program is by far the most advantageous of these programs offering partial interest and penalty relief for any applicable tax arrears. The Limited Program only provides relief from criminal prosecution, and gross negligence penalties, and is normally reserved for applications where the original omission was clearly intentional to defraud the government. Both of these programs are discussed in more detail below.
The General Program is designed for most taxpayers who did not use intentional measures to shelter their income, either domestically, or internationally, and whose omission does not include huge amounts of underreported income. Unfortunately, the CRA does not provide a dollar threshold for what constitutes a huge amount, however, in my experience it would involve amounts greater than $10,000,000.
If accepted into the general program, the information submitted through the program will ensure that the taxpayer will not be criminally charged for the omission and it will cancel all penalties for the preceding 10 years. However, returns outside of this 10-year period would still be subject to full penalties, and the taxpayer will only receive partial interest relief.
The Limited Program is for taxpayers who do not qualify for the General Program for some of the reasons mentioned earlier. Unfortunately, if the taxpayer is accepted through the limited program the only benefit the taxpayer receives is that they will not be criminally charged for the omission.
It is therefore important that every effort is made to show that your omission was not intentional in an effort to qualify under the General Program.
The CRA lists 5 criteria for an application to qualify for relief under either the General or Limited Program:
- The disclosure must be voluntary;
- The disclosure must be complete;
- The disclosure must involve the application of potential application of a penalty;
- The disclosure must include information that is at least one year past due; and
- The disclosure must include payment of the estimated tax owing.
In order for an application to be considered voluntary, it needs to be just that, voluntary. A taxpayer cannot be aware of any enforcement action against them, or a related party. Enforcement action is pretty broad but can include things like letters demanding that returns be filed, audits or investigations, or calls from the CRA.
It should be noted that enforcement action does not include letters inviting someone to participate in the program, or a recent audit for an unrelated account. In order for a recent audit to not preclude an individual’s application from being considered voluntary, the taxpayer must establish that there was no correlation between the audit, and the information being disclosed.
The notion of a “related party” is pretty broad, but for the most part includes individuals or corporations who the taxpayer would have a direct connection with and can be easily shown that the enforcement action against that party led to the taxpayer coming forward. Usually this would be people that are related to the taxpayer, or a corporation for which they are connected. A taxpayer that owned shares in a publicly traded corporation who has been audited would not preclude their application from being considered voluntary since it hard to show that the taxpayer was connected to that corporation (unless they had vast holdings in it).
The next condition for an application to be accepted is that it must be complete. This means that all years that were previously not filed, or inaccurate are filed with your client’s application. Unfortunately, this does mean that if they have been not reporting all their income for a long time you may have to report for more than the last 10 years, even though the CRA cannot grant penalty and interest relief for more than the last 10 years.
If there are certain years for which the taxpayer cannot accurately determine their omission, the CRA requests that they estimate their underreported income for the years in question.
The CRA will not deny a VDP application due to minor errors or omissions related to years in which the taxpayer cannot accurately determine the amounts and needs to provide estimates; however, they must be satisfied that all reasonable efforts were made to either locate the documents or make an educated estimated.
- Application of a Penalty
An application must involve a penalty, or potential penalty in order to be accepted into the program. The usual applicable penalty are late filing penalties; however, instalment penalties also qualify.
- One-Year Past Due
A VDP application must contain information that is at least one year past due. A VDP application will meet this criterion if an application contains information that is at least 1 year past due, as well as information that is less than 1 year past due.
- Payment of Estimated Taxes Owing
If there are taxes owing as a result of filings submitted through a VDP application, the taxpayer must include a cheque, or other proof of payment to cover the estimated taxes owing. The amount does not need to perfectly match the actual amounts owing that will be shown in notices of reassessment but must be an educated guess. When calculating the estimated taxes owing you will need to also estimate the interest you owe, but you do not need to estimate or pay any penalties.
If you are unable to pay the full amount owing, you can request that the CRA’s collection department reaches out to you in order to set up a payment plan. In order to qualify for a payment plan, a taxpayer must show that they do not have the financial means to pay the estimated taxes owing all at once. A collection officer will then work with you in order to determine the maximum amount that you can pay towards your estimated taxes owing each month. Once this is approved, the VDP application should be processed as if the payment had of estimated taxes owing had been made in full.
After determining that an application meets the five criteria mentioned above, it is time to actually prepare the application. In order to do so the taxpayer needs to prepare an RC199, Voluntary Disclosure Program (VDP) Application. In this application the taxpayer must fill out all of the sections that are relevant to their disclosure. The form contains sections for offshore and domestic income, GST/HST returns, and information returns; however, the taxpayer only needs to fill in the sections for the information that they are disclosing.
Some taxpayers will find the form is quite limited, and that they wish to express more than what is being requested, especially when it pertains to the reasons behind the omission. Therefore, we often recommend including a covering letter that details all of the reasons that led to the omission, as well as what brought you to make this disclosure.
Once all of the information is ready including the RC199, the income tax returns or adjustments themselves, and the payment the application is ready to be sent. If you choose to submit a voluntary disclosure on your own without the help of a lawyer (which is not advised for amounts which are significant or involve offshore components, or where there is the possibility of criminal prosecution). An application can be made either online through the taxpayer’s My Account / My Business Account, or by mailing it to the CRA.
After the application has been sent, you should expect to receive a letter from the CRA indicating that your application has met the preliminary requirements to be accepted into the program. This letter does not mean that the application has been accepted, but rather that they have acknowledged receiving it. The CRA will also provide an effective date of disclosure (EDD), which means that any enforcement action taken by the CRA between the EDD and the time that your application is accepted or denied will not disqualify you from the program.
After receiving this letter there is not much that can be done besides wait. You should continue to file all other returns on time, and with complete information even before your application is accepted. Unfortunately, estimated wait times for the CRA to process a VDP application can easily exceed 18 months.
Once an application is accepted then you will receive a letter indicating that the application has been accepted and indicating which program that it was accepted into. After being accepted into the program the returns are sent to the processing centre to be processed, and you will receive reassessments.
If a VDP application is denied, then a similar letter will be sent to you informing that you application was denied, and the reasons why it was denied. The letter will indicate that the returns will be sent to the processing centre to be processed as normal, and you will not receive any of the benefits of the program – including the protection against prosecution.
If you do not agree with the decision, a second administrative review can be requested by submitting a letter to the assistant director of the VDP program explaining why they were wrong in their decision and requesting that they review the application and render a new decision. If you didn’t seek professional advice in the preparation of your initial application, it is probably a good idea to do so at this stage. If the assistant director agrees with your second submission, then another letter will be sent indicating that the application upon reconsideration has been allowed into the program. If assessments had been issued during this time due to the application being originally denied, new reassessments will be issued reflecting the change to the interest and penalties where applicable.
If the VDP application is still denied upon second review, then you do have the option of filing an application to the Federal Court for a Judicial review of the CRA’s decision. Any taxpayer looking to pursue this option should immediately consult with a tax lawyer, as there is a 30-day deadline to file the application after the decision is received.