Honest Errors do not Bring the Wrath of the Tax Department

In practice, honest errors realized after filing are corrected by simply writing to the CRA; the VDP is used where there has been a misrepresentation or gross negligence on the part of the filer.

Potential Reduction of Penalties and Interest

Penalty Relief
Disclosures accepted by the CRA as meriting relief under VDP guidelines will be considered valid and the taxpayer will not be charged penalties or prosecuted.

Interest Relief
If a disclosure is accepted by the CRA, the Minister may also grant partial interest relief on assessments for reporting periods preceding the three most recent years of required filings.

When the VDP is Recommended

Individuals and corporations are permitted to seek relief from penalty or prosecution when they have either claimed ineligible expenses or failed to:

• Fulfill their obligations under the applicable act
• Report taxable income
• Remit source deductions of their employees
• Report GST/HST, (including undisclosed liabilities or improperly claimed refunds or rebates, unpaid tax or net tax from a previous reporting period)
• File information returns
• Report foreign-source income taxable in Canada

When the VDP is Not Recommended

There are also specific areas in which the taxpayer should not use the VDP; specifically, the CRA will not consider:

• Returns with no taxes owing or with refunds expected
• Elections of provisions in acts administered by the CRA that entitle the taxpayer to choose specific treatment for certain types of taxable transaction
• “Advance pricing arrangement”: an agreement between the Minister of National Revenue and a taxpayer covering certain taxable transactions between the taxpayer and a non-resident entity that predetermines an appropriate transfer pricing method and its application to specific transactions for a stated period using certain terms and conditions
• “Rollover provisions”: an election allowing deferral of income that would otherwise become taxable when property is transferred to a taxable Canadian corporation
• “Bankruptcy returns”: these returns are required to be filed in the year of bankruptcy
• Post-assessment requests for penalty and interest relief because they will be considered as retroactive tax planning

It is also important to note that a disclosure will not be considered voluntary in certain circumstances, including if the taxpayer is aware of an impending audit or investigation.

2005 and 2007

For submissions made on or after January 1, 2005, relief is limited to any reporting period ended within the 10 years prior to the end of the calendar year in which the submission is filed. For example, if relief was applied for on May 1, 2007, it would be available only for 1997 and subsequent taxation years.

For submissions concerning GST/HST or excise taxes the limitation affects only those submissions made on or after April 1, 2007, for reporting periods ended within the previous 10 years.

Each Submission Will Stand on its Own Merit

The Minister is not obligated to grant relief under the VDP provisions; each request will be reviewed and decided on its own merit. If relief is denied or granted only in part, the CRA will provide the taxpayer with the reasons for the decision.

Named and No-Name Disclosure

There are two methods of submitting documentation: Named and No-Name. Both approaches require the same information but differ in the time of disclosing the taxpayer's identity.

Under the Named method, the identity of the taxpayer is stated on the submitted disclosure forms.

The No-Name method allows the taxpayer to have informal, anonymous, general discussions with a representative of the VDP that bind neither party. After submission of all the required documentation, the CRA can, if requested, review the information and indicate any possible tax implications. If this information is contradicted by facts obtained after disclosure of the taxpayer's identity, the CRA may discard its preliminary advice.

The CRA will only provide relief under the provisions of a No-Name approach if the anonymous taxpayer ultimately provides a name. The taxpayer must provide the name within 90 days of the effective date of disclosure (EDD). This date is considered the earlier of:

• The date the CRA receives a complete and signed Form RC 199 Taxpayer Agreement (available at www.cra-arc.gc.ca); or
• The date a letter, signed by the taxpayer or the taxpayer's authorized representative and containing information similar to that in Form RC 199, is received by the CRA.

Disclosure Requirements

A disclosure is not considered valid unless it is:

• Voluntary
• Complete and accurate
• Subject to a penalty if not made under the protection of the VDP
• Providing information at least one year past its due date or correcting a previously filed return

Taxpayers must send in a written submission using Form RC 199 to initiate the disclosure. You must use Form RC199 or provide similar information in order to avoid a delay in the review.

To support a disclosure submission, the taxpayer must provide the following information:

1. Name, address, telephone number, social insurance number, partnership number, trust account number, business number, licence number, GST/HST registration number or any other identification tax number assigned by the CRA to the taxpayer. (Naturally, this information is not required in a No-Name disclosure.)
2. Postal code to determine the regional Tax Office that will handle the application. In the case of a if a No-Name disclosure, only the first three characters of the taxpayer's postal code are required.
3. Address of the taxpayer's authorized representative (if any), including telephone and fax numbers (if applicable)
4. Under the No-Name method, gender and age, if the taxpayer is an individual
5. Reporting period(s)
6. amount of the disclosure (where applicable)
7. Type of return(s) involved: personal T1, GST/HST, corporate T2, trust T3, etc.
8. Type of information return(s) and/or slip(s) involved ( T3, T4, T1134, T1135)
9. Type of omission (business income, unremitted GST/HST, investment income, pension income, capital gain, etc.)
10. Reason for the omission
11. Primary business activity
12. An explanation of how the taxpayer considers each of the four validity conditions as set out under ICOO-1R2 (dated October 22, 2007) of the information circular have been met

Avoid Vagueness

The submission must include sufficient detail to allow the CRA to verify the facts. Taxpayers and/or their authorized representatives are expected to make available all documents, records, and books of account, as well as any other required information.

Where to File

The disclosure should be forwarded to the Assistant Director, Enforcement Division of the regional tax services office for the taxpayer's home address or, if the taxpayer is a corporation, the operating address.

Seek Professional Assistance

Since timing of any submission is critical to obtaining relief from penalties and interest, it is in the best interest of taxpayers to rely on a professional to represent their interests. Careful consideration should be given to whether that professional should be a lawyer because communications between only a lawyer and client are privileged. This may be particularly important if the disclosure submission is denied.