Voluntary Disclosure of Unfiled Taxes
by L. Kenway BComm CPB
What You'll Find In This Chat
- Making the Disclosure
- Non-Compliance Penalties
- Protecting Yourself Against 3rd Party Penalties
In this chat, I'm going to touch on my limited knowledge of CRA's Voluntary Disclosure Program. So warm up your tea cup and join me for the next five minutes to understand your options.
Do you have years where you (or your clients) have failed to file a return ... or perhaps the tax return filed wasn't an accurate tax return because of unreported income ... or understated sales ... or overstated expenses?
In Canada, our system is a self assessing system and relies on voluntary compliance.
The purpose of the voluntary disclosure program is to encourage individuals to self-correct incomplete or inaccurate information, and past omissions; while granting relief to those who satisfy all the conditions through waiving interest, penalties, publicity, and prosecution.
Tax Audits - Four Part Series
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Tax Audits The Process
Receiving a Tax Notice
Making The Voluntary Disclosure
The request must be in writing by letter ... or use CRA Form RC199. The voluntary disclosure date is when the CRA has received the request OR the date the taxpayer (or their representative) signs the client agreement form.
You must meet four conditions to qualify for the program. The four conditions are:
- it must be voluntary;
- it must be complete;
- must involve an income tax penalty; and
- the information is at least one or more years overdue.
You must pre-plan your disclosure because you only have a 90 day deadline to provide CRA with the type of returns involved, type of information returns, type of omission, primary business activity along with an explanation of how you feel you have met the four validity conditions that must be met.
There are two options when applying - with a name disclosure OR as a no-name disclosure ... each has different information requirements.
There is a procedure to follow to make a voluntary disclosure ... and it is advisable to follow it and not cut corners.
good bookkeeping practice
Protect Yourself Against Third Party Civil Penalties
If you suspect that criminal proceedings may be possible if the voluntary disclosure program was not used ...
... it is usually recommended that you refer your client to a tax lawyer (one who specializes in this field) before proceeding because ...
... a lawyer has solicitor - client privileges that an accountant or bookkeeper does not have.
The lawyer can then engage the services of an accountant or bookkeeper
of the client's choice to act as their agent. You should then not be
subject to the possibility of third party civil penalties.
The first submission must be done correctly in the event the request is denied.
E&Y's Tax Intelligence Newsletter dated September 2012 covers the topic of client privilege in the article, Understanding privilege in a tax context. It is worth reading!
The article explains that privilege is different than confidential
communications with professional advisors. It goes on to explain how you
can protect privilege over communications with professional advisors
other than your lawyer.
Penalties apply for failure to comply with the Income Tax Act (ITA). Technically, it is a criminal offense not to file a tax return for any reason ... but CRA rarely prosecute solely for not filing ... but it could happen.
My references say penalties include:
- gross negligence civil penalties (knowingly under reporting tax income) ... the greater of
- $100; and
- 50% of tax that was avoided
- A corresponding provincial penalty may also be applied
- repeated failure to file income
- 10% of income not reported ... and a corresponding provincial penalty may be applied
- failure to file criminal charges (failed to file when required ... OR tax evasion) ...
- A minimum $1000 fine plus possibly 12 months in jail; OR
- A penalty between 50% and 200% of the tax evaded plus possibly 5 years jail time respectively.
- failure to file civil penalties ... failure to report income civil penalties ...
- The penalty is 5% of the unpaid tax at the date on which the return was due to be filed AND 1% of the unpaid tax for each complete month the return was late ... for up to 12 months ... that's a minimum of 17% per year (before compounded daily interest).
- Repeated failures to file ... after a demand for return was served ... doubles the penalties.
Voluntary Disclosure Ineligibility
If CRA has already made a demand request, you are no longer eligible for the program.
So ... first important rule in doing business in Canada ... each year pay CRA by the filing deadline ... estimating the tax payable if necessary.
My favorite tax site has a great income tax calculator you could use to this do estimate.
In closing, some the consequences of unreported income that may be of interest to you are:
- Interest and penalty assessments.
- Possible charges of tax evasion and/or imprisonment along with public posting of charges on CRA website.
- Loss of personal property as CRA forces sale of home and other personal assets. CRA liens are paid out first (i.e. before your mortgage).
The Canadian Bar Association has an introduction to the Federal Voluntary Disclosures Program titled Coming Clean to the CRA.
It's been great chatting with you .
Your tutor Lake