Tips for late tax filers

People who’ve neglected to pay their taxes should use CRA’s voluntary disclosure program before they become ineligible.

As an example, we’ll look at Kathy, a Canadian resident who’s been running a consulting business since 2010. With each year that passes, her business has become more profitable and her taxes more complicated.

Say you brought her on a client in early 2014 and, shortly after, offered to help with her 2013 tax return. Unfortunately, you then found out she’d neglected to file her 2012 tax return. And now, she’s worried about the implications of filing that late return.

Read: Come clean with CRA

So what can she do? Her first option is to simply file her late return with CRA and wait to see if the agency penalizes her. This is the least desirable scenario.

Instead, she can take advantage of CRA’s Voluntary Disclosure Program, or VDP. Under this program, CRA can waive penalties, and sometimes interest, on late tax returns that are filed. In order to be eligible for the program, however, Kathy would need to meet specific criteria.

She may submit their tax returns through the VDP program so long as:

• any submitted returns are more than one-year late;
• CRA has yet to ask for late tax returns and related materials;
• she’s not being audited, reviewed or investigated by CRA;
• her late filing may result in a penalty since she owes money; and
• her tax return will be complete and accurate when submitted.

If Kathy meets these criteria, you can help her complete her 2012 tax return, including any related tax disclosures and related documents such as the RC199 form. She needs to submit everything to the appropriate VDP office—B.C. and Yukon residents file to a different office than those who live or operate a business in the rest of Canada.

For clients to complete the RC199 form, they need to explain how they meet the criteria for the VDP program, as well as explain what year or years they’re filing for.

Read: Should clients file taxes if they’re bankrupt?

Penalties and interest on late filings can be significant, which is why it’s key to help people through the VDP process. Also, clients can’t wait too long since filing under VDP is no longer an option once CRA sends a request to file.

Consider that if Kathy owed $10,000 for 2012, her late filing penalty would be upwards of $1,700 plus interest (penalties are calculated using 5% of the total amount owed, plus 1% extra per month of unpaid taxes up to a maximum of 17%). By filing under VDP, she could avoid paying this penalty and the interest (though whether interest must be paid is at the discretion of CRA).

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Although CRA may ask for taxes to be paid at the time VDP is filed, many people don’t have the funds to pay any outstanding balances. To help clients, you need to file under VDP and then communicate with the agent assigned to the case as soon as possible. In most cases, CRA is reasonable in discussing a payment plan for outstanding tax debts.

Keep in mind that VDP rules and procedures are complicated and, even worse, incorrect VDP filings can jeopardize people’s chances of having penalties waived. If you’re not a tax expert, connect with a tax planner or accountant who can assist you with helping clients.

Read:

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Phil Hogan is a chartered accountant who practices in Victoria, B.C. He specializes in Canadian and U.S. taxation, and focuses primarily on cross-border tax matters and CRA/IRS dispute resolution. He can be reached at phil@hutcheson.ca or at 250-381-2400.