Voluntary Disclosures Program (VDP)
While tax systems may be similar among various countries, each country has its own unique rules and regulations that may not be readily known and understood. When an individual or company becomes involved in another country through their physical presence or actions, both the individual and company may become subject to both their home country’s and the other country’s tax systems.
In these situations, unfamiliarity with the other country’s tax system may cause these taxpayers to become non-compliant without realizing it, exposing themselves to a cascade of potential risk of consequences. The Canadian tax authorities recognize the likelihood of this situation and offers taxpayers an opportunity to mitigate their risk by coming forward with the non-compliance through Canada’s Voluntary Disclosures Program.
Benefits of Canada’s VDP
Non-compliance generally gives rise to tax liabilities that a taxpayer may initially be unaware of, and non-payment of these liabilities oftentimes launches the domino effect of accruing penalties and interest, with rare, severe cases leading to imprisonment.
Canada’s VDP grants relief to taxpayers who voluntarily come forward to fix errors or omissions in their tax filings before Canada Revenue Agency (CRA) discovers and contacts them. Acceptance of a VDP submission will not void the original tax liability, but the CRA may allow prosecution relief, as well as full waiver or partial reduction of penalties and interest, which may accrue from the first day of non-compliance. Relief is determined on a case by case basis.
Some cases that a taxpayer may inadvertently be non-compliant in and may benefit from a VDP submission include, but are not limited to:
- An individual who has moved to and lived in Canada for several years, earning income from foreign sources, but has never reported these foreign income on his/her Canadian tax returns;
- An individual who has left Canada and has rented his/her home in Canada while he/she is in another country, but has not filed appropriate tax slips nor prepared Canadian tax returns;
- A company who has sent an employee to work in Canada from his/her temporary home in Canada, but has not prepared proper Canadian payroll filings for the employee; or
- A company who has sent an employee to set up an office in Canada and to report to work from that Canadian office, but has not prepared proper Canadian payroll filings for the employee.
The individual and/or company may not have been aware of, or received proper Canadian advice, and therefore may be non-compliant with Canada’s tax system. A company’s non-compliance, especially, may even trickle into an employee’s non-compliance if the employee was also unaware that he/she had an obligation.
If the CRA has not contacted the taxpayer regarding a non-compliance, the taxpayer has the opportunity to proactively disclose details to the CRA through the VDP and request for relief. It is important for taxpayers to take action on any identified non-compliance as soon as possible as the VDP submission process may be time-consuming as it requires numerous pieces of information and calculations. In addition, the CRA is presently only able to grant relief up to 10 calendar years from the date of submission; thus, any VDP submissions for long-term non-compliance should be submitted as soon as it is discovered.
Furthermore, if the non-compliance relates to the province of Quebec, Revenu Quebec offers a similar VDP, which follows many of the same guidelines as the Federal program. However, a separate submission is required as the Quebec tax system differs slightly.
Proactively taking action on any non-compliance in advance of the CRA is key in taking advantage of the potential reliefs through a VDP submission. Individuals and companies may take the initiative by:
- Reviewing records to identify any historical actions that may possibly have triggered a tax obligation in Canada. For individuals, this may include being physically present in Canada for an extended period of time or working in Canada for a short period of time. For companies, this may include sending employees to work in Canada or hiring and paying contractors to provide services in Canada;
- Gathering any available related records in order to compile the necessary details such as persons involved, days in Canada, and unreported wages or other income; and
- Reaching out to an experienced tax professional, such as BDO, to obtain proper advice on the risk of exposure and possible next steps.
A VDP submission may be time-consuming and require numerous conversations between the taxpayer, tax professional, and the CRA. However, a VDP may offer significant relief that could translate to thousands or millions of dollars better used to invest elsewhere. Where situations are too complex to handle alone, BDO is standing by should aid be required.