Voluntary Disclosure Program (VDP) Under Income Tax

What is the Voluntary Disclosure Program?

The Voluntary Disclosure Program (VDP) is a second chance offered to certain eligible taxpayers by the Canada Revenue Agency (CRA). Suppose you are going through your historical returns and find that you failed to file a tax return in a year and/or incorrectly reported information on a previous tax return. In that case, the VDP grants you with ‘amnesty’ from prosecution and other penalties for the oversight or omission – on the condition that you come clean on your own and meet the other criteria mentioned below.

Criteria for using the VDP

A Voluntary Disclosure Program (VDP) cannot be used arbitrarily as an excuse for failing to file your tax return in the previous year. When filing a Voluntary Disclosure Application, the following criteria needs to be met for it to be considered valid and appropriate for your purposes:

  • It must be self-initiated (hence, the Voluntary Disclosure Program). As such, once the CRA contacts you for any non-compliance issues related to previous tax returns, you are then deemed to be ineligible to use the VDP.
  • The newly filed return must be complete. A partial correction that still has other errors in the tax return may still put you at risk of penalties.
  • Income tax returns on the VDP must be filed at least a year after they are due. If the return is being filed under a year from when it becomes overdue, it can be filed as per a normal return. You should note that late fees will apply here.
  • Returns using the Voluntary Disclosure Program cannot be used to obtain a tax refund. The VDP can only be used if a tax amount is owing and/or involves the application or potential application of a penalty.

Once the voluntary disclosure is filed and reviewed by the CRA, you will receive a notice indicating whether it has been accepted or not. It is pertinent to note here that filing using the VDP does not exempt you from paying the taxes and interest on the new returns. In certain cases, the CRA may waive some penalties. However, these waivers are granted on a case-by-case basis as per each taxpayer’s unique circumstances and disclosure. Also, the CRA reserves the right to audit or verify information provided in a VDP application irrespective of it being accepted under the VDP or not.

Changes as of March 1, 2018

In March 2018, the CRA modified its policies around the Voluntary Disclosure Program. Under the old program, similar levels of treatment were provided to all accepted applicants. Post-March 2018, the VDP was split into two separate sub-programs.

  • The VDP General Program is targeted at taxpayers who previously committed an error inadvertently, and now that they are aware of their mistake, they are seeking to correct them. In this program, the CRA will not pursue criminal prosecution and/or charge penalties that would normally be associated with the issue. In addition, a certain degree of interest relief will also be provided for any corrected years that are not within the preceding three most recent years of returns.
  • The VDP Limited Program is targeted to taxpayers, where the CRA has reason to believe that the taxpayer intentionally avoided tax obligations. For accepted cases in the VDP Limited Program, the CRA will still not pursue prosecution and not charge gross negligence penalties but will charge full amounts of interest and other penalties as applicable on a case-by-case basis.
  • Once you file the disclosure, the sub-program that it is classified under will depend on variables such as the quantum of the erroneous or missed filing, the number of years that the VDP covers, and/or the financial savviness and sophistication of the taxpayer in question.

What type of errors can I use the VDP for?

Assuming that the aforementioned criteria are met, the most common reasons for which to use the Voluntary Disclosure Program include:

  • Not reporting taxable income in its full amount
  • Expenses claimed on the original return that would be ineligible as per CRA policy
  • Not reporting income earned from a foreign source that should be taxed in Canada

While the Voluntary Disclosure Program is a lifeline for many, it is important to take the application process seriously.

For any questions regarding the VDP, please contact Prasad & Company LLP today. Our experts have worked with many clients to guide them through each step of the process, communicate on their behalf with the CRA, and ultimately ensure a painless and streamlined experience in what can potentially be a stressful issue for many.

Disclaimer

This article has been prepared for informational purposes only and is not intended to provide or be relied upon for tax, legal, or accounting advice. Please contact Prasad & Company LLP to discuss these matters in the context of your particular circumstances. Prasad & Company LLP, its partners, employees, and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.