Do You Have Undeclared Income or an Error in a Filed Tax Return?
You may be liable for interest, penalties, taxes owing and subject to imprisonment, if you:
(a) have not properly declared any of the following:
- income earned from any source and not reported on any tax return;
- income earned in a foreign account (eg. income earned on monies received as an inheritance);
- income earned from a non-Canadian business; or
- income earned in an offshore trust
(b) have not properly filed any of the following:
- any information forms required to be filed, for example:
- the annual information form required to be filed if the cost amount of your foreign assets (other than personal property such as a vacation home) exceeds $100,000 (eg. a U.S. bank account with $20,000 and also a Swiss investment account with $90,000);
- the form required to be filed if a Canadian resident receives a distribution from a non-resident trust;
- a GST/HST return; or
- a tax return.
If any of the above scenarios are applicable to you, it is imperative that you read this article!
CRA Increases Efforts to Battle Tax Evasion
In 2013, the Canada Revenue Agency ("CRA") increased its efforts to suppress tax evasion with the formation of an Offshore Compliance Division that is slated to be home to 70 full time employees.1 The crackdown initiative on offshore funds hardly comes as a surprise as it represents the next logical step in Canadian government's battle with unreported income.
The increased scrutiny by the CRA and the vast number of information leaks from what have been traditionally viewed as confidential entities (eg. Swiss banks) has encouraged Canadian taxpayers to ‘come clean' to the tax authorities in unprecedented numbers. Canadian taxpayers that have unreported income in their non-Canadian accounts have led the surge in voluntary disclosures over the past year. The Globe and Mail reported that Philippe Brideau, a spokesman for the CRA, indicated that as of September 2014, the CRA had received nearly 6000 voluntary disclosures, a "dramatic increase" from 1215 voluntary disclosures in 2006.2 We have made our own inquiry to the CRA pursuant to the Freedom of Information and Protection of Privacy Act, which indicated that the CRA had an even higher number of voluntary disclosures over the past few years (please see table below for details). Consistent with these trends, we have also experienced a significant increase in the number of voluntary disclosures we submitted for clients in 2014.
Total Annual Number of Voluntary Disclosures Submitted to the CRA
2011 – 2012
2012 – 2013
2013 – 2014
Only a Lawyer Can Keep Your 'Secret' Confidential
The Voluntary Disclosures Program is an important procedure that can be undertaken by a taxpayer in order to minimize, if not eliminate, the possibility of a penalty assessment and prosecution by the CRA — something that can happen at any time. The CRA regularly pursues investigations that lead to prosecutions of taxpayers that fail to declare their incomes. For example, on September 2, 2014, it was reported that a Toronto professional was found guilty of tax evasion and received a fine of $175,586 and a two year (less a day) conditional sentence.3
In order to minimize the possibility of being prosecuted by the CRA for tax evasion, and incurring the unpleasant consequences therefrom, we encourage you to consult with a tax lawyer about the possibility of utilizing the Voluntary Disclosures Program. Lawyers, unlike accounting professionals, are required to maintain solicitor-client confidentiality on all communications, and generally cannot be compelled to release this information. Accounting professionals are not subject to solicitor-client confidentiality, i.e., they cannot keep a secret if the CRA asks the right questions.
How to Qualify for Voluntary Disclosures Program
Qualification for the CRA's Voluntary Disclosures Program is important. Your legal advisor can help ensure the qualifications are met while protecting your rights. In order to ensure that the disclosure is valid under the CRA program, a taxpayer must satisfy the following four conditions:
- The disclosure must be voluntary. Generally, this means that you must not know that the disclosed information is going to be subject to an audit, investigation or enforcement action by the CRA, and the CRA must not have started an enforcement action against you, a related person (such as a spouse, shareholder, corporation or partner) or, in some circumstances, a third party, which is likely to uncover the disclosed information.
- The disclosure must be complete. You have to submit to the CRA by the required deadlines all of the correct facts and supporting documents for all of the relevant tax years or reporting periods where information was inaccurate, incomplete or unreported.
- The disclosure must potentially involve the application of a penalty, such as a late filing penalty, a failure to remit penalty, an installment penalty or a discretionary penalty.
- The disclosure generally must include information that is at least one year past due. (The disclosure can include information that is more recent as long as it contains information that is at least one year past due, or it corrects a previously filed return.)
A legal advisor will assist you by:
- Drafting the required submission and filing it in a way that minimizes risk;
- Generally obtaining relief from all penalties that would otherwise apply; and
- Possibly obtaining relief from interest that would otherwise apply.
Your Next Steps
Since a disclosure must be voluntary in order to be valid, it is important to come forward before the CRA conducts an investigation or takes an enforcement action on your file. Time is of the essence! We encourage you to promptly consult a legal professional to see the next steps that should be taken.
1 Bill Curry, "CRA staffing shakeup throws promised tax crackdown into question," The Globe and Mail, (19 September 2014).
3 Canada Revenue Agency, "Toronto Dentist Fined $175,586 for Tax Evasion," Marketwired, (4 September 2014).
* Natasha Miklaucic and Alex Klyguine are tax lawyers at Borden Ladner Gervais LLP and have together helped a large number of taxpayers to take advantage of the CRA's Voluntary Disclosure Program. If you would like to learn more about the CRA's Voluntary Disclosures Program, or if you have any questions about this article, please contact the authors of the publication.