TAXFlash News from IncomeTaxCanada.net

Jim Maroney

:: Underground economy based on cash to avoid income taxes and GST, but CCRA pursuing tax evasion

:: Have you ever purchased a good or service only to have the vendor offer to sell at two different prices – one price for payment in cash and another for a non-cash payment? Who hasn’t right? Of course the vendor may simply be offering a discount for cash to avoid the administrative hassle of alternative payment methods – on the other hand, there may ulterior motive at work. Can you say underground economy?

I don’t now what the “real” statistics are, and my observations are anecdotal at best, but I’d say that compliance with the Canadian tax system has declined since the introduction of the GST. I’d also feel safe in saying that the Canada Customs and Revenue Agency (CCRA) has come to this same conclusion.

In an effort to combat the proliferation of non-compliant taxpayers, CCRA does pursue cases of tax evasion. Indeed it’s a rare week when I don’t receive notification over the internet of another tax evasion case. When successful in prosecuting tax evasion, CCRA seeks publicity through the media to, in its own words, “maintain confidence in the integrity of the self-assessment system, and to increase compliance with the law through the deterrent effect of such publicity”.

But investigating and prosecuting tax evasion cases is combative, costly and cumbersome so CCRA also offers a Voluntary Disclosure Program (VDP) designed to appeal to the sense of guilt non-complying taxpayers may experience. This program is been in existence for some time but CCRA has been adding refinements in recent years in an effort to increase public awareness.

Last month CCRA issued a revised Information Circular (IC00-1R) outlining the basic elements of the VPD. The introductory paragraph to this Circular states “the VDP encourages clients to come forward and correct deficiencies to comply with their legal obligations. It is a fairness program that is aimed at providing clients with an opportunity to correct past omissions, thus rendering themselves compliant”. And no, that was not a typo – CCRA does indeed consider you, the taxpayer, to be a “client”.

Basically, the VPD permits taxpayers who have failed to file a tax return or filed an incorrect tax return to fess up, come clean and settle any tax liability without fear of prosecution or the imposition of penalties for gross negligence or wilful evasion.

There are four conditions that must exist in order for a disclosure to be considered “voluntary”:

1. The disclosure must be voluntary. This means that the taxpayer, or “client” if you prefer, must initiate the disclosure. If the taxpayer “volunteers” only after getting wind of an audit, investigation or other enforcement action initiated by CCRA the VDP will not apply.

2. The disclosure must be complete. The “client” is expected to provide full and accurate reporting of all previously inaccurate, incomplete, or unreported information. After initial discussions with the client, if CCRA requests additional documentation to verify the amounts to be disclosed the client is expected to comply. A disclosure will not be disqualified simply because it contains minor errors or omissions – the same cannot be said where the disclosure contains material errors or omissions.

3. The disclosure must involve at least one penalty. If no penalties apply to the information being disclosed, the client does not need to seek penalty relief through the VDP.

4. The disclosure must include information that is:

i. at least one year past due, or

ii. if less than one year past due, not initiated simply to avoid the late filing or instalment penalties.

If guilt is getting the better of you and a voluntary disclosure is in order, you need to contact CCRA either in person or in writing, provide details of the disclosure and show how the above conditions have been met. Your initial submission does not need to be complete at the time of disclosure – CCRA will normally allow 90-days to finalize the information. Fair enough but those considering a voluntary disclosure should be sure to follow-up with the remaining support – starting with an incomplete disclosure and failing to provide outstanding information is not a wise move.

Taxpayers making a voluntary disclosure will be expected to either pay the balance of the tax owing or make mutually agreeable arrangements for payment of the amount due. Statutory interest and late filing penalties will apply, however, depending on the circumstances, it may be possible to have these reduced or waived under the so-called Fairness Package. Such reductions typically only occur where the circumstances that lead to the non-compliance were beyond the control of the taxpayer.

Voluntary disclosure won’t get you off the hook -you’ll still be expected to pay the tax you owe in addition to the unpaid interest thereon. A valid voluntary disclosure can, however, provide relief from various penalties and even prosecution not to mention mental stress. Evidently, increasing public awareness of the VPD is having the desired effect based on the fourfold increase in the number of voluntary disclosures during the past decade.

...for more Canadian Tax Information

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Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca
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