Government plans to tighten program for tax filing errors

The Canada Revenue Agency is planning to make changes to the voluntary disclosures program.

Under the current VDP, taxpayers have a second chance to change a tax return previously filed or to file a return that should have been filed. The taxpayer can request that the CRA provide relief from prosecution and penalties.

If the agency accepts the disclosure, then penalties will be waived and the taxpayer will have to pay only the money owed plus interest.

The CRA has proposed modifications to the VDP that could make your life more difficult.

Failure to fully disclose all taxes owing could be wilful or simply an error or forgetfulness. It could be related to issues outside your control.

Consider a situation where a farmer dies without a will. This happens more often than you’d expect. Let’s say the estate is without a will but a separation agreement with a spouse and children is in effect. They may be in for a difficult ride.

In this situation, the courts will assign a liquidator and trustee, establish distribution percentages for every beneficiary for all assets and after one or two years of court proceedings, a deceased tax return is ready for filing. The return is now overdue and burdened with interest and penalties.

A farmer may also err in material income declaration, non-disclosure of offshore holdings or neglecting to include offshore pension payments.

The VDP is designed to allow people in these situations to get on the right side of the taxman.

There are several requirements to be eligible.

The taxpayer must be in the situation where a penalty would apply.

The penalty could be related to issues such as late filing or omission of information.

The disclosure must be voluntary. That means it must be made before taxpayers are aware of the CRA taking any compliance action against them.

The information in question must be at least one year overdue.

The voluntary disclosure must include all relevant information.

One of the biggest changes coming is that taxpayers will have to include payment of the estimated taxes owing with their VDP application.

Only in extraordinary circumstances will a request to enter the VDP be granted without payment of the anticipated taxes.

This change effectively takes away the ability to apply for relief anonymously. Until now, you were able to submit an application without a name to see if the facts qualify for relief.

Under the new rules, the CRA will allow taxpayers to enter into a “pre-disclosure discussion” on a no-names basis, but they are intended to be informal, non-binding.

The change also affects how interest is calculated. The minister may grant partial interest relief related to years preceding the three most recent years of returns required to be filed.

Generally, this interest relief will be 50 percent of the applicable interest for those periods.

Full interest charges will be assessed for the three most recent years of returns required to be filed

The minister’s ability to grant interest relief is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed.

The interest relief option will depend on whether the VDP application is accepted under the general or limited program. The limited programs are for situations of major non-compliance.

Interest relief will still be available to those in the general program, but might not be in the limited program.

If you are in a situation where you are considering using the VDP, I highly recommend that all contacts with CRA be made by your professional tax or accounting adviser.

You should also consider any disclosures under the VDP this year before the more restricted rules come into effect in 2018.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 800-265-1002.

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