Canada, like most western democracies that collect income taxes, depends on the voluntary reporting of income and calculation of taxes by individual taxpayers. Income tax laws are often very complicated, and taxpayers must be especially careful in reporting income and deductible expenses. If a taxpayer under reports income or overstates deductions to avoid taxes, he may be subject to not only interest and penalties on the unpaid taxes but criminal prosecution which can result in high fines or prison time. The Canada Revenue Agency (CRA) is responsible for collecting taxes and enforcing tax codes in Canada. Taxpayers must report most forms of income such as salaries, wages, bonuses, capital gains, interests, and income from many passive sources, rents, trust funds, etc. Canada does exempt some forms of incomes like inheritance, winnings from lotteries, or some types of government payments. The CRA has many ways to track income and detect under reporting of income, but there are sources of income that are not as well documented or not documented at all. If a taxpayer has a side business or works for cash or sells items online the CRA may not receive any direct notification of these payments unless the taxpayer reports it. The CRA might detect net worth changes, spending, and indirect financial information that might indicate under reporting, but self- reporting is the best way to collect the taxes owed.
So what happens if a taxpayer under reports whether intentionally or unintentionally? If the Canada Revenue Agency determines a taxpayer has under reported income, overstated deductions and owes back taxes, it will take steps to collect back taxes with penalties and Interest. The CRA, if it determines criminal charges are called for can prosecute the taxpayer in a criminal proceeding. The Canadian government has provided the taxpayer a way to bring their tax payments and liabilities up to date through Voluntary Disclosure. Through Voluntary Disclosure a taxpayer receives amnesty from criminal charges and more severe penalties. Tax Amnesty in Canada does require the taxpayer to disclose all income and pay taxes, penalties and interest. To qualify the taxpayer needs to meet certain criteria. First and foremost, it must be voluntary. The application for Amnesty cannot be the result of a Canada Revenue Agency contact, audit or collection attempt. It must begin with the taxpayer making the application. The income not reported, must now be correct and complete. This also applies to people who over deduct and now want to report the correct taxable net income from a prior year. The tax year or years to be amended must be at least one year in the past.
Tax Amnesty in Canada does include amnesty for intentional tax evaders. This includes people who want to report income from illegal activities. Even if your income is derived from illegal acts, you are still required to report the income. Taxpayers who never filed at tax return could also apply for amnesty. Some taxpayers might have not reported money made overseas and now have repatriated to Canada and want to make a clean slate and amnesty is the place to start. The CRA does not have to accept the application, so the taxpayer should seek tax advice including legal advice. The taxpayer does not need a lawyer but given the stakes and potential negative consequences, the taxpayer should consult an attorney. The attorney has an attorney client privilege and can approach the CRA without disclosing the client’s identity or other identifying information. There is no client privilege with tax advisers, friends, accountants, or other financial professionals and it’s important for a taxpayer facing criminal prosecution not to allow anyone but a licensed attorney to make the application to the CRA. If the accountant or other advisor is also an attorney, the client privilege would apply. The attorney can submit the application and negotiate the terms of the amnesty without identifying the client until the amnesty is approved. The taxpayer cannot enter to any agreement to gain amnesty with the intent to continue to hide income. Taxpayers who are repeat offenders run the risk of being denied amnesty or being charged more interest and penalties.
If a taxpayer, whether due to a guilty conscience or fear of discovery or a new found ethic or patriotism wants to amend his returns and pay his due taxes, he must first gather all the records he can. Failing to have records can cause issues, especially when trying to justify deductions, but does not mean the taxpayer cannot apply for amnesty. The taxpayer should hire an attorney specializing in income taxes and experienced in the amnesty program in Canada. The taxpayer must be honest and forthcoming with the attorney and must also be prepared for full disclosure to the CRA of all pertinent information and financial data required. The taxpayer must review their current resources and ensure they have resources to settle the tax liability including penalties, fines, etc., if not immediately, in compliance with any payment schedule required by CRA. The taxpayer should take steps to prevent the tax issue from reoccurring to avoid the harsh consequences of repeated offenses. The disclosures made during the amnesty process will make the taxpayer more vulnerable to CRA scrutiny and the taxpayer must be very careful with all future tax filings. The taxpayer should also take steps to avoid making the same mistakes in the future by better record keeping and through the use of tax professionals. If the taxes are due to unremitted taxes from a small business payroll, the taxpayer should hire a firm specializing in human resource and payroll functions for small businesses. There are also many software options for payrolls, businesses, accounts payables, receivables, sales records, and book keeping in general. So whether the tax liability is from revenue received from that online store, overseas employment, cash paid for services done or even from illegal activity tax amnesty in Canada might be the solution.