Voluntary Disclosure Program and the Taxpayer

Many taxpayers fear the words “audit” or “investigation” when spoken by an agent of the Canada Revenue Agency, especially if they fear that a filing was inaccurate. This holds true for employers who have not remitted GST or payroll deductions or an individual who has not disclosed earnings from abroad, income made through e-commerce or even the corporation or trust that has claimed invalid expenses. Fortunately, the CRA has implemented a Voluntary Disclosure Program, where a taxpayer can correct insufficient filings without fear of prosecution or penalty. The Program allows taxpayers to assess and prepare for the outcome of disclosing their inaccuracies on a named or anonymous basis. In a named disclosure, the taxpayer would have to provide a Taxpayer’s Agreement (Form RC199), the taxpayer’s full postal code along with all other contact details including their Social Insurance Number. In an anonymous disclosure, the taxpayer would have to disclose the first three digits of its postal code, contact information of its representative, gender and age if an individual, taxation years, reporting periods or fiscal periods involved in the disclosure, amount of the correction, the type of return involved, type and reason for the omission, primary business activity and how the taxpayer meets CRA’s conditions of use. There are many benefits to using this program as well as some other important points that should be considered. These will be discussed and the conditions of use will be outlined below. The Program has provided Canadian residents a relatively safe method of curing deficiencies in previous filings.

Benefits of Disclosing

Some of the benefits of disclosing include the following:

The avoidance of enforcement procedures and avoidance of special investigations into any or all of their affairs. By disclosing prior to an audit or investigation, the CRA will not pursue such action into the disclosed information and the difficulties in providing a defence against tax evasion that are associated with it.
The avoidance of the stress of being prosecuted. The consequences of prosecution can include jail time of one year per charge and/or fines ranging from $1,000.00 to $25,000.00. Taxpayers often lose sleep or suffer emotional stress from having this additional burden on their shoulders. By using the Program, a taxpayer can alleviate themselves from this burden.
The absolution of penalties associated with the non disclosure. The late filing penalty on first offence is 5% of the balance outstanding and 1% for every full month the balance remains outstanding to a maximum of 12 months. For every offence thereafter, the penalty is 10% of the balance outstanding and 2% of interest for every full month to a maximum of 20 months. Interest is added to the principal and interest is charged upon it in the next month.
The mitigation of interest. Since interest accrues on interest immediately from the date the tax liability is due, this can add substantially to the tax liability. In fact, there have been cases where the interest was considered excessive, because it exceeded the tax liability. If the inaccuracy relates to a return that is more than three years old and within the ten years previous to the submission of the Voluntary Disclosure, the CRA may be in a position to grant partial interest relief.
The reinstatement of recognition of refunds and the interest thereon, GST credits, Child Benefit Tax Credits and carry forwards on RRSP contributions. For taxpayers who have not filed a return at all, the CRA cannot assess and provide these credits to the taxpayers as they are based on the previous year’s income. By disclosing, the taxpayer reinstates the availability of these credits.
The ability to assess repercussions and prepare for the outcome of assessment without disclosing one’s identity. Through the use of Anonymous Disclosure, the taxpayer can determine a likely outcome without fully committing to it. Although the CRA will not commit itself to a binding outcome based on anonymous disclosure, if the relevant information is the same, the outcome should not differ. After a settlement is reached, the taxpayer has 90 days from the date that the Taxpayer Agreement or initial letter was submitted to the CRA to disclose its identity. The Anonymous disclosure also provides the benefit of allowing the taxpayer to meet Condition 1: Voluntariness of the Disclosure should an investigation/audit occur within the period that the Anonymous disclosure was made and the date it is perfected.

The benefits of disclosing are varied. There are few circumstances where they do not outweigh the detrimental affects of remaining non-compliant with the CRA, given that if a taxpayer is found non-compliant, they can be subject to jail time or substantial fines.

Other Considerations

The taxpayer must take into consideration the following items, prior to using this Program:

Generally, the taxpayer cannot use the program twice. Therefore, all inaccuracies should be disclosed at the first instance in order to fully benefit from the Disclosure. This being said, the taxpayer may avail itself of the VOLUNTARY DISCLOSURE program a second time if the second inaccuracy is beyond their control, they are submitting a Named Disclosure and they have informed the CRA that they have used the Program before.
Following this line of thought, the taxpayer is expected to remain compliant with CRA standards following the disclosure. This is not a program where one can continue to report inaccuracies. It is the CRA’s expectation that by providing a one-time clearing of the slate, the taxpayer will be compliant in the future.
An investigation can be opened into other aspects of the taxpayer’s accounts with CRA. For instance, if the taxpayer discloses for the 2006 taxation year only, CRA may open an investigation into the 2004. taxation year or if a taxpayer discloses that they did not remit GST remittances for a series of years, the CRA may investigate Payroll Deduction remittances. It is very important to review returns for relevant and important inaccuracies.
After the VOLUNTARY DISCLOSURE process is started, the taxpayer has a limited amount of time to provide all disclosure documentation and verify its disclosure. This means that the taxpayer should have reviewed its files and be prepared for a request for additional documents.
The 90 day time limit to disclose the taxpayer’s name in an Anonymous Disclosure cannot be extended and so the taxpayer must be prepared to decide if it is going to move forward based on the terms provided by the CRA.
Further in Anonymous Disclosure, the terms of repayment are not binding on the CRA. Generally, they will uphold the terms provided prior to disclosure of the name of the taxpayer. However, if it is decided that the disclosure provided did not reveal all relevant circumstances, the terms will not be complied with and the taxpayer is open to prosecution and penalty.
The taxpayer should also consider other programs available to it such as an Application for Taxpayer Relief, or GST Penalty Relief or simply filing a T1 Adjustment Form in certain circumstances. It is best to consult a tax specialist to determine which method is best for the scenario on hand.
The use of professionals is also important. The use of a tax lawyer to submit the disclosure and negotiate with the CRA regarding the terms of repayment can be invaluable, especially since the taxpayer’s dealings with its lawyer are privileged, meaning that the lawyer cannot disclose additional information to the CRA without the taxpayer’s consent.

The most important item for a taxpayer to do is to prepare, prepare, prepare. Ensure that all documents, filings and supporting evidence for the last six years are accessible and that the information provided in the disclosure is supportable.

Conditions of Use of the Program

The following are conditions that the taxpayer must meet before submitting a Voluntary Disclosure:

The disclosure must be voluntary. The taxpayer must be unaware of any audit, investigation or enforcement procedure. If the disclosure is outside of the audit or investigation parameters, the taxpayer may proceed with the Voluntary Disclosure. For instance, where an investigation is confined to the issue of GST remittances and the taxpayer wishes to disclose inaccuracies in payroll deductions. Taxpayers should be aware that time may be running out as the CRA considers disclosure involuntary if they have issued even a request to file for the taxpayer or a third party closely associated to the taxpayer in certain circumstances.
The disclosure must be complete. The taxpayer must provide full and accurate disclosure for the reporting periods being rectified. If the CRA requests additional information, it must be provided within the timeframes cited and the taxpayer must provide a full and complete picture of their tax liability. This is important to the taxpayer for two reasons. First, the terms negotiated between the taxpayer and the CRA are invalid if the CRA finds an omission in the Voluntary Disclosure submitted and second, complete disclosure does not leave the door open for the CRA to investigate or prosecute those affairs of the taxpayer.
The inaccuracy must involve a penalty. If there is no penalty, the normal route for disclosure should be used. However, the Voluntary Disclosure Program offers an elimination of the penalty associate with the inaccuracy disclosed. Penalties can range from the GST remittance penalty to non filing penalties and numerous others between.
The one year condition. The disclosure must apply to a return that is more than one year old or part of a disclosure that is more than one year old. If the taxpayer would like to disclose an error in its 2008 tax return, it could only do so under this program if it was citing errors in its 2007 or older tax returns. If it is only the 2008 inaccuracy that it wishes to cite, the most efficient manner of reporting it would be to file a T1 Adjustment form.

These conditions allow the CRA to achieve their goal of providing taxpayers a methodology to correct inaccurate returns without fear of penalty or prosecution while ensuring that the procedure is not being abused.

For individuals who have realized their previous tax filings are inaccurate, the Voluntary Disclosure Program provides a relatively safe procedure to assess and prepare themselves for disclosing the inaccuracy and relieving themselves of worrying that an audit or investigation can bring additional fines or imprisonment. The main benefits associated with the Program is the ability to determine the outcome of disclosing on an anonymous basis, being relieved of the payment of penalties, and potentially some of the interest arrears as well. Taxpayers considering the program should note the limited timeframe they have to produce documentation and reveal their identity and should therefore prepare and have information easily accessible. Also, they should ensure that they meet all four of the conditions of use outlined here. Finally, the use of a good professional to submit Voluntary Disclosure documentation is important in that it affords an extra layer of anonymity and aid in communicating with the CRA.

Fernandes, Merlyn
(416) 972-9001
clientservices@heydary.com

Hamilton, Robert J.
(416) 972-9001 Ext. 500
clientservices@heydary.com

Reinbergs, Eb
(647) 288-1181
clientservices@heydary.com

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Voluntary Disclosure Program and the Taxpayer