While it’s unlikely that many of them do so with any great degree of enthusiasm, the vast majority of Canadian taxpayers meet their tax filing obligations each spring, by completing and filing the annual tax return. And, in most cases, the return filed is correct and complete.
While that’s the desired result, it can be derailed in any one of a number of ways. Our tax system is complex, to such an extent that making a mistake on one’s tax return isn’t at all remarkable – generally, through a misunderstanding of the tax rules, or how they apply in the taxpayer’s particular situation. In other cases, taxpayers may fail to file a return at all. In many cases, where the taxpayer owes taxes on filing and doesn’t have the means to pay them, the (incorrect) conclusion reached is that it’s better not to file at all. And, inevitably, there are situations in which the taxpayer simply chooses not to file, or files a return in which income amounts or available deduction or credit claims (or both) are misstated.
Whatever the reasons or circumstances, a failure to file a tax return when required, or misstating income or deduction and credit amounts on a return, can be very costly to the taxpayer. By law, the Canada Revenue Agency (CRA) charges interest on overdue or insufficient payments of tax at higher than commercial rates. Currently, and until the end of the 2026 calendar year, the rate of interest levied is 7%. In addition, all interest amounts levied are compounded daily, meaning that each day interest is charged on the previous day’s interest. Not surprisingly, under such rules, interest charges can accumulate quickly, even over a relatively short period of time.
In addition to levying interest charges on underpayments or late payments of taxes owed, the CRA also imposes penalties where a return is not filed on time, with such penalties calculated as a percentage of tax owed at the time of filing. The first such late filing will result in an immediate penalty of 5% of any tax amount owed. In addition, a penalty of 1% per month is levied for each full month that the return is not filed, to a maximum of 12 months.
Late-filing penalties are increased substantially where a first-instance penalty was imposed in any of the previous three years. In such case, the immediate late filing penalty increases to 10% of any tax amount owed, and the monthly penalty imposed increases to 2% per month, to a maximum of 20 months. In a worst-case scenario, where a late-filing penalty has been imposed in the previous three years, and a subsequent return is filed more than 20 months after the due date, the total penalty charge will reach 50% of tax amounts owed. And, finally, interest is levied on all such penalty amounts, as well as on overdue tax amounts, and all such interest charges levied are compounded daily.
Given the substantial interest and penalty amounts for which they may be liable, it’s understandable that taxpayers who are in arrears with respect to their tax filing and/or tax payment obligations feel some trepidation about coming forward to disclose those delinquencies.
Fortunately for such taxpayers, there is an alternative in the form of the CRA’s Voluntary Disclosure Program (VDP). That program allows taxpayers to come clean with the tax authorities with respect to past tax transgressions on what amounts to a no-fault basis. Specifically, taxpayers are incentivized to participate in the VDP by the CRA’s policy that, while any income tax amounts owed will have to be paid, in most cases interest or penalty amounts which would ordinarily be assessed in addition to tax amounts owed will be reduced, or forgiven altogether. In addition, taxpayers who participate in the VDP will not face any criminal prosecution for past instances of tax evasion.
In October of 2025, the CRA made changes to the VDP, with the goal of making the program more accessible to Canadian taxpayers and expanding the level of relief which can be provided.
Under the rules which apply to voluntary disclosures made on or after October 1, 2025, a VDP application accepted by the CRA will be characterized as either an unprompted or a prompted application. The distinction between the two is an important one, as the kind and level of relief which the taxpayer may obtain differs significantly depending on the category into which their VDP application is assigned.
Generally, an unprompted application is what it sounds like – an application made to the CRA with respect to past tax transgressions that is made before any communication about those transgressions is received from the CRA. More technically, as explained in the Information Circular issued by the CRA, an unprompted application is defined as follows:
“An application is generally considered unprompted in the following situations:
- an application is made when there has been no communication (verbal or written) about an identified compliance issue related to the disclosure
- an application is made following an education letter or notice that offers general guidance and filing information related to a particular topic.”
Where a VDP application is received by the CRA and is accepted and determined to be an unprompted application, tax owing will have to be paid, but 75% of the applicable interest charges and 100% of the applicable penalties will be waived. In other words, a taxpayer who makes a VDP application which is accepted by the CRA as an unprompted application will be required to pay all taxes owed and 25% of applicable interest charges but will not have to pay any penalties and will not be subject to criminal prosecution.
As might be expected, the available relief for those who make a prompted application is not as extensive. For purposes of the VDP, a prompted application is defined in the Information Circular as follows:
“An application is generally considered prompted in the following situations:
- an application is made following verbal or written communication about an identified compliance issue related to the disclosure, which may include letters or notices (excluding education letters) to the taxpayer with one or more of the following:
- an identification of a specific error or omission found on the taxpayer's account
- a deadline to correct an error or omission, where there is an expectation for the taxpayer to file or comply
- an application is made after the CRA has already received information from third party sources regarding the potential involvement of a specific taxpayer (or of a related taxpayer) in tax non-compliance.”
In sum, an unprompted application for the VDP can be made by a taxpayer only where they have NOT been contacted by the CRA with respect to an identified compliance issue related to the subject matter of the disclosure, and the CRA has NOT received information about the taxpayer’s non-compliance from a third-party source. If either of those two circumstances exist, any VDP application made and accepted by the CRA will be treated as a prompted application.
Where a VDP application is accepted as a prompted application, the taxpayer will be required to pay all tax amounts owed. They will receive 25% relief of the applicable interest charges and up to 100% relief of the applicable penalties and will not be subject to criminal prosecution. In other words, they will be required to pay all taxes owed and 75% of all accrued interest charges. Penalty amounts assessed may be forgiven, but the degree to which such penalty relief will be provided is discretionary on the part of the CRA.
Taxpayers who are considering making an application under either stream of the VDP might understandably feel some trepidation about coming forward to do so. It is possible, however, for any taxpayer considering such a step to consult with CRA officials for what is termed a “pre-disclosure discussion”. That discussion is conducted on an anonymous basis, to enable the taxpayer to obtain information about the kinds of relief which may be available in their particular circumstances, and is not binding on either party. Taxpayers who wish to pursue a pre-disclosure discussion can call the CRA’s Income Tax Enquiries Line at 1-800-959 8281 to make such arrangements.
Making a voluntary disclosure to the CRA, especially where a significant amount of tax and/or interest and penalty amounts are owed, is a significant step which will inevitably mean a financial cost to the taxpayer. However, taxpayers should keep in mind the fact that the costs involved will be significantly higher, and that a worst-case scenario can include criminal prosecution, where past tax transgressions are discovered by the CRA and collection and enforcement action is taken outside of the Voluntary Disclosure Program.
Information about the changes to the VDP for disclosures made on or after October 1, 2025 can be found on the Agency’s website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/voluntary-disclosures-program/changes-vdp.html. The updated Information Circular, which provides significantly more detailed information about those changes, is available on the same website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic00-1.html.