A second chance: that’s what the Canada Revenue Agency (CRA) calls its Voluntary Disclosure Program (VDP). If you or a client made an error on a tax return, this program allows you to correct the error in a way that leaves you on good terms with the CRA. This opportunity helps you or your clients wipe the slate clean while making a promise for future compliance. To ensure fairness in the administration of this program, on March 1, 2018, the CRA implemented new rules that tightened up eligibility for the VDP.
When and How to Apply for the VDP
Generally, to make changes to an income tax return filed in the last 10 years, you can request to amend the return as long as the CRA has already assessed it. To disclose income tax information that is at least one year past due, apply for the VDP by completing the RC199 Voluntary Disclosures Program Application.
To make a disclosure related to Goods and Services Tax (GST) or Harmonized Sales Tax (HST), you can file an application when you need to submit information that is at least one reporting period past due. You can make GST/HST disclosures through the VDP as long as you meet the conditions for valid disclosures.
Conditions for Valid Disclosures
In order for the CRA to accept your application, you must make voluntary and complete disclosures. If the CRA discovers you misrepresented some information, the agency considers the form incomplete and takes away any offered relief. Applications for VDP are only considered in cases where there is a potential for the assessment of penalties (for income tax) or for penalties or interest (for GST/HST). You or your clients must also calculate and submit any tax owed due to the disclosure. If you can’t afford to make the payment, you can request a payment plan.
Voluntary Disclosure Tracks
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. This new rule has the purpose of imposing stricter penalties on people who purposefully withhold information from the CRA.
Taxpayers making income tax disclosures fall into the limited group or the general group. Those who potentially attempted to dodge tax liability go into the limited group, while 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. Fortunately, neither group faces criminal prosecution or gross negligence penalties.
When taxpayers make voluntary disclosures for GST/HST, excise taxes, soft lumber products export changes, or excise duties, they can fall into one of the three following tracks:
- Wash: Disclosures related to suppliers that don’t collect GST/HST from entities entitled to input tax credits
- Limited: Disclosures of intentionally withheld information
- General: All other disclosures
Again, with these tracks, people in the general category are eligible for relief from 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 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. But in reality, the florist should pay the GST/HST and then claim an input credit on their own GST/HST return. In this situation, the craft store’s disclosure of the mistake qualifies as a wash transaction.
General vs. Limited VDP Tracks
You may wonder how the CRA plans to sort people into limited and general categories. In most cases, people don’t note that they intended to defraud the CRA but changed their minds on their disclosures. Instead, the CRA makes this distinction on its own. To decide, it takes into account the amount of money and number of years involved plus the sophistication of the taxpayer or registrant.
This is where the issue gets interesting for accountants and other financial professionals. The CRA considers you sophisticated in terms of tax law simply by nature of your training. As a result, if you make a voluntary disclosure related to your personal return, your business return, or a client’s return you prepared, you’re likely to find yourself placed in the limited category. But depending on the specifics of the case, you may fall into the general category. Additionally, keep in mind that corporations with more than $250 million in revenue during two of the last five tax years automatically go in the limited track.
Additional CRA VDP Changes
In the 2018 rules update, the CRA also banned no-name disclosures. This means 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 has a specialist review the disclosure before accepting it for the program. In particular, the CRA plans to bring specialists in to deal with transfer-pricing issues.
The VDP offers a great way to rectify outstanding tax issues. Going forward, you can stay on top of any new rules and stay in compliance with the CRA by using accounting software that provides automatic updates. With that in mind, accelerate your year-end adjustment process and start saving time on corporate returns with QuickBooks Online Accountant. Sign up for free.