A second chance, that’s what the Canada Revenue Agency calls its voluntary disclosure program. If you or a client has made an error on a tax return, this program allows you to correct the error without worrying about facing financial or criminal penalties. As of 2018, the CRA is implementing several new rules to the VDP. Here’s a look at the main changes.
Timing of the VDP
To make a voluntary disclosure related to income tax, the issue has to be at least a year old. Generally, if you want to make changes to an income tax return before that time, you can request to amend the return, as long as it has been assessed. Under the new rules, if you want to make a disclosure related to goods and services tax or harmonized sales tax, you don’t have to wait a year. Instead, you can make GST/HST disclosures related to the previous reporting period, and depending on sales, businesses file GST/HST returns anywhere from monthly to annually. This rule makes it easier to report GST/HST issues quickly, and that helps to prevent interest from building up.
To be accepted, disclosures must be voluntary and complete. If the CRA discovers that you misrepresented some information, the agency considers the form incomplete, and it takes away any relief offered. You or your clients must also submit any tax owed due to the disclosure. This is a new rule, but if you can’t afford to make the payment, you can request a payment plan. On top of that, you must also calculate a penalty for income tax and either a penalty or interest for GST/HST. This shift in the GST/HST rules makes it more affordable for GST/HST registrants to disclose issues. They don’t have to worry about facing both interest and penalties, as they only have to deal with one.
The biggest change to the VDP concerns the creation of several different tracks. Basically, the CRA sorts every taxpayer who makes a disclosure into a track, and based on the tracks, taxpayers get different types of relief. The purpose of this new rule is to impose stricter penalties on people who were purposefully withholding information from the CRA.
Taxpayers making income tax disclosures fall into the limited group or the general group. The limited group is for situations where there was potentially an attempt to dodge tax liability. All other taxpayers fall into the general program. Taxpayers in the general track don’t have to pay penalties on the tax related to the disclosure, and they only have to pay interest based on the last three years. In contrast, people in the limited program have to pay interest and penalties. Neither group faces criminal prosecution or gross negligence penalties.
When taxpayers make voluntary disclosures for GST/HST, excise tax, soft lumber products export changes, or excise duty, they can fall into one of the three following tracks:
- Wash – Disclosures related to a supplier who doesn’t collect GST/HST from an entity entitled to input tax credits
- Limited – Disclosures where the information was originally withheld intentionally
- General – All other disclosures
Again, with these tracks, people in the general category get relief from all penalties and some interest. People in the limited track get relief from criminal prosecution and gross negligence penalties, but they still have to pay interest and late payment penalties. Taxpayers who disclose wash transactions don’t pay any interest or penalties.
To illustrate how wash penalties work, say a professional florist buys some ribbons from a craft store. The employees at the craft store don’t charge GST/HST because they assume the florist doesn’t need to pay it. However, in reality, the florist is supposed to pay the GST/HST and then claim an input credit on its own GST/HST return. In this situation, if the craft store discloses the mistake, that qualifies as a wash transaction.
General vs. Limited Tracks
You may be wondering how the CRA is going to sort people into limited and general categories. In most cases, people aren’t going to note on their disclosures that they intended to defraud the CRA but changed their minds. Instead, the CRA is going to make this distinction on its own, and to decide, it will take into account the amount of money involved, the number of years involved, and the sophistication of the taxpayer or registrant.
This is where the issue gets interesting for accountants and other financial professionals. Just by nature of your training, you are sophisticated in terms of tax laws. As a result, if you make a voluntary disclosure related to your personal return, your business return, or a client’s return that you prepared, you are likely to be put into the limited category, but depending on the specifics of the case, you may fall into the general category. Additionally, corporations with more than $250 million in revenue during two of the last five tax years are automatically placed in the limited track.
As of 2018, the CRA is also banning no-name disclosures. You can have a conversation with a CRA agent about the disclosure anonymously, but once you apply for the VDP, you have to reveal your identity. In addition, if the disclosure involves complex issues or very large dollar amounts, the CRA will have a specialist review the disclosure before accepting it for the program. In particular, specialists will be called in to deal with transfer-pricing issues.
The VDP is a great way to rectify tax issues without worrying about scary criminal or financial penalties. If you plan to make a disclosure, you want to understand the new rules and how they affect your situation. These rules are effective March 1, 2018, and if you need to make an anonymous disclosure or prefer the old rules for any other reason, you may want to make your disclosure before that date.