While it’s unlikely that they do so with any great degree of enthusiasm, the vast majority of Canadians prepare their annual tax return each spring and file that return on time. That’s necessary, because the Canadian tax system is a “self-assessing” one, in which the onus is completely on the taxpayer to ensure that a return in prescribed form is completed and provided to the tax authorities. On that return, the taxpayer provides a listing of income earned during the previous calendar year as well as any claims made for tax deductions and credits. The end result of that process is a determination of the amount of tax owed for the year; any such amount must then, of course, be paid on or before April 30.
The number of taxpayers who don’t file a return as and when required, or who file a return in which income amounts aren’t reported or incorrect tax deduction or credit claims are made, is, as a percentage of the overall number of tax filers, very small. However, even a very low non-compliance rate of 1% or less still means hundreds of thousands of returns not filed or filed with incomplete or inaccurate information.
There are a number of reasons why taxpayers don’t file a return – sometimes it’s just procrastination, or a lack of knowledge of how and when to get the return filed. In other cases, taxpayers don’t believe that they are required to file a return – for instance, where they have little or no income for the year.
However, in many instances in which taxpayers don’t file a return, it’s likely because taxes are owed and they are unable to pay those taxes on time or in full – or at all. In such situations, it’s tempting to conclude that it’s better not to file in the hope, perhaps, that the CRA will overlook or somehow not notice the delinquency. That’s not, however, a realistic conclusion. Where a Canadian resident earns income, the payor of that income must file an income slip (T4 for employment income, T5 for interest income, etc.) with the Canada Revenue Agency, on which the recipient of that income is identified by name, address, and social insurance number. As well, beginning with the 2024 tax year, e-commerce sites are required to provide the tax authorities with identifying information for individuals who sell goods through those online marketplaces. And, where information provided to the tax authorities doesn’t match up with income reported on a return for the year by the taxpayer (or no return was filed at all), the omission will probably come to light.
Although each such instance of non-compliance can represent lost revenue to the Canadian government, the resources needed to track down each and every such occurrence simply aren’t available, especially since in many cases the amount recovered may be less than the costs which must be incurred to recover that amount.
With all of that in mind, the Canada Revenue Agency provides a program – the Voluntary Disclosures Program (VDP) – intended to encourage non-compliant taxpayers to come forward and put their tax affairs in order. The incentive to do so arises from the fact that in most cases, while taxpayers who participate in the VDP program will still have to pay outstanding tax amounts owed, plus some interest, they can avoid some other interest charges, penalties which would normally be imposed, and the risk of criminal prosecution.
There are five criteria which must be satisfied for an application to qualify for such relief under the VDP. Generally, any such application must:
- Be voluntary (meaning that it is made before the CRA contacts the taxpayer or initiates any enforcement action related to the information to be disclosed);
- Be complete (meaning that it includes all relevant information and documentation);
- Involve the application or potential application of a penalty;
- Include information that is at least one year or one reporting period past due (as of June 2025 that would include individual income tax returns for tax years up to and including 2023); and
- Include payment of the estimated tax owing (taxpayers who are unable to do so can request a payment arrangement).
The VDP program includes two separate “tracks” for income tax disclosures – the Limited Program and the General Program – and the kind and extent of relief available depends on the track to which a particular application is assigned.
While the Canada Revenue Agency will ultimately make the determination of whether an application should proceed under the Limited or the General Program on a case-by-case basis, there are guidelines in place. The CRA’s intention is to restrict the Limited Program to instances in which taxpayers intentionally avoided their tax obligations (as distinct from inadvertence), or there is conduct on the part of the taxpayer which amounts to gross negligence. In making its determination of the appropriate track for a disclosure, the factors which the CRA will consider include the following:
- the dollar amounts involved;
- the number of years of non-compliance;
- the sophistication of the taxpayer;
- how quickly the taxpayer acted to correct their non-compliance after becoming aware of it;
- whether the disclosure was made after the taxpayer became aware of the CRA’s intended specific focus on that particular area of taxpayer compliance; and
- whether efforts were made to avoid detection through the use of offshore vehicles or other means.
Those whose applications are accepted under the Limited Program will be required to pay outstanding tax balances owed, plus interest, and will be subject to penalties. They will not, however, be subject to criminal prosecution and will be exempted from the more stringent penalties which usually apply in cases of gross negligence on the part of the taxpayer.
Taxpayers whose conduct does not consign them to the Limited Program will instead be considered under the General Program. Under that Program, no penalties will be charged and no criminal prosecutions will take place. As well, the CRA will provide partial interest relief for the years preceding the three most recent years of non-compliance. For example, a taxpayer who makes an application to the VDP after having failed to file returns or pay tax owing, or who filed returns which omitted information or included incorrect information, for the 2018 through 2023 taxation years may be provided with partial interest relief with respect to tax arrears owed for the 2018, 2019 and 2020 taxation years. Such relief is generally equal to 50% of interest normally owed – in other words, the taxpayer will be required to pay only half of the interest charges which would otherwise be levied for those years. No interest relief will, however, be provided on tax amounts owed for the three most recent taxation years (2021, 2022, and 2023). Since interest charges levied by the CRA are, by law, higher than current commercial rates (for instance, the rate levied for April, May and June 2025 is 8%) and interest charged is compounded daily, having interest amounts forgiven, even in part, can make a significant difference to the overall tax bill faced by the taxpayer.
The decision to apply to the VDP and to “come clean” about all previous tax transgressions is something that most taxpayers will likely consider with considerable trepidation. Those who are unsure about whether they want to move forward with a VDP application do have the option of using the CRA’s “pre-disclosure discussion service”. As the name implies, that service allows taxpayers to participate in preliminary discussions with a CRA official, on an anonymous basis, to gain some knowledge about the VDP program, the process involved, and the potential relief available.
Whether or not they choose to avail themselves of the pre-disclosure discussion service, taxpayers who decide to apply to the VDP should complete and file Form RC199 Voluntary Disclosures Program Application, which is available on the CRA website at https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/rc199.html. (While it’s possible to apply to the VDP by drafting a letter to the CRA, using the prescribed form is generally the better approach. Doing so will ensure both that all required information is included and that that information is presented in a format which will be familiar to the CRA officials assessing the application.) Once the application is received, the CRA will check to make certain that it meets all the criteria required for a valid application, and that all of the required information, documentation, and payment have been sent. Once the application has been accepted, the next step is for the CRA to determine the program (Limited or General) to which it should be assigned and the taxation year(s) for which relief is being considered. At each step the taxpayer will be provided with written notice of the CRA’s decisions.
If the decision made is that the application is not eligible for the VDP, the taxpayer will also be advised in writing, with reasons, of the CRA’s decision to deny the application.
Where the decision made by the Agency is one with which the taxpayer disagrees, they are entitled to ask for a second administrative review of the application by the CRA. It is also possible for a taxpayer to ask the Federal Court to provide judicial review of the Agency’s decision. However, a taxpayer who wishes to pursue their application to the extent of filing such a Federal Court application is well advised to obtain legal advice before doing so.
Finally, taxpayers should recognize that the VDP Program can’t be used as a kind of “get out of jail free card” with respect to repeated failures to meet tax filing and payment obligations. The CRA’s expectations are that taxpayers who have benefitted from the VDP will thereafter meet their tax obligations, and a second review will be provided for the same taxpayer only in situations where the second application relates to a different matter than the first, and where the circumstances giving rise to the second application were beyond the taxpayer’s control.
Detailed information on the VDP can be found on the CRA website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html. Additional details with respect to the Program are also outlined in the CRA’s Information Circular IC00-1R6, Voluntary Disclosures Program, which is available on the same website at IC00-1R6 - Voluntary Disclosures Program - Canada.ca.