If you run personal expenses through your business, you expose yourself to severe penalties and potential prosecution under the Income Tax Act. Your best option—no matter how long or how much you’ve been mingling—is to come clean with Revenue Canada by taking advantage of its Voluntary Disclosures Program (VDP).
What is the Voluntary Disclosures Program?
The program gives people who haven’t met their tax obligations an opportunity to sidestep the most severe consequences of a Revenue Canada audit. The process starts with a disclosure submission that corrects past omissions and other inaccuracies in previous tax filings.
The bad news is you still have to pay the taxes you should have paid in previous years. You’ll also have to pay interest owed on those taxes.
How do I make a submission?
THE NAMED METHOD:
You reveal your identity in your submission. Do this if you know you’re guilty, or have a feeling an audit’s coming, and want to get it over with.
THE NO-NAME METHOD:
You describe your situation in a way that won’t give up your identity. This option is designed for people who have cold feet about the program, and want to be sure they qualify for relief before revealing their identities. Those who take part have 90 days to notify Revenue Canada who they are.
What are the disclosure conditions?
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VOLUNTARY:
You must come forward before being targeted by Revenue Canada for any kind of audit, investigation, or enforcement action. If auditors have already started asking for files, it’s too late.
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COMPLETE:
The taxpayer must provide relevant facts and documentation for all tax years for which incomplete or inaccurate information was submitted. This is where the mingling skeletons come out of the closet.
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CANDID:
You may be ready to ‘fess up about the art the company bought for the office that’s now hanging in your living room, but what about the gambling habit being run out of a swelling petty cash drawer?
If you’re not ready to be completely open, don’t opt for the disclosures program. Revenue Canada puts those files through a comprehensive evaluation and verification process. If they find out you didn’t come clean on all the mingling, your disclosure submission will be denied and you’ll be subject to the consequences.
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TIMELY:
In most cases, the information has to be at least one year past due.
Is there a time limit?
Be aware there’s a 10-year limit on voluntary disclosures. So if you make a valid VDP submission on December 1, 2015, relief would only be available for 2005 and subsequent tax years.
Is there any amnesty?
While the program is aimed primarily at relief from penalties and prosecution, it also includes a provision allowing for partial forgiveness of interest charges.
This should come as a big relief to long-time minglers. Ten years’ worth of vacations, boats, renovations, and landscaping bills passed through the company’s books will carry a hefty interest bill.
How can I ensure success?
You increase the chances your disclosure will be approved if you work with a reputable accounting firm. It makes Revenue Canada more confident.
What’s the long-term consequence?
By coming forward with a disclosure, you now have a profile with the taxman (or woman). But people who go through the program generally enjoy a cleaner bill of health and credibility in Revenue Canada’s eyes.
Richard Weber is an Oakville, Ont.-based accountant.