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

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

What is the Voluntary Disclosure Program?

The Canada Revenue Agency’s voluntary disclosure program allows taxpayers to come forward proactively to correct prior errors or omissions with their taxes. Our experienced Canadian tax lawyers can identify whether the voluntary disclosure program would be beneficial and applicable for you. To incentivize taxpayers to take part in the program, the Canada Revenue Agency offers relief from prosecution, penalties and interest. The exact nature of the relief is dependent 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 by the taxpayer or a closely related party, such as shifting money overseas to avoid reporting it.

Subject Matter of the Voluntary Disclosure

Any penalty, interest and criminal prosecution relief offered by the voluntary disclosure program is limited to the “subject matter of the disclosure” meaning the errors or deliberate omissions disclosed as part of the voluntary disclosure. If a taxpayer fails to include something in the voluntary disclosure, the voluntary disclosure relief will not be extended to that omission even if it relates to a year disclosed.

To illustrate, Frank voluntarily discloses cryptocurrency income he forgot to report in 2018 and 2019 and receives relief under the voluntary disclosure program. He does not disclose rental income in 2019 and 2020 from some properties he owns overseas as he is under the incorrect impression he does not need to report income from foreign properties in Canada. The Canada Revenue Agency then reassess Frank for the unreported rental income with full interest and penalties on the unreported rental income.

Effective Date of Disclosure

Interest and penalty relief only applies for a certain number of years from the date on which the voluntary disclosure application is filed – known as the effective date of disclosure. Our experienced Canadian tax lawyers advise keeping careful record of when a voluntary disclosure application was sent in as this can impact the relief received.

Prosecution for Tax Evasion

Both the “General” and “Limited” program offer relief from criminal prosecution for tax evasion with regards to the subject matter of the disclosure. Misreporting on your taxes under the Income Tax Act can amount to criminal offence where there is wilful attempt to evade taxes by incorrectly reporting. The Canada Revenue Agency can 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 incur a penalty which is 5% of your tax amount owing, plus another 1% a month for every month you fail to file up to twelve months. Certain reporting forms such as the T1134 and T1135 have their own failure to file penalties.

Under the “Limited” program, the taxpayer will only receive relief from gross negligence penalties. These penalties are usually imposed where a taxpayer knowingly, or in 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 restricted to the past 10 taxation years from the effective date of disclosure. For disclosures filed in 2022, penalty relief will only extend back to the 2012 taxation year.

Interest Relief

Interest accrues on unpaid taxes and penalties. It is worth noting that the interest starts from the date the taxes were due to be paid, not when an assessment or tax reassessment is issued. Therefore, one of the main benefits of voluntary disclosure program is receiving interest relief. Interest relief is only available under the General Program. It provides relief of 50% of the interest that accrued within the past ten calendar years of the effective date of disclosure, even if the underlying tax and penalties were for tax years prior. No interest relief is applied to the last three taxation years disclosed.

Example of Voluntary Disclosure Relief  

Joanna purchased a condo in Florida for $100,000 CAD in 2010. Outside of sporadic family vacations, the condo is used pretty much entirely as an AIRBNB run by a local management company. Joanna reports income from the AIRBNB rental each year. Joanna sells the condo in 2021. In 2017, Joanna lent $10,000 to her sister with $500 in interest payable in each year. Joanna’s sister pays the interest in each year and pays off the principal in 2021. Joanna does not to report the interest income from this loan. When figuring out how to report the sale of the condo on her tax return, Joanna learns she was required to file the T1135 form for each year she owned the condo.

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

  • Joanna is granted penalty relief for 2012 to 2020 for the unfiled T1135s and unreported interest income from 2018 to 2020. There is no penalty relief for 2021 because Joanna’s filings were not due until April 30th 2022, and therefore she had not yet incurred a penalty for 2021.
  • Joanna receives no penalty relief for 2010 and 2011, as well as no interest relief for interest that accrued in those two years because these years are more than 10 years past the filing date of the disclosure application.
  • Joanna receives no interest relief for interest related to unreported tax in 2018, 2019 and 2020 as those are the three most recent years disclosed.
  • Joanna is granted interest relief on 50% of the interest accruing between 2012 and 2022. This relief includes relief on interest arising from her undisclosed interest income in 2017 and any interest accruing on the penalties for failure to file the T1135 in 2010 and 2011.
  • Joanna can not be criminally prosecuted for not filing her T1135 or reporting the interest income.

Without the voluntary disclosure, Joanna would have owed $25,000 in T1135 failure to file penalties, tax on $2,000 in unreported interest income on the loan, any penalties on the unreported interest income as well as interest on all these aforementioned amounts. With the disclosure, she pays only the tax on the $2,000 in unreported interest income, $2,500 for the two years of T1135 penalties, plus any interest which was not waived. Her tax bill has been reduced substantially.

Pro Tax Tips: Completeness Requirement Must Be Met

Hearing there is a 10-year limitation to interest and penalty relief may incline a taxpayer to simply not include anything which is 11 or more years old in the voluntary disclosure application. However, for a voluntary disclosure application to be accepted, it must be complete. This means it must include all errors and omissions in tax reporting even if they are more than 10 years old. Failing to report errors or omissions out of a concern for the 10-year period may cause the voluntary disclosure application to be rejected and penalties and interest to be assessed without relief. Secondly, there is still the interest relief applicable under the voluntary disclosure for the past ten years, even with respect to unreported taxes for years 11 or more years old.

Our experienced Canadian tax lawyers can review your tax affairs to confirm what does need to be corrected. At times, clients come to our tax law firm concerned they have a large amount of unreported income to disclose and we are able to identify that their reporting errors are less than expected.

F.A.Q.

The two programs are the “Limited” and “General” programs. The “Limited” program provides less relief than the “General” program as taxpayers qualify for the “Limited” program when themselves or a closely related person have engaged in intentional conduct with regards to misreporting taxes.

Relief Type Relief Description Applicable Program
Criminal Prosecution The taxpayer will not be criminally prosecuted with regards to the amounts disclosed in the voluntary disclosure application General and Limited
Penalty Relief Applicable penalties from the past 10 years from the date the voluntary disclosure application is filed will be deleted. General – All penalties
Limited – Gross Negligence Penalties only
Interest Relief 50% of the interest accruing in the past 10 years from the date the voluntary disclosure application is filed will be waived. Excludes interest related to that last three taxation years involved in the disclosure. General