Although it’s doubtful that anyone does so with any great degree of enthusiasm, each spring millions of Canadians sit down to prepare for the completion of their annual tax return or, more often, engage a professional accountant to do it for them. Although the rate of compliance among Canadian taxpayers is very high — for the last filing season, just under 30 million individual income tax returns were filed with the Canada Revenue Agency (CRA) — there are, inevitably, those who do not.
There are a lot of reasons why individual Canadians don’t file their returns or pay their taxes on a timely basis, and almost all of them are based on a lack of understanding of how our tax system works, or on incorrect information about that system.
Some taxpayers don’t file because they believe that there’s no reason to do so if they don’t owe anything and aren’t expecting a refund. While that can be true, it’s also the case that it’s necessary to file to receive income-tested tax credits and benefits, including the HST credit, the Canada child benefit and a range of provincial tax credits. Those who don’t file can’t have their eligibility for such credits determined and so no credits can be paid to them. Others don’t file because they have a balance owing but don’t have the funds to pay that balance on filing. That, too, is the wrong approach, as anyone who owes taxes but doesn’t file a return by the filing deadline gets hit with an immediate penalty of at least 5% of the outstanding amount owed. In such circumstances, the right approach is to file on time and to contact the CRA to come to an agreement on a payment arrangement over time. Finally, there is a persistent (and completely false) tax myth that has been circulating for decades, that the federal government does not have the legal right to collect taxes and every year some taxpayers fall victim to someone peddling that myth.
There are also some Canadians who file returns in which income amounts are underreported and/or deductions or credits to which that taxpayer is not entitled are claimed. While the overall percentage of taxpayers who don’t file or pay on time, or who file returns which are not accurate isn’t high, there are a lot of such returns when measured by absolute numbers. And, although each such instance of non-compliance represents lost revenue to the Canadian government, the resources needed to track down each instance of non-compliance simply aren’t available, especially since, in many cases, the amount recovered may be less than cost of recovering it.
With all of that in mind, several years ago the CRA instituted a program intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arose from the fact that, in most cases, such taxpayers would have to pay outstanding tax amounts owed, plus interest, but would avoid the payment of penalties and the risk of criminal prosecution.
That program, the Voluntary Disclosure Program, has generally fulfilled its objectives but has been a target for criticism as being a means by which those who engage in deliberate tax avoidance can escape the consequences of their actions. The CRA recently announced that changes would be made to the Voluntary Disclosure Program, beginning on March 1, 2018, and that those changes would narrow the eligibility criteria for the program and impose additional conditions on participants, to avoid such effects.
To start, the basic requirements for participation in the VDP as of March 1, 2018 include the following. To qualify for relief, an application must:
- Be voluntary (meaning that it is done before the taxpayer becomes aware of any compliance or enforcement action by the CRA);
- Be complete;
- Involve the application or potential application of a penalty and, for GST/HST application, the application or potential application of a penalty or interest; and
- Include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due.
The basic change which will come into effect after February 2018 is that two tracks will be created for income tax disclosures — the Limited Program and the General Program. The determination of whether an application should proceed under the Limited or the General Program will be made on a case-by-case basis. The intention, however, is to restrict the Limited Program to instances in which applications disclose non-compliance which appears to include intentional conduct on the part of the taxpayer. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:
- the dollar amounts involved;
- the number of years of non-compliance; and
- the sophistication of the taxpayer.
Those whose applications are accepted under the Limited Program will not be subject to criminal prosecution and will be exempt from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer. Interest on outstanding tax balances will be payable, however, and other penalties will be levied.
Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged, and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief, specifically for the years preceding the three most recent years of returns required to be filed.
There are, as well, other changes to the administration of the Voluntary Disclosure Program. The most important of those, from a taxpayer’s point of view, are the following.
As of March 1, 2018, taxpayers who make an application under the VDP must pay the estimated taxes owing as a condition of qualifying for the Program. Where the taxpayer is financially unable to do so, he or she can request that the CRA consider a payment arrangement. Formerly, there was no requirement to pay outstanding taxes owed as a condition of participating in the VDP.
As well, taxpayers could formerly “test the waters” with respect to making a voluntary disclosure by making an anonymous (termed a “no-names disclosure”) disclosure and receiving an opinion on the likely outcome. That option will be discontinued after February 2018 and replaced by a “pre-disclosure discussion” service. That new service will still allow a taxpayer to discuss his or her tax affairs with a representative of the CRA on an anonymous basis, but such discussion will not constitute acceptance into the VDP.