Voluntary Disclosure Program May Help Remedy an Error in Your Tax Return
With tax season behind us, many of us are not likely thinking about taxes. However, some of us may have realized an error was made in the filing of the tax return. If that is the case you may be asking yourself what to do about the error. Should you contact the Canada Revenue Agency (“CRA”) right away? If so, is there a process for reporting this? What are the potential consequences for reporting an error?
These are all good questions and questions I get asked on a regular basis as mistakes in reporting happen. First, let’s talk about the consequences if CRA finds out you have submitted an inaccurate tax return. There are several different types of penalties that can be assessed if this is the case, however, the most common and often the most severe are ‘gross negligence penalties’. These penalties can be assessed under the Income Tax Act and grant the CRA the ability to assess a penalty amount which equals up to 50% of the value of the tax that was avoided as a result of the error in the tax return. Now this may sound terrifying but there is a test that the CRA must pass in order to assess such a penalty and there are several defenses that you may raise. I will talk further about gross negligence penalties in a later column.
One thing that is definitive is that CRA can only assess a penalty if they are aware of the inaccurate information. This leads to the next question of whether you should and how you can tell CRA that you have made an error in your tax return. If you choose to report the inaccuracy to CRA you will need to go through the Voluntary Disclosure Program (VDP). The VDP exists as an opportunity for taxpayers to voluntarily disclose an error that was made in their tax returns and potentially avoid penalties being levied. I say ‘potentially’ avoid penalties because the CRA can decide not to ‘accept’ your voluntary disclosure statement and if that were the case, the CRA now has been alerted to the inaccuracy and they may reassess you and levy gross negligence and other penalties. One of the main reasons that CRA may choose not to accept your disclosure is if the disclosure is made after CRA has sent the taxpayer a notice of reassessment or given the taxpayer some other indication that they have noticed a potential issue with their tax return. If this is the case, the CRA generally takes the position that the disclosure statement is not voluntary and the taxpayer may face reassessment and penalties.
The VPD can be a very useful program in trying to fix an honest mistake; however, there are numerous considerations that a taxpayer should take into account before submitting a statement to the CRA. If you have questions regarding these considerations I would highly recommend seeking the advice of a tax lawyer experienced in making this determination prior to diving in!
Author: Greg Pratch p: 250.869.1194 e: firstname.lastname@example.org