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A Canadian Tax Lawyer’s Perspective on Voluntary Income Tax Disclosure Relief – Tax

What is the Voluntary Disclosure Program?

The Canada Revenue Agency’s Voluntary Disclosure Program allows taxpayers to proactively come forward to correct past errors or omissions with their taxes. Our experienced Canadian tax attorneys can determine if the Voluntary Disclosure Program would be beneficial and applicable to you. To encourage taxpayers to participate in the program, the Canada Revenue Agency offers relief from lawsuits, penalties and interest. The exact nature of the relief depends on whether a taxpayer qualifies for the “general” or “limited” program. Taxpayers will qualify for the “limited” program instead of the “general” program where there is an element of intentional conduct on the part of the taxpayer or a closely related party, such as transferring money overseas to avoid to declare it.

Purpose of voluntary disclosure

Any penalty, interest and relief from criminal prosecution provided by the Voluntary Disclosure Program is limited to the “subject matter of the disclosure”, meaning the errors or willful omissions disclosed in the Voluntary Disclosure. If a taxpayer omits to include something in the voluntary disclosure, the voluntary disclosure relief will not apply to that omission, even if it relates to a disclosed year.

To illustrate, Frank is voluntarily disclosing cryptocurrency income he forgot to report in 2018 and 2019 and is receiving relief under the Voluntary Disclosure Program. He is not disclosing rental income in 2019 and 2020 from certain properties he owns overseas because he is under the false impression that he does not need to report income from foreign properties in Canada. The Canada Revenue Agency then reassesses Frank for unreported rental income with full interest and penalties on the unreported rental income.

Disclosure Effective Date

The relief from interest and penalties only applies for a certain number of years from the date the request for voluntary disclosure is filed – known as the effective date of disclosure. Our experienced Canadian tax lawyers advise keeping an accurate record of when a voluntary disclosure request has been sent, as this may affect the relief received.

Lawsuit for tax evasion

Both the “General” and “Limited” programs provide relief from criminal prosecution for tax evasion with respect to the subject matter of the disclosure. Misrepresentation of your taxes under the income tax law may constitute a criminal offense in the event of a deliberate attempt to evade tax by incorrectly declaring. The Canada Revenue Agency may also pursue fraud or other criminal charges under the criminal code.

Tax penalty

Under the “General” program, a taxpayer will receive full penalty relief. These penalties may include, for example, a late filing penalty, as late filing will result in a penalty of 5% of your tax owing plus an additional 1% per month for each month you fail to file by twelve months. Some return forms such as the T1134 and T1135 have their own penalties for failure to file.

Under the “limited” program, the taxpayer will only receive relief from gross negligence penalties. These penalties are generally imposed when a taxpayer, knowingly or under circumstances amounting to gross negligence, failed to report income on a tax return. The penalty is equal to the greater of $100 and 50% of the tax related to the failure to report.

In either program, the penalty relief is limited to the last 10 tax years from the effective date of the disclosure. For disclosures filed in 2022, the penalty relief will only extend through the 2012 tax year.

Interest Relief

Interest accrues on unpaid taxes and penalties. It should be noted that interest begins from the date the taxes were due, not when an assessment or reassessment is issued. Therefore, one of the major benefits of the Voluntary Disclosure Program is Interest Relief. Interest Relief is only available under the General Program. It provides relief of 50% of interest accrued over the last ten calendar years from the effective date of the disclosure, even if the underlying tax and penalties were for previous tax years. No interest relief is applied to the last three tax years disclosed.

Sample Voluntary Disclosure Waiver

Joanna bought a condo in Florida for CA$100,000 in 2010. Outside of sporadic family vacations, the condo is used almost entirely as an AIRBNB run by a local management company. Joanna reports AIRBNB rental income annually. Joanna sells the condo in 2021. In 2017, Joanna loaned her sister $10,000 with $500 interest payable each year. Joanna’s sister pays the interest each year and repays the principal in 2021. Joanna does not have to report the interest income from this loan. When considering how to report the sale of the condo on her tax return, Joanna learns that she had to file Form T1135 for each year she owned the condo.

Her experienced Canadian tax attorney files a voluntary disclosure for unfiled T1135s from 2010 through 2021 and unreported interest income from 2017 through 2021 on Joanna’s behalf in March 2022 and successfully obtains relief for Joanna under the “General” program.

  • Joanna is receiving penalty relief for 2012 through 2020 for unfiled T1135s and unreported interest income from 2018 through 2020. There is no penalty relief for 2021 because Joanna’s filings n were not due before April 30.and 2022, and therefore had not yet incurred a penalty for 2021.

  • Joanna receives no penalty relief for 2010 and 2011, and no interest relief for interest accrued in those two years, as those years are more than 10 years after the date the claim was filed. disclosure.

  • Joanna does not receive any interest relief for interest related to unreported tax in 2018, 2019 and 2020 as these are the last three years disclosed.

  • Joanna receives interest relief on 50% of accrued interest between 2012 and 2022. This relief includes interest relief from her undisclosed interest income in 2017 and any accrued interest on penalties for failure to file the T1135 in 2010 and 2011.

  • Joanna cannot be criminally prosecuted for not filing her T1135 or reporting interest income.

Without the voluntary disclosure, Joanna would have owed $25,000 in T1135 for failure to file penalties, tax on $2,000 in unreported interest income on the loan, any penalties on unreported interest income as well as interest on all the above amounts. With the disclosure, she only pays tax on the $2,000 of unreported interest income, $2,500 for the two years of T1135 penalties, plus any unreported interest. waiver. Its tax bill has been significantly reduced.

Pro Tax Tips: The Completeness Requirement Must Be Satisfied

Knowing that there is a 10-year limit on relief from interest and penalties may discourage a taxpayer from including anything that is 11 years or older in the voluntary disclosure request. However, for a request for voluntary disclosure to be accepted, it must be complete. This means that he must include all errors and omissions in the tax return, even if they are more than 10 years old. Failure to report errors or omissions out of concern during the 10-year period may result in the denial of the voluntary disclosure application and the imposition of penalties and non-recourse interest. Second, there is still the applicable interest relief under voluntary disclosure for the past ten years, even with respect to unreported taxes for years 11 years or older.

Our experienced Canadian tax lawyers can review your tax affairs to confirm what needs to be corrected. Sometimes clients come to our tax law firm fearful that they have a large amount of unreported income to disclose and we are able to identify that their reporting errors are fewer than expected.

FAQs

What are the two voluntary income tax disclosure programs?

The two schedules are the “Limited” and “General” schedules. The “Limited” program provides less relief than the “General” program because taxpayers are eligible for the “Limited” program when they or a closely related person has committed intentional conduct with respect to misrepresentation of taxes.

What relief does the Voluntary Disclosure Program offer?









Type of relief Description of relief Applicable program
Legal pursuits The taxpayer will not be criminally prosecuted with respect to the amounts disclosed in the voluntary disclosure request General and Limited
Relief from penalties Penalties applicable for the past 10 years from the date of filing of the voluntary disclosure request will be waived. General – All Penalties
Limited – Penalties for gross negligence only
Interest Relief 50% of the interest accrued over the last 10 years from the date of filing of the voluntary disclosure request will be cancelled. Excludes interest related to the last three tax years covered by the disclosure. General

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.