Underreported your income or missed tax returns? Tax amnesty may help you

If you have never filed all your income tax returns or have filed them incorrectly, Revenue Canada’s Voluntary Disclosure program, often called “tax amnesty,” may be for you. If you have missed to report your income and pay the corresponding taxes, there may be potentially very serious consequences, including heavy penalties, interest, and even criminal charges and jail time. Before the tax man knocks on your door, you should consider correcting the situation and gaining control of your own affairs.

The amnesty program is essentially a fairness program that allows for taxpayers to voluntarily declare income and pay the owing tax without incurring other serious consequences. Tax amnesty can be applied in several situations including:

  • Failure to report income
  • Income with inaccurate or missing information
  • Income earned off-shore or from criminal activity
  • Failure to file tax returns
  • Improper expense claims
  • Not remitted source deductions
  • Neglecting to retain of a portion of a purchase price on the acquiring of assets from non-residents under section 116 of the Act.

Legislative sources of power

The Canada Revenue Agency (CRA) has the legislative authority to waive or cancel interests and penalties, in whole or in part, on a voluntary disclosure application. The pertinent legislative provisions can be found in:

  • subsection 220(3.1) of the Income Tax Act
  • sections 88 and 281.1 of the Excise Tax Act
  • sections 30 55 of the Air Travellers Security Charge Act (ATSCA) and
  • section 37 of the Softwood Lumber Products Export Charge Act, 2006 (SLPECA)

If your amnesty application is accepted, the CRA will waive all your civil penalties and be required by law not to prosecute you criminally. Although CRA may also waive the interest on your owing taxes, in practice this seldom happens. However, if the taxpayer suffers financial hardship or there are other extraordinary circumstances, it may be argued and accepted by the CRA that interest be waived.

Eligibility for tax amnesty

While you may be free to disclose voluntarily, not all are accepted as eligible for the amnesty program. The single most important requirement for the amnesty is that you must file your disclosure before you are being investigated, otherwise it will be too late. So keep this in mind and act quick!

More specifically, you should consider the following guidelines in deciding whether to file a disclosure:

  • The disclosure must be voluntary. Again, you must initiate the disclosure and contact the CRA before they contact you.
  • The disclosure must be complete and accurate. Previously pardoned penalties will be applied if a person reveals only partial information or provides information with material errors. Note that you must provide complete and accurate disclosure within 90 days. If you cannot do this, consider delay making the application. Again, this must be weighed against the risk of filing too late.
  • The disclosure needs to involve a penalty. If no penalty exists, declare and file as usual.
  • Disclosure must be information that is over one year old. If it is less than one year, do not simply employ as an attempt to use this program to file late and avoid penalty.
  • If the stakes are high and you cannot decide on whether to disclose or not, consider making a “no-name” application to test the water.

No-name disclosure

Since some information concerning your past may be very sensitive, the amnesty program allows for anonymous disclosure, which protects the identities of the complying taxpayers. If a taxpayer decides to keep his or her identify anonymous and confidential, he or she will be able to proceed with disclosure, free of prosecution for 90 days.

The 90 day period begins from the “effective date of disclosure,” which is determined by the date of a written voluntary disclosure submission or the receipt of a VDP-1 Taxpayer Agreement Form as received by the CRA tax services office.

This period allows for the taxpayer to prepare and submit a complete disclosure without any CRA interference or prosecution, and obtain a preliminary assessment from the CRA based on the information furnished. This anonymity is even applicable if the unreported income has been earned off-shore or through criminal activity.

What if I disagree with the decision on my amnesty application?

If you disagree with the CRA’s decision on your voluntary disclosure, you should consult a lawyer as soon as possible. The lawyer will usually help you with a second review within the CRA. If the result is still not satisfactory, the lawyer may also help you to apply for a judicial review of the CRA’s decision with the Federal Court of Canada.

Last advice, use a lawyer instead of other professionals to handle this for you whenever possible. Voluntary disclosure may look simple but the stakes can be very high. Only lawyers enjoy client-solicitor privilege and the contents of your communication with lawyers are protected by law. Remember that the CRA, the police and the court may force an accountant or other professionals to testify against you. You will not want to see this happen, especially when your disclosure application is rejected and a full-fledge investigation is launched against you.