Come clean with CRA

It may be tempting to skirt the rules by under-reporting your income, but the consequences can be substantial. While the penalties won’t dissipate over time, you do have options.

If you’re caught, in addition to still owing the taxes, you could also face paying interest, penalties and even prosecution. And the Canada Revenue Agency (CRA) is doing more to detect under-reporting.

For assets held outside of Canada, the level of global cooperation is evolving rapidly, leading to greater transparency and a much higher risk of detection. New inter-country agreements require financial institutions to report information to local tax authorities, which is subsequently shared with tax authorities in other countries.

Domestically, CRA can analyze data to detect trends and patterns that indicate tax evasion. Some new programs even encourage people to snitch on other taxpayers. For instance, the new Offshore Tax Informant Program provides a substantial monetary reward when information leads to convictions related to offshore assets.

How to come clean

CRA has an administrative program, Voluntary Disclosure, which encourages Canadians to come clean and declare a delinquent indiscretion from the past. A valid disclosure eliminates the risk of penalty or prosecution and can result in cancelled or reduced interest.

The process begins with you making a complete and accurate disclosure of the situation that involves the potential for a tax liability or penalty. The issue must relate to a period older than one-year where there is a past-due amount. The disclosure can be on a named or unnamed basis. The latter lets you gage the CRA’s perception of the situation before providing a full disclosure. With an anonymous disclosure, you must provide the first three characters of your postal code, along with your age and gender.

Either way, the situation can’t be the subject of an open investigation by CRA or other authority.

If CRA accepts the disclosure, but you disagree with the resulting assessment or re-assessment, the regular dispute process kicks in. This begins with filing a Notice of Objection within the required time frame.

If CRA rejects the disclosure application there is no formal right of objection. However, you can request reconsideration on the grounds that discretion was not provided in a fair and reasonable manner. This is done through a written request to the director at the applicable tax centre. CRA personnel who are not involved in the initial application will review the file.

Upon receipt of a negative decision after CRA’s administrative review, you can apply to the Federal Court for a judicial review, once again on the grounds that discretion was not fair and reasonable for the circumstances. If the Federal Court finds errors in the process, it will refer the case back to CRA for reconsideration. The last level of appeal is the Federal Court of Appeal.

The potential relief for interest owing is limited to a 10-year window. When a voluntary disclosure is finalized, you’re required to pay all income tax and interest owing.

You’re typically only permitted one disclosure in your lifetime, so proceed carefully. It’s a valuable opportunity for you to avoid the full wrath of the law.