Canada’s tax system is what is known as a “self-assessing” one, in which taxpayers are expected (in fact, in most cases, required) to take the initiative to prepare and file an annual tax return by a specified deadline, to report all taxable income on that return, claim allowable deductions and credits, and pay any balance of income tax owed for the year.
It’s a system which depends heavily on the co-operation of taxpayers and, in most cases, taxpayers do meet their statutory obligations with respect to filing and payment. That said, given that nearly 33 million individual income tax returns were filed this year, it’s inevitable that there will be instances in which taxpayers do not file a return when required, or the income amounts reported or deductions or credit amounts claimed are incorrect. In most instances such errors are unintentional, the result of a taxpayer’s misunderstanding of our (very complex) tax rules, or a simple misreading of the tax form or tax information slips. In a minority of instances, however, non-compliance or inaccurate returns represent a deliberate attempt to “game the system” in order to pay less tax or avoid paying tax altogether.
The dilemma for the tax authorities is that, while the potential exists for a significant loss of tax revenue from hundreds of thousands of such instances of non-compliance, each such instance usually involves a relatively small amount of income tax. Not only does the Canada Revenue Agency not have the resources to pursue every such case, in many cases the cost of doing so would exceed the amount of tax revenue recovered.
In light of that reality the CRA has, for many years, provided taxpayers with the opportunity to come forward and disclose instances of past non-compliance with their tax obligations. That opportunity is provided through the Agency’s Voluntary Disclosures Program (VDP); significant changes have recently been made to that program, with those changes taking effect as of October 1, 2025.
Taxpayers are incentivized to participate in the VDP by the CRA’s policy that, while any income tax amounts owed will have to be paid, in most cases interest or penalty amounts which would ordinarily be assessed in addition to tax amounts owed will be reduced, or forgiven altogether. In addition, taxpayers who participate in the VDP will not face any criminal prosecution for past instances of tax evasion.
The changes which take effect for VDP applications made on or after October 1, 2025 are two-fold. First, the circumstances in which a taxpayer is allowed to make a voluntary disclosure have been expanded; as well, there are changes to the rules which determine the extent to which interest and penalty amounts will be reduced or forgiven.
To understand the changes, a bit of background is required. Under the VDP rules in place prior to October 1, 2025, an application made under the VDP and accepted by the CRA was assigned to either the General or the Limited stream. Taxpayers whose disclosure fell under the General stream were required to pay any taxes owed, but no penalties were assessed and partial interest relief was provided. Specifically, while full interest charges were assessed for the three most recent years of returns required to be filed, 50% of interest charges which would have been levied for tax years prior to that three-year period were forgiven. Taxpayers whose application was assigned to the Limited stream (generally, instances in which the circumstances included larger tax amounts or several years of non-compliance, or involved the use of offshore tax entities) were also required to pay any outstanding tax amounts owed, but were subject to penalties (with the exception of gross negligence penalties) and did not receive any interest relief. Under both streams, the taxpayer was not subject to criminal prosecution.
The recent changes replace the Limited and General streams structure with a system offering two new relief tiers: General Relief and Partial Relief. Where the CRA accepts a VDP application under the updated policy, it will determine which type of relief may be provided, as follows:
- General relief will normally be provided for unprompted applications. These applications will receive 75% relief of the applicable interest and 100% relief of the applicable penalties.
- Partial relief normally applies to prompted applications. These applications will receive 25% relief of the applicable interest and up to 100% relief of the applicable penalties.
The question which immediately arises is what constitutes an “unprompted” or a “prompted” application. Under the rules in place prior to October 1, virtually any form of contact from the CRA to the taxpayer disqualified that taxpayer from making a voluntary disclosure – in other words, once the CRA contacted the taxpayer about non-compliance, any subsequent disclosure made was, by definition, not voluntary and could not qualify for the VDP. The changes provide more latitude to taxpayers in this respect.
The question of what constitutes an “unprompted” or a “prompted” application is addressed in the detail in the updated Information Circular on the VDP. That Circular explains the difference as follows.
“An application is generally considered unprompted in the following situations:
- an application is made when there has been no communication (verbal or written) about an identified compliance issue related to the disclosure
- an application is made following an education letter or notice that offers general guidance and filing information related to a particular topic.
An application is generally considered prompted in the following situations:
- an application is made following verbal or written communication about an identified compliance issue related to the disclosure, which may include letters or notices (excluding education letters) to the taxpayer with one or more of the following:
- an identification of a specific error or omission found on the taxpayer’s account
- a deadline to correct an error or omission, where there is an expectation for the taxpayer to file or comply
- an application is made after the CRA has already received information from third party sources regarding the potential involvement of a specific taxpayer (or of a related taxpayer) in tax non-compliance.”
In sum, an unprompted application for the VDP can be made by a taxpayer only where they have NOT been contacted by the CRA with respect to an identified compliance issue related to the subject matter of the disclosure. Once a contact of that nature has occurred, any VDP application made will be treated as a prompted application, eligible (if accepted by the CRA) for only Limited Relief.
The CRA notice of the changes to the VDP can be found on the Agency’s website at https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/voluntary-disclosures-program/changes-vdp.html. The updated Information Circular, which provides significantly more detailed information about those changes, is available on the same website at https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic00-1.html.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
