Anyone can make a mistake. And that’s why Canada Revenue Agency has a voluntary disclosure program aimed at taxpayers who want to come clean.
It’s a bad idea to give wrong financial information to Canada Revenue Agency. For one thing, there’s the moral aspect – citizens are expected to pay their fair share of taxes for the common good.
For another, information that doesn’t add up can trigger an audit by CRA. And if that happens, the tax collection agency can look at your journals, bank accounts, sales invoices, expense accounts, investments, appointment books and much more. And CRA can go back many years.
And if the auditor does find mistakes, you’re on the hook for more than just back taxes. You’re also looking at penalties and interest.
But CRA also wants to send the message that almost everybody deserves a second chance and that’s why it created its Voluntary Disclosure Program.
Essentially, this means that you come forward and make a clean breast of things with CRA. The VDP doesn’t just apply to individuals. An employer, a corporation or partnership can also take advantage of the program. But you have to make the first step.
Online, you will find a VDP Taxpayer Agreement form here.
By disclosing what you owe, you will just have to pay the back tax amount and applicable tax. In early 2016, CRA charged an interest rate of five per cent on overdue taxes. This was roughly two percentage points above the prime rate, the rate which Canadian banks offer loans to their best customers. CRA also has the discretion to cancel or waive interest payments in some circumstances, such as inability to pay or financial hardship.
Paying just the interest means you wouldn’t pay a penalty. These can be heavy.
For example, supposed you owed tax for 2015 and didn’t file your return for that year on time. CRA would charge you a late-filing penalty amounting to five per cent of your 2015 balance owing, plus one per cent of your balance owing for each full month your return is late, to a maximum of 12 months.
It gets worse as time goes on. If CRA charged a late-filing penalty on your return for the previous three years, the late-filing penalty for 2015 may be 10 per cent of your 2015 balance owing. In addition, it could assess an additional two per cent of your 2015 balance owing for each full month your return is late, to a maximum of 20 months.
There are, however, a number of conditions to the Voluntary Disclosure Program.
At the top of the list is the fact that it’s called the Voluntary Disclosure Program for a good reason – you have to approach CRA. It’s too late if you get a call from CRA inquiring about your tax form.
Also, the information has to be at least one year old and it must be complete.
And you better be prepared for CRA to go back into your financial records by several years as part of the reassessment process, which will include filing proper and accurate returns to make up for the erroneous/falsified ones.
If you’re nervous about approaching CRA about the voluntary program, you can do it anonymously. But you have to provide the taxpayer’s identity within 90 days.
CRA will contact you within two weeks after you make your disclosure and advise on the next steps.
Generally speaking, CRA expects you to pony up the back taxes and interest payment once all is settled. But CRA will work with you to develop a payment plan if that is not possible.
Finally, you should also know that in most cases, it’s never too late to come clean with the federal tax collection agency. But again – don’t wait until CRA notices there is a problem because you won’t be able to take advantage of the Voluntary Disclosure Program.
For full details, you can check out the CRA’s webpage on the VDP.