Why the CRA waives penalties on many Canadians who admit they didn’t pay taxes
Did you “forget” to pay your taxes last year?
Perhaps you really forgot — or perhaps you didn’t. But whether you made a mistake or cheated the taxman, there are steps you can take to come clean and avoid some of the serious consequences that would normally apply.
Under the Canada Revenue Agency’s Voluntary Disclosures Program (VDP), Canadians who made mistakes in their return, didn’t file or didn’t declare some of what they earned can apply for relief from penalties and prosecution.
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How the VDP works
In order to change a tax return or submit one you never filed without getting into trouble, you need to put together a VDP application — and you need to do it right.
This is one of those instances where you should probably seek professional help — and not from a tax accountant, but a tax lawyer.
While you can report your back taxes on your own or with the help of an accountant, this “exposes you to the [CRA], who may reject your application and impose penalties or commence prosecution based on the information that has been provided to them,” according to Canadian Tax Amnesty, a website run by Toronto-based tax law firm Rotfleisch and Samulovitch.
Also, when you use an accountant, “your information will not be privileged, so CRA can seize the accountant’s files and use the content against you and have the accountant testify against you. If you have to go to court, the accountant cannot represent you and the way in which your file was handled may create problems in court,” the firm noted.
Mistakes in the paperwork are a common reason why the CRA rejects VDP applications, said David Rotfleisch, principal at the firm.
Don’t wait for the CRA to smoke you out
An application that’s been properly put together will normally be accepted, said Rotfleisch, but not if the CRA already has you in its crosshairs.
“If the CRA has come to you already, you’re not eligible,” Rotfleisch explained.
You still have to pay interest
A successful VDP application means you avoid penalties, and could potentially avoid prosecution, but you generally have to pay interest on any taxes you owe. Sometimes, though, the CRA will decide to reduce your interest charges as well.
You only get one second chance
Except in very rare circumstances, you can only apply under the VDP program once. After that, the CRA expects you “to keep your taxes up to date,” the agency says on its website.
Why does the CRA do this?
As with most cases when authorities are trying to get people to do things they’d rather not do — like paying taxes — it’s a good idea to have both a stick and a carrot. The VDP program is the CRA’s carrot.
Voluntary disclosure options, which are common in advanced economies, are “an integral part of a broader compliance strategy,” according to the Organisation for Economic Co-operation and Development (OECD).
Such programs “need to be considered as part of a variety of compliance actions that tax administrations and governments take in order to encourage all taxpayers to meet their obligations,” says the OECD, which has spearheaded efforts to crack down on international tax evasion and boost co-operation among advanced economies to close tax loopholes and improve information-sharing.
Also, it’s often cheaper for the government if you come forward on your own, said Rotfleisch. Tax investigations are costly and tie up a lot of resources, he added.
“It’s a win-win,” said Rotfleisch, for both you and for the CRA.
Even those who’ve earned their money illegally can take advantage of the VDP. Rotfleisch had his share of clients who came forward to avoid tax penalties and prosecution after criminal charges were laid against them.
But the VDP isn’t just for druglords and Canadians with millions stashed away in the Cayman Islands.
“Canadians from all walks of life” end up at Rotfleisch’s office.
Often, the amounts of taxes owed are relatively small, he noted.
One scenario he sees frequently is people who once forgot to file their taxes by the deadline because of a dramatic life event, such as a death in the family or a natural disaster that affected their home.
“Some people will remember they didn’t file taxes and send in their returns shortly after the deadline,” said Rotfleisch, “but a lot of people don’t.”
These people only realize their mistake when the next tax season rolls around. Often, they become fearful of the CRA and again skip sending in their returns for several years afterwards, getting deeper and deeper into trouble.
Sometimes people make honest mistakes, said Rotfleisch. For example, a lot of seniors who live in Canada but receive pension income from the U.K. do not realize that income is taxable here.
Another frequent case is that of immigrants who didn’t know they had to declare money kept in a foreign bank account. Sometimes, it is their children who need to take advantage of the VDP, when they discover they inherited taxable assets abroad that they didn’t know existed, and on which taxes should have been paid, according to Rotfleisch.
And Rotfleisch expects to see an uptick in VDP applications in the next few years from Canadians who will realize they should have been paying taxes on their Airbnb rental or their eBay sales.
Fewer breaks for the real tax cheats?
Currently, the CRA reserves the same treatment for anyone who applies through the VDP.
Perhaps, however, the government should be a little harder on those who resorted to elaborate schemes to skirt their taxes and failed to declare considerable sums. That, at least, was the recent recommendation of a federally appointed committee tasked with reviewing offshore compliance.
“It is our view that the CRA should view all of the circumstances surrounding the disclosure and that relief from interest and penalties should be reduced in certain cases. For example, where sophisticated taxpayers have sought expert advice and used complex offshore structures to evade significant amounts of tax over several years, the amount of relief from interest and penalties should be reduced,” reads the committee’s report.
The committee also questions whether the government should offer its standard, generous deal to those who come forward only after details of their financial activity have been leaked, in cases such as the so-called Panama Papers, which revealed the offshore accounts of several high-profile personalities around the globe.
Ottawa has yet to act on the recommendations.
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