In light of the Canada Revenue Agency’s (CRA) annual report revealing that there has been a significant increase in the number of Canadians coming forward to correct their tax affairs under the Voluntary Disclosures Program (VDP), we wanted to give some insight into what the VDP is about.
Essentially, the VDP gives a taxpayer a “second chance” and the opportunity to come forward and disclose a tax mistake or omission about income or other reporting on their tax return. The following are a few questions that we thought most readers would want answered regarding the VDP. To help us answer the following questions, we went to tax specialist Michael Friedman. Mr. Friedman is a tax partner at McMillan LLP and head of the firm’s Tax Group.
Q. If I am a taxpayer who is currently thinking of using the VDP, do I require a tax lawyer or any other tax specialist to make the disclosure to the CRA?
A. A tax lawyer or any other tax specialist is not required when disclosing past reporting errors or omissions to the CRA under the VDP. However, Mr. Friedman flagged two important considerations when making the decision of whether or not a taxpayer should consult a tax lawyer or any other tax specialist prior to making a disclosure. Those considerations relate to whether to make a “named” or “no-names” disclosure.
- The identity of the taxpayer is immediately revealed to the CRA in the initial submission requesting relief under the VDP.
- To submit a disclosure, Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement is to be filled out, or a letter can be written giving the same information as on the form.
- The identity of the taxpayer is not revealed to the CRA in the initial submission requesting relief under the VDP.
- To submit a disclosure, you may use Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, or a letter can be written giving the same information as on the form.
Important notes: Taxpayers who are considering this route should note that the same information as a named disclosure (except for their identity) must be provided to the CRA, as well as the first three characters of the postal code of the taxpayer’s residence or, if a business, the operating address. Within 90 calendar days the identity of the taxpayer involved must be provided to the CRA. The 90 days will start on the date the CRA sends the taxpayer a letter stating that the 90-day count has begun.
Mr. Friedman indicated that if a taxpayer is looking to make a no-names disclosure, that involves someone else making the disclosure on your behalf, so therefore, at that time, you would usually require a tax advisor.
Q. What are the advantages and disadvantages of going the “named” v. “no-names” disclosure route?
A. Mr. Friedman indicated that taxpayers usually gravitate towards a no-names disclosure, and that such disclosure is advantageous. It allows a taxpayer’s representative to talk over the situation with the CRA and gain a better understanding of the CRA’s standpoint on the taxpayer’s disclosure without revealing who they are. A taxpayer would only provide limited information regarding their identity (first three characters of the postal code), as described above. The taxpayer can then simply walk away if they are not satisfied with the CRA’s initial feedback.
On the other hand, if a taxpayer decides to make a named disclosure and the taxpayer does not make a “valid disclosure” in accordance with the requirements under the VDP, the CRA can act based on the information the taxpayer provided. That being said, the taxpayer may be subject to penalties or charges, if applicable, depending on the situation.
Mr. Friedman mentioned that the following are four conditions that make a valid disclosure:
- the disclosure is voluntary;
- the information is complete;
- the information is at least one year overdue; and
- a penalty applies to it.
Mr. Friedman noted that the above process would be easier if a professional advisor were there for guidance.
Q. Considering the penalties and charges that can result from corporations failing to comply with their tax responsibilities, what are some best practice suggestions?
A. For Mr. Friedman, being proactive and taking responsibilities seriously is important.
Try and avoid errors before they are being made. Get into the habit of regular review practice.