Article by Jonathan Wright
E-mail: jwright @wrightlegal.ca
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Tax is complicated. Mistakes happen, even to professionals.
Unfortunately, these mistakes, especially ones carried on over a number of years, can be expensive. In recovering a tax debt, the CRA can go after a person’s assets and even his or her home. Even in circumstances where no tax was owing (such as a missed form) penalties can mount up.
Fortunately, the CRA has a program for individuals, trusts and businesses to voluntarily disclose their tax issues and details and then potentially receive a waiver of penalties and sometimes a reduction in interest.
The program is called the “Voluntary Disclosures” program. The process works as it sounds. A taxpayer explains the details of the overlooked tax matter or delinquent tax issue and provides the missing returns or forms which were required.
If the CRA approves the disclosure under the General Program, they waive all penalties and sometimes even interest. This is a very substantial benefit and depending on the tax owing can mean a savings of hundreds of thousands of dollars.
If the disclosure is approved under the Limited Program, the taxpayer will not be referred for criminal prosecution with respect to the disclosure and will not be charged gross negligence penalties, although normal penalties and interest will be assessed. Though the relief under the Limited Program is less than under the General Program, gross negligence penalties can be particularly large, so avoiding them is a significant benefit.
The General and Limited Programs are discussed in greater detail below.
Requirements for a Valid Disclosure
There are five requirements for a successful voluntary disclosure.
1. It must be voluntary.
In brief, this means that the CRA hasn’t begun any action against the taxpayer which already has or might in the future uncover the tax issues being disclosed. For example, a disclosure won’t be voluntary if a company under audit for unreported income discloses that unreported income.
2. It must be complete.
The CRA wants you to come in from the cold. No tax issues can be withheld. If a deliberately-suppressed tax issue comes up during the course of the disclosure, this issue could put the entire disclosure in jeopardy.
3. It must involve a penalty.
This is satisfied in most circumstances where tax issues arise. If you don’t report income or file a form you are required to file, this will involve a penalty.
4. It must be one year past due.
In other words, the issue occurred last year or prior to that. If the issue began more than a year ago and continues to this day, the ongoing issue may still be included.
5. It must include payment.
In most circumstances, in order to be accepted under the Voluntary Disclosures Program, the application will have to include payment of the estimated tax owing.
If you don’t have the ability to pay at the moment, there is another option. In these circumstances, we may request a payment arrangement with the CRA, subject to approval by CRA collections officials.
The process begins with hiring a tax practitioner, such as Wright Legal, to gather your information and put together your explanation for non-compliance. For most of my clients the reason for the tax issue simply comes down to a misunderstanding of what was required.
The tax practitioner will then work closely with your accountant to put together the returns or forms that should have been filed. If you don’t have an accountant, we would be happy to provide you with the contact information for a number of accountants we trust.
Limited or General
The difference between the General and Limited Programs is one of intent. The typical disclosure will fall under the General Program. The Limited Program on the other hand is designed for disclosures with an element of intentional conduct.
There is room for your tax practitioner to make your case for the General Program. The factors the CRA considers include (among others):
- efforts to avoid detection through the use of offshore entities or otherwise;
- large dollar amounts involved;
- the number of years of non-compliance; and
- the sophistication of the taxpayer.
Even if one of these factors applies to you, this will not necessarily mean that you are only eligible under the Limited Program. The CRA considers the facts as a whole.
If you would like to come in for a consultation on your tax matters, or are wondering about tax planning opportunities for you personally or for your business, please do not hesitate to contact the author at firstname.lastname@example.org or 604.678.4459, or visit our website at wrightlegal.ca.