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Aug 22, 2012   //   by Kristiina   //   Blog  //  No Comments

Coming clean with the CRA—The Voluntary Disclosures Program (July 2012)

While it’s obviously preferable, when it comes to taxes, to file on time and to make sure the information provided to the Canada Revenue Agency (CRA) is complete and accurate (as each taxpayer certifies on the last page of his or her return), things don’t always happen that way. Taxpayers who are in financial difficulty and unable to pay their taxes may simply put off filing. More commonly, a taxpayer may discover, after filing a return for the year (or previous years), that an information slip was overlooked and a portion of income consequently not reported. Or, the taxpayer may receive an amended T4 after filing his or her return, necessitating a change in the return filed and, sometimes, an increase in tax payable. And, of course, some Canadians just put off doing what everyone agrees is an unpleasant task, and eventually can find themselves several years in arrears with respect to filing. The dilemma which arises, of course, is whether to come clean with the tax authorities, or “lie low” and hope the failure to file or error or omission is never discovered.

Where the needed change is in respect of a current year return, it’s relatively simple to set things right. In such circumstances, the taxpayer needs to write to the Tax Centre to which the original return was sent, notifying them of the error and providing the correct information. It is not necessary—in fact it is not a good idea—to send a second return containing the correct information to the CRA. Rather, in such circumstances, the CRA provides a form to be used, the T1-ADJ. While the use of the form, which is available on the Agency’s Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-adj/README.html, isn’t mandatory, using it does ensure that all the information required by the CRA to process the taxpayer’s request has been provided. Once the T1-ADJ is received, the corrected information should be incorporated into the taxpayer’s return and reflected on the amended Notice of Assessment ultimately issued by the CRA.

Where a failure to report income, or to file, or the erroneous claiming of a deduction or credit which is discovered by the taxpayer relates to a previous taxation year, the CRA provides taxpayers with another option, in the form of the Agency’s Voluntary Disclosures Program. As the name implies, the Program allows taxpayers to voluntarily disclose to the CRA any past errors or omissions or failures to file when required. Where the requirements of the program are met, the CRA is authorized to cancel (or “waive”) any penalties which might otherwise be assessed against the taxpayer. It’s important to note that only penalties may be forgiven, and that the taxpayer will, notwithstanding any voluntary disclosure, continue to be “on the hook” for any outstanding taxes, plus interest charges.

The CRA imposes four conditions which must be met before a disclosure will qualify under the program. They are as follows.

  • The disclosure must be truly voluntary in nature – that is, it must be initiated by the taxpayer and, in particular, must not be the result of the taxpayer’s knowledge of enforcement action about to be taken by the CRA. In other words, a taxpayer who “voluntarily” discloses past transgressions after finding out that he or she is about to be audited will not qualify under the Program.
  • Any disclosure made by the taxpayer must be “complete”, as that term is understood by the CRA. The taxpayer is expected to provide full and accurate reporting of all previously inaccurate, incomplete or unreported information. It’s not possible to make selective disclosure of, for instance, one tax year but not others. As well, the CRA will request documentation to verify the amounts to be disclosed. If that documentation shows that the initial disclosure contained significant errors or omissions, the disclosure will not qualify under the VDP. In such a case, the disclosed information will be processed by the CRA and the Agency will be able to apply interest and penalties to the entire outstanding amount.
  • The voluntary disclosure by the taxpayer must involve at least one penalty. Since the point of the VDP is to forgive penalties while collecting outstanding taxes and interest, there would be no point to seeking penalty relief where no penalties are involved. In such cases, the relevant information should simply be disclosed to the CRA, which will process it and assess any taxes and interest owed.
  • Finally, the taxpayer’s disclosure must generally include information which is at least one year past due. In other words, a disclosure could not normally be made in respect of a 2011 income tax return (which was due April 30, 2012) until May of 2013. The CRA will, in some circumstances, accept a disclosure of information which is less than one year past due, but such disclosure cannot be used by the taxpayer simply to avoid penalties. For instance, a taxpayer who fails to get his return in and his taxes paid by April 30 cannot make a “voluntary disclosure” a few days or weeks later simply in order to avoid the late-filing penalty which would otherwise be assessed.

Finally, a taxpayer who is considering making a voluntary disclosure (and whose situation meets the four criteria required by the CRA, as outlined above) can “test the waters”, to a degree, before deciding to make full disclosure. The CRA will accept a “no-name” disclosure from a taxpayer and will discuss the taxpayer’s situation with him or her on a hypothetical basis, providing the taxpayer with information on how an actual disclosure would be handled. The CRA’s policy with respect to such no-name disclosures requires the taxpayer who makes a no-name disclosure to provide identifying information within 90 calendar days from the effective date of disclosure, in order to “complete” the disclosure. During the 90-day period, the taxpayer is protected from prosecution and from the application of penalties. However if, at the end of the 90 day period the identity of the taxpayer remains unknown, the voluntary disclosure file will be closed without further contact from the CRA, and no extension of the 90-day period will be allowed to identify the taxpayer.

No one really likes paying taxes, and paying back taxes, plus interest, is even more unpalatable. However, for taxpayers who find themselves in a position where an investigation or audit by the CRA into their affairs would likely result in the payment of taxes, plus interest, plus penalties, or even a prosecution, the Voluntary Disclosure Program offers a way to “come clean” without the risk or prosecution, and without the often onerous penalties which can be levied by the tax authorities.


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.

 

Federal government tightens mortgage lending rules for residential borrowers … again (July 2012)

Canada was largely spared the sub-prime mortgage crisis which caused such economic havoc in the United States in the fall of 2008, and the effects of which continue to be felt. A much stricter regulatory regime and more conservative lending practices meant that both the Canadian financial and housing markets were, for the most part, unaffected by the debacle which occurred south of the border. Notwithstanding that, however, the federal Department of Finance has now moved, for the fourth time in the past four years, to tighten the rules which apply to lending for mortgages backed by the Canada Mortgage and Housing Corporation (CMHC).

To understand who will be affected by the most recent set of changes, some background is necessary. Under federal law, home purchasers whose down payment is less than 20% of the cost of the property must obtain mortgage insurance through CMHC. That insurance, the premiums for which are paid by the homeowner, guarantees the lender that in the event of default by the homeowner the federal government will make good on any deficiency. As well, the federal government backs private mortgage insurers’ obligations to lenders, subject to a deductible of 10% of the original principal amount of the mortgage. Overall, the Canadian government has a lot of exposure in the event of widespread mortgage defaults.

Over the past several years, the federal government has become increasingly concerned about the amount of debt being carried by Canadian families, and much of the recent increase in that debt has been secured by borrowers’ home equity. Of equal concern were the terms on which mortgages were being provided, as the amount of required down payment decreased and the time period over which the funds could be repaid (the amortization period) got steadily longer. Canadian mortgage lending practices never approached the degree of recklessness which came to characterize US mortgage lending in the past decade. Nonetheless, the federal government has become concerned that Canadians were taking on more and more debt related to home purchases, and were carrying that debt for unprecedented lengths of time.

Recently, Statistics Canada announced that Canadian families had reached a new milestone, in that, on average, such families were carrying a debt load equal to 152% of their annual income. While interest rates remain near historic lows, such levels of debt are perhaps manageable.  However, when interest rates rise, as they must and will do, overextended Canadians will begin to feel the pinch. With all of that in mind, perhaps, the recent changes announced by the federal government are aimed squarely at new residential home purchasers and current homeowners who seek to borrow against existing home equity.

The announced changes, which will take effect on July 9, 2012, limit the amount of home equity borrowing which is permitted, provide shorter amortization periods for home mortgages, impose more stringent income-to-debt-servicing ratios, and eliminate government-backed insurance entirely for the most expensive homes.

Until the summer of 2008, it was possible to buy a home in Canada with a zero down payment (in other words, the entire cost of the home was borrowed), and to amortize repayment of that cost over a period of up to 40 years. Successive changes implemented by the federal government have whittled away at those practices. Borrowers are now required to have at least a 5% down payment on a residential home purchase. And, under the new rules announced recently, the maximum amortization period on a residential mortgage will be reduced from the current 30-year maximum to 25 years.

When a would-be home purchaser applies for mortgage financing, there are two ratios commonly used to measure the risk associated with the borrower’s potential debt. The first of those, the gross debt ratio (GDS), is the percentage of the borrower’s gross (i.e., before tax) income needed to pay housing-related expenses, including mortgage payments, property taxes, and the cost of heating the home. The second ratio, the total debt service (TDS) ratio, is the percentage of the borrower’s gross income needed to pay all current debt obligations, including housing related expenses. The latest set of changes announced by the federal government will require, for CMHC-insured mortgages, that the borrower’s GDS not exceed 39% and that his or her TDS does not exceed 44%. Put another way, where a borrower seeks to buy a home and obtain a mortgage with less than a 20% down payment, he or she must be able to show that paying for housing related expenses will consume less than 39% of annual gross income and that all current debt obligations can be met with less than 44% of annual gross income. A borrower who cannot satisfy those requirements will not be eligible for a CMHC-insured loan.

Many Canadians have taken advantage of recent increases in real estate values by borrowing against the equity they have in their homes, either by refinancing the mortgage or by taking out a home equity line of credit. Their ability to do so will be somewhat curtailed after July 9, as the maximum mortgage (or home equity line of credit) amount which can be borrowed on a refinancing will be limited to 80% of the value of the property. The current limit of 85% was set in March 2011; prior to that date, the limit was 90%.

Finally, the federal government will no longer be providing CMHC insurance on homes which are purchased for more than $1 million. Consequently, purchasers of homes costing more than $1 million will be required to have at least a 20% down payment.

This most recent set of changes affecting home-related borrowings may well, as conceded by the Minister of Finance, mean that some would-be home owners will need to save a bit longer to realize that goal, or will perhaps have to purchase a smaller, less-expensive property. The hope is that taking such measures now will avoid a much greater problem, both for those borrowers and for the Canadian government and the Canadian economy as a whole, further down the road.
The Department of Finance press release and backgrounder outlining the new rules can be found on the Department’s Web site at http://www.fin.gc.ca/n12/12-070-eng.asp.


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.

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