Primarily based on the self-assessment principle, Canada’s tax system relies on the taxpayers’ voluntary compliance. Each individual is responsible for doing their own taxes every year. Generally, it includes reporting one’s income tax return and determining whether they owe taxes or qualify for tax benefits and credits.
Canada enjoys a healthy compliance rate in the tax system. According to the Canada Revenue Agency (CRA), 86 percent of Canadian taxpayers voluntarily complied with their tax obligations. But inevitably, some individuals and businesses don’t file or make timely tax payments.
Interests and penalties may apply if you submit your taxes later or decide to wait to file them. The good news is that the CRA offers a chance for non-compliant taxpayers to come forward and correct their tax matters voluntarily through the voluntary disclosure program assistance.
Most taxpayers and registrants can apply for the CRA voluntary disclosure program (VDP). However, it only grants relief on a case-by-case basis. This article will explore in what cases your business should apply for the VDP.
When You Have Unreported Taxable Income
A portion of your business revenue should be set aside for paying income tax. In Canada, businesses must pay federal and provincial or territorial income tax. However, some situations often cause business owners to have unreported income for an entire tax year.
Regardless, failure to report all your business income may have dire consequences. These may include a penalty of 10 percent of the unreported amount after the first omission. You can rectify the unreported income and present an application to CRA.
Suppose the CRA approves your VDP application. They may not impose penalties on the unreported income. However, you’ll still be responsible for paying any additional taxes due to changes to the returns.
When You Have Inaccurate Expenses Claimed
Business expenses are deductible. The CRA specifies a list of deductible expenses that businesses can claim. However, some taxpayers may accidentally file tax returns with inaccurate expenses claimed. The expenses may be much higher than the actual amounts.
Instead of paying the fair share, you may pay smaller taxes. Do you have expenses included in your initial returns that don’t meet the CRA policy eligibility criteria? The VPD can be a great option to come clean and rectify the inaccuracies.
When You Missed Tax Deadlines
Missing tax deadlines can lead to hefty penalties and interest charges. Technically, businesses must file their return within six months of the end of each tax year. A penalty applies if one fails to file the return on time.
There’s usually a five percent penalty of the unpaid tax due to the filing deadline. Moreover, there’s an additional one percent penalty for the unpaid tax for each month the return is late, with a maximum limit of 12 months. The CRA VDA allows you to get a penalty or partial interest relief.
Important Points to Remember
There are more situations where applying under the VDP is a smart decision for your business. But it’s only possible if you meet the CRA’s predetermined conditions. For instance, the disclosure is only valid if voluntary, meaning you apply before the CRA comes to you. Working with an experienced tax professional is always a good idea to ensure proper disclosure.