Monday, July 9, 2012

Voluntary Disclosures to the Canada Revenue Agency

Keypunching tax data at the CRA (hopefully with newer computers since this photo was taken).
Photo credit: Government of Canada.
As a tax lawyer, and a taxpayer, I know there is lots of fear and mistrust implicit in the relationship between Canadians and the Canada Revenue Agency. This is unfortunate, because the relationship between the CRA and those it serves is not fundamentally adversarial.

Now I'm not at all trying to sound like a cheerleader for the CRA, but what you need to understand is that its employees have a very different mandate and relationship with Canadians than do the police. The fundamental purpose of the CRA is tax administration, collection, compliance verification, and lastly - and this is a distant last - enforcement. The fundamental purpose of the police is law enforcement. Sure the police have other purposes, like crime prevention and community safety, but if it comes down to competing resources, enforcement needs come first for the police. Thus the police will often be interacting with two classes of Canadians: victims and suspected offenders. Not true with the CRA - they are almost always interacting with "taxpayers."

Taxpayers constitute an enormously bigger class of people than the victim/offender classes. Taxpayers can included all Canadians with a taxable income. Even those who don't owe any tax! So the CRA exists not just to squeeze you for tax, but also to make sure you receive all the deductions and refunds you are entitled to in a timely manner. However, you can only receive those deductions and refunds if you file returns, and you are honest about what you disclose on those returns. I've actually come across cases where individuals think that by not filing returns, they are saving thousands in tax, whereas in reality the government would owe them money if they had been filing. 

The CRA's Voluntary Disclosures Program (sometimes known informally as a "tax amnesty") is a great way to come clean on your taxes, so long as you make the disclosure prior to the CRA initiating any compliance action against you. You can cure HST/GST irregularities, as well as Income Tax deficiencies, through the program. You might not need to even pay any kind of penalty on such a disclosure, only any amount in unpaid tax that is owing (which sometimes can be a lot less than you thought it would be) plus interest running from the time that tax payment was due. If you make your voluntary disclosure about taxes due within the last ten year, the CRA might even waive some or all of the interest owing!

Better still, you can make the Voluntary Disclosure initially on a no-name basis where you can get a preliminary opinion from the CRA on the tax consequences of making such a disclosure, and only then decide if you want your name to be revealed in order to proceed to a final determination by the CRA of your tax position.

A tax lawyer may be in the best position to negotiate a tax amnesty for you, as once you have retained such a lawyer solicitor-client privilege will generally protect all your communications with your lawyer for the purpose of seeking or receiving legal advice, including information implicating you in tax non-disclosure. To be fair, your accountant may also be able to assist you with this process, but solicitor-client privilege doesn't exist for accountants. While you can also try to engage in DIY with the CRA, a no-name voluntary disclosure would be very difficult to achieve if you are directly conducting CRA negotiations yourself.