Get out in front of the CRA if you have unfiled taxes

In my practice as a tax lawyer, I have had many people come to me afraid that they are going to go to prison for not filing and paying their taxes. A new client will come in and be concerned that the CRA is going to pursue criminal charges against them. Much to the client’s relief, I tell them that is rarely the case.

The CRA undertakes criminal investigations, generally, where there is evidence of tax evasion or fraud. Even then, the amount of actual cases referred to the Public Prosecution Service of Canada (PPSC) is not very high. For example, only 71 income tax and GST/HST cases were referred to the PPSC for 2012-2013 for all of Canada.

The reason for these low numbers is likely that a criminal case is not easy for the CRA to pursue as any criminal charges must be proved to the criminal standard, which is proof beyond a reasonable doubt.

Given the penalty regime in both the Income Tax Act (ITA) for income taxes and Excise Tax Act (ETA) for GST/HST, the CRA can collect from a taxpayer without resorting to the harder to obtain criminal penalty.

However, this does not mean that the taxpayer should ignore potential problems.

Usually, the taxpayer that is worried about criminal penalties is the one that has not filed returns for multiple tax years and owes taxes to the CRA. Under the Voluntary Disclosures Program (VDP), the CRA will waive penalties, criminal prosecution and sometimes partial interest that would otherwise have been imposed.

There are four main criteria that the taxpayer must meet for a valid disclosure under the VDP. They are that the disclosure be voluntary, the disclosure be complete, a penalty must be involved, and that the return is one year past due.

Voluntary means that the taxpayer has not been contacted by the CRA regarding their outstanding tax returns. What constitutes a “voluntary” disclosure has been the subject of several court cases.

Generally speaking, if the taxpayer has not been contacted by the CRA in any manner about an unfiled return, then any disclosure made should be voluntary.

However, even if the taxpayer has been contacted by CRA, under the right circumstances, a valid disclosure can still be made.

If a disclosure is denied, this is the ground that it will usually be denied on.

The other criteria are more straightforward.

“Complete” means that the taxpayer must provide full and accurate facts and documentation for the relevant period. This typically consists of having complete and accurate tax returns done for the taxation years where no returns were filed. The “penalty” criterion means that there must be a potential penalty that would apply to the taxpayer if the disclosure had not been made.

Penalties are usually assessed as a percentage of taxes owed, so where a taxpayer owes no taxes or is eligible for a refund for unfiled returns there is no need to make a voluntary disclosure as there is no penalty to be assessed.

Finally, the one year past due requirement means that voluntary disclosures are only accepted where one year or more has passed since the given year’s filing date.

So the good news is if you haven’t filed tax returns, you are very likely not facing criminal sanctions.

However, it is best to correct the situation as soon as possible before the CRA finds out about the missing returns to take advantage of the VDP.

Robert Daniel Lyons is a tax lawyer based in Vanderhoof. He can be reached through his website at lyonstax.ca.