Read this article if you are behind filing your personal, business, GST/HST and any other reporting obligations?
The Voluntary Disclosures Program (VDP) gives you a second chance to correct a tax return you previously filed or to file a return that you should have filed. If you file a VDP application and it is accepted by the Canada Revenue Agency (CRA) you will have to pay the taxes owing, plus interest in part or in full. However, you would be eligible for relief from prosecution and, in some cases, from penalties that you would otherwise be required to pay.
To ensure fairness for Canadians, applications for relief from taxpayers who intentionally avoided their tax obligations will not get the same relief as those who want to correct an unintentional error. The CRA will also restrict participation in the VDP if it has already received information on a taxpayer’s (or a related taxpayer’s) potential involvement in tax non-compliance; for example, a leak of offshore financial information, or other information that names the taxpayer.
You can apply to the VDP to correct errors or omissions in your tax filings through two streams, depending on the type of disclosure you want to make.
Replacement of “no-names” disclosure method by a new pre-disclosure discussion service:
As of March 1, 2018, the old process for taxpayers and authorized representatives to make disclosures on a no-names basis has been eliminated. Under the new “pre-disclosure discussion” service, taxpayers or their authorized representatives can have a conversation with a CRA official on an anonymous basis, but that discussion does not constitute acceptance into the VDP.
You can use the pre-disclosure discussion service to participate in initial discussions about your income situation on an anonymous basis and get an understanding about the VDP process. The pre disclosure discussion will help you become informed with good understanding of the consequences of not updating your income tax matters in order to meet your CRA obligations, and the relief available under the VDP.
Pre-disclosure discussions with a CRA official are informal, non-binding, and you do not need to reveal your identity. These discussions do not mean acceptance into the VDP and have no impact on CRA’s ability to audit, penalize, or refer a case for criminal prosecution.
The new VDP applications relating to late and non-filed income tax disclosures fall into one of two programs:
1- The General Program
2- The Limited Program.
The determination of which track an application will be processed under will be made by the CRA VDP officer on a case-by-case basis.
In order to determining if a disclosure will be processed under the General or Limited Program. the CRA may consider a number of factors, including but not limited to:
– dollar amounts involved
– the number of years of non-compliance; and
– the sophistication of the taxpayer/registrant.
1- VDP General Program
Applications accepted under General VDP program, will be eligible for penalty relief and partial interest relief. Under this program, taxpayers will not be charged penalties and will not be referred for criminal prosecution related to the information being disclosed. The CRA will provide partial interest relief for years preceding the three most recent years of returns required to be filed. The General Program is aimed at taxpayers who want to correct unintentional errors. If your application is accepted into the General Program, you will not be charged penalties and will not be referred for criminal prosecution related to the information disclosed.
Through the General Program, you may be granted partial relief of interest for assessments for the years preceding the three most recent years of returns that must be filed. Generally, this interest relief will be a reduction of 50% of the applicable interest rate that applies for those years. Full interest charges will be assessed for the three most recent years of returns required to be filed.
2- VDP Limited Program
The Limited Program limits the level of relief for taxpayers who intentionally avoided their tax obligations. If your application is accepted into the Limited Program, you will not be referred for criminal prosecution related to the information disclosed and you will not be charged gross negligence penalties. However, you will be charged other penalties as applicable.
No interest relief will be provided for applications processed under the Limited Program.
The following factors may be considered in determining if an application is accepted into the Limited Program:
• efforts were made to avoid detection through the use of offshore vehicles or other means
• the dollar amounts involved
• the number of years of non-compliance
• the sophistication of the taxpayer
• if the disclosure is made after an official CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to taxpayers involved in a particular sector about a compliance issue)
The existence of a single factor will not necessarily mean that you are eligible only for the Limited Program. For example, a sophisticated taxpayer may still correct a reasonable error through the General Program.
This is a “Limited Program”, it applies to taxpayers who have intentionally avoided their tax obligations. See the December 15, 2017 news release. The new Limited Program. The Limited Program provides limited relief for applications that disclose non-compliance where the facts suggest that there is an element of intentional conduct on the part of the taxpayer or a closely related party.
Under the Limited Program, taxpayers will not be referred for criminal prosecution with respect to the disclosure and will not be charged gross negligence penalties. However, they will be charged other penalties and interest as applicable.
Mandatory waiver of rights of objection and appeal: Under the Limited Program, participants will have to sign a waiver of their right to object and appeal in relation to the specific issue disclosed.
In other cases, the General Program would generally apply.
You can voluntarily correct inaccurate, incomplete, or unreported information, and do so without penalties or prosecution, provided that a valid disclosure is made to Canada Revenue Agency (CRA).
Disclosures can be made for to resolves issues such as:
– Income Tax and related reporting schedules such as T1135
– Goods and Services Tax/Harmonized Sales Tax (GST/HST)
– Charges under the Softwood Lumber Products Export Charge Act, 2006
– Air Travellers Security Charge Act
A valid VD-voluntary disclosure must meet the following conditions:
– Must be voluntary
– Must be complete
– Must involve the application or potential application of a penalty
– Must include information that is more than one year overdue.
– Must include payment of the estimated taxes owing.
When a taxpayer does not have the ability to make payment at the time of filing the VDP application, they may request to be considered for a payment arrangement.
A disclosure will not be considered a voluntary disclosure if the taxpayer is aware that CRA is about to do an investigation regarding the information to be disclosed, or if CRA has already contacted the taxpayer with a request for information that would uncover the information to be disclosed.
If CRA accepts the disclosure as valid, taxes and interest will still be payable.
How to make a Voluntary Disclosure
Form RC199, Taxpayer Agreement – Voluntary Disclosures Program, should be completed. It is important to use this form. The form can be submitted by the taxpayer, or by an authorized representative. The completed application can be sent either electronically, (My Account, My Business Account, or Represent a Client), or by mail. For more information see IC00-1R6 (link below).
Taxpayers who are unsure whether they want to proceed with a disclosure can participate in a pre-disclosure discussion on a no-name (anonymous) basis, but this does not apply to applications which would be done under the Limited Program. This allows discussions with a VDP officer which are non-binding and general in nature, without revealing the identity of the taxpayer. Using this method, the VDP officer can confirm that there is nothing in the information provided that would immediately disqualify the taxpayer from further consideration under the VDP. However, a final determination cannot be made until the identity of the taxpayer is known and all facts related to the 4 validity conditions have been verified.
A second review may be requested by a taxpayer if they disagree with a VDP decision, and an application for a judicial review can be made. If the VDP results in an assessment or reassessment with which the taxpayer disagrees, a Notice of Objection can be filed.
Due diligence can save you
Taxpayers’ due diligence in complying with ITA obligations can be a mitigating factor when seeking relief from late filing penalties. Due diligence is a common law defence that judges are cautious applying. The Moore case suggests that unclear administrative guidance, coupled with a taxpayer’s conscientious and otherwise compliant behaviours, are circumstances that could allow for a successful use of this defence.
There are two reporting methods:
1. the simplified method for taxpayers with SFP between $100,000 and $250,000; and
2. the detailed method for taxpayers with SFP in excess of $250,000.
In both the simplified and detailed method, taxpayers are required to disclose (among other information) the total amount of income produced by the SFP as well as any capital gains or losses realized during the calendar year.
What is specified foreign property?
Subject to certain exceptions includes:
• funds in foreign bank accounts;
• shares of foreign corporations (even if held in Canadian brokerage accounts);
• interests in foreign mutual funds;
• shares of Canadian corporations on deposit with a foreign broker;
• debts owed by non-residents including bonds, debentures, mortgages, and notes receivable;
• interests in a non-resident trust;
• interests in a partnership that holds specified foreign property;
• land and buildings located outside Canada (foreign rental property);
• tangible and intangible properties located outside Canada;
• life insurance policies issued by a foreign insurer;
• precious metals, gold certificates, and futures contracts held outside Canada.
The T1135 reporting requirement, as well as disclosure of income and capital gains (losses), can be confusing. This is especially the case where specified foreign property is jointly owned with a family member, particularly where the attribution rules apply. Let’s use an example to illustrate.
Common Mistakes You Must Avoid as a Taxpayer:
We prepare both U.S. (1040, 1040NR) and Canadian (T1, T2) returns, some of the following information may or may not apply to you.
1. Late filing.
If you are late in filing your Canadian tax return, the first time penalty is 5% of the balance owing, plus 1% of your balance for each full month that your return is late to a maximum of 12 months.
If you were charged a late filing penalty for any of the three previous years your late filing penalty would be 10% of the balance owing plus 2% of the balance for each full month that your return is late to a maximum of 20 months.
If you file on time and don’t have the money to pay they will charge interest only, currently 5% for Canada. There will be no penalties. There might be other consequences such as CRA or IRS freezing your bank account and even putting leans on your house, depending on which country’s tax return you are dealing with. Once filed, you can make arrangements to pay monthly installments of what you owe.
2. Improper or Poor record keeping
If you fail to report tax slips such as T4, T4A,T5018, T5, T3, CRA will catch the omission during their matching process. Each department receives a copy of all relevant tax slips for each corresponding country such as W2, 1040 slips for IRS, T4, etc.. for CRA issued on your behalf. When the annual rush at the end of tax season is over, their computers check what you have reported against the slips they have on file. If you fail to report an amount on your current tax return (missing slip) and you also fail to report any amount on the previous three years you may have to pay a federal and provincial repeat failure to report income penalty. For Canada Revenue Agency the penalties are currently 10% each on the federal and provincial tax owing.
3. Ignoring correspondence from the tax department
Ignoring a letter from the tax authorities is not going to make them go away and if you irritate them they have full powers to enforce tax compliance. If you are not certain what the department wants, contact your tax preparer before you respond. In most cases the tax department will contact us first, if you have authorized Fairtax Business Services to represent you. Every year we resolve a lot of compliance issues on behalf of our clients without even contacting them.
4. Preparing your own taxes
There is no problem with preparing and filing your own return. But, our fee for simple tax returns is so low that in most cases a very small mistake or discrepancy can cost you a lot more than the fee you pay us.
5. Business expenses
Proper record keeping can save you money and headache. This is a good idea for several reasons. One, you know how your business is doing Secondly, the tax department might audit you at some point in the future (they can go back up to seven years) and the outcome may not be pretty. First of all beware that any amounts credited to your bank account can be considered your income unless you prove otherwise. Tax law requires you have to keep a reasonable set of books. You must have records to support all expenses you are claiming otherwise the expense will be rejected and the amount added back into your income. All receipts related to the earning of income should be kept for six years.
6. Charitable Donations & Tax Shelters
Donating money to a legitimate charity is a good thing. make sure you donate to known organizations which have charitable numbers assigned to them by CRA or IRS. All receipts must have such numbers printed on them. Be skeptic of so called tax shelters offering big tax breaks for donations. They will always be challenged by income tax authorities. To this date none have stood up in court. If anyone offers you the opportunity to donate $10,000.00 to a charity, and promises to issue you a receipt for many thousands of dollars more than you donate be careful. Make certain you obtain independent advice. s.
7. Are you an employee or independent contractor?
Your employer and yourself cannot decide that you are now going to be paid as an independent contractor and receive gross amounts without taxes, and relevant deductions being withheld at source.
You should contact your accountant or lawyer or alternatively ask Canada revenue Agency or Internal Revenue Service for their booklet called-Employee or Self-employed form. If you don’t qualify to be considered an independent contractor, the consequences can be expensive. You and your employer are not in a position to decide that you are an independent contractor, rather the courts have decided on the nature of such relationships. If after receiving proper information you are still uncertain, you can ask for a formal ruling from the relevant taxation authority.
8. Keep your Notice of Assessment- NOA
The Notice of Assessment often contains information on carry forward claims that can be utilized in the current tax year. Such things as non-capital loss carry forward and unused RRSP contribution can reduce your current year taxes. Home Buyer Plan contributions and adjustments .
9. Child care expenses
Child care expenses paid to a day care or individual are normally deductible. You can pay day care expenses to anyone including a relative or grand-parent living in your home and who may have little or no income and who babysits. Any babysitting receipt issued by an individual must contain his or her full name and SIN number.
10. Caregiver amount
If at any time in the tax year you maintain a dwelling where you and one or more of your dependents resided you may be able to claim a caregiver amount if their income is low. There are two categories: parents over the age of 65 years or relatives who are over 18 years of age and are dependent on you due to mental or physical impairment. The impairment must be certified by a licensed practitioner.
11. US and other international income
Residents of Canada must declare their world income. Those with U.S. source income and US citizenship should also consider filing 1040 or 1040NR returns.
CRA’s most common requests for back up documentation includes the following:
• Medical expenses
• Moving expenses
• Charitable donation receipts
• Rent receipts
• Claims for eligible dependents (after separation or divorce)
We have been in business since 1996 and have prepared over 25,000 Canadian and U.S tax returns of all types.
Call or visit us at: A-50 Ontario Street South, Kitchener, ON., N2G 1X4, Canada
• Personal Returns (T1, 1040, 1040NR)
• Rental income
• Capital gains
• Final returns (estates for deceased person)
• Corporate tax returns (T2, etc…)
• Trust returns (T3)
Reporting sales of Principle Residence: Starting with the 2016 Tax year, you must report basic information on your tax return when you sell your principle residence.
Canada Child Tax Benefit (CCB)- is a tax free monthly payment made to eligible families with children under the age of 18. It replaces all other federal and provincial child tax benefits.
Children’s Fitness Amount – Under the proposed changes, the maximum amount of eligible fees for each child has been reduced from $1000.00 to 500.00. Children’s arts tax credit has been reduced from 500.00 to 250.00
Family Tax Cut – A proposed non-refundable tax credit of up to $2000 is available to eligible couples with children under the age of 18, and is effective starting with the 2014 tax year. This credit was eliminated effective 2016 taxation year.
Universal Child Care Benefit (UCCB) – see CCB above, changed to CCB as of Jan 01, 2017. Under proposed changes, this benefit is being increased for children under age six. Effective January 1, 2015, parents will be eligible for a benefit of $160 per month for each eligible child under the age of six- up from $100 per month.
GST/HST credit – You no longer have to apply for the Goods and Services tax/Harmonized Sales Tax (GST/HST) credit. When you file your return, the Canada Revenue Agency (CRA) will determine your eligibility and will advise those who are eligible to receive the credit. If you have a spouse or common-law partner, only one of you can receive the credit. The credit will be paid to the person whose return assessed first. The amount will be the same, regardless of who (in the couple) receives it.
We can help if
• You have not filed your return in years (we can go back 10 years)
• You’ve lost all your slips (we can retrieve them after obtaining you authorization)
• You’ve received a letter from the tax department and you don’t understand why
• You owe money and the collection department is on your case
• You have been reassessed and asked for more money but do not agree with Canada Revenue Agency