Disclosing Unreported Foreign Income or Offshore Accounts in Canada

Many people end up with foreign income they never reported in Canada. It might be interest from an account abroad, rent from a property overseas, or money earned while living elsewhere. Once you realize the omission, the worry is usually about penalties, interest and whether the CRA could treat it as something worse.

The CRA's Voluntary Disclosures Program (VDP) exists for people who want to come forward before the CRA finds the problem. This article explains whether foreign income and offshore accounts can fit, what you would need to put in the application, and what can get in the way.

This article covers Canadian federal tax law, which applies in every province.

Can the VDP cover foreign income and accounts?

The VDP lets a taxpayer correct errors or omissions, such as unreported income or unfiled returns. If the application is accepted, the CRA may give penalty and interest relief and will not refer the disclosed matter for criminal prosecution. The CRA specifically lists not reporting foreign income that is taxable in Canada among the income tax situations that may be eligible.

Foreign property reporting is a related but separate issue. On Form T1135, the CRA says the VDP may be available if the conditions are met, and to qualify you must file a valid disclosure. Penalties for missing the T1135 deadline may otherwise be relieved only under the taxpayer relief provisions, on written request.

Other situations the CRA lists as possibly eligible include these:

• Not reporting or under-reporting income.
• Not filing a return that is now a year late.
• Claiming ineligible expenses.
• Undisclosed tax liabilities, and corporations can apply too.

What the application must include

A valid application must be voluntary and complete, must involve interest, penalties or both, and must include information at least one year past the filing due date. It must also include payment of the estimated tax owing or a request for a payment arrangement.

The application consists of the completed and signed Form RC199, all returns, forms and schedules needed to correct the non-compliance, and payment or a payment arrangement request. For assets or income located outside Canada, supporting records generally cover the most recent ten years, rather than the six years that apply otherwise. Years with no errors or omissions need not be included.

If a representative submits the application for you, both you and the representative must sign it, and the name of any adviser who helped must be included.

What relief you can expect

The level of relief depends on whether the application is unprompted or prompted. An application is generally unprompted if the CRA has not communicated with you about the issue, or if the only contact was a general education letter. It is generally prompted if it follows a CRA communication identifying a specific error or setting a correction deadline, or follows third-party information about your non-compliance.

In either case, relief is on penalties and interest only. The CRA states that the VDP provides relief on penalties and interest, not on the tax itself, and tax owing must be paid. Eligible applicants are protected from prosecution for the disclosed information, and gross negligence penalties do not apply to that information.

What can stop or limit a disclosure

A disclosure is not voluntary if an audit or investigation has been started against you or a related taxpayer for the information you want to disclose. This includes investigations by law enforcement, securities commissions and other federal or provincial regulators, not just the CRA.

A CRA letter on a specific issue does not by itself end eligibility. If you are not under audit or investigation, the CRA treats the application as prompted and gives partial relief.

• Applications that produce a refund, or no tax or penalties owing, are generally not eligible.
• Requests for relief on penalties or interest already assessed are generally not eligible.
• Applications to make or alter an election, and insolvency for the years involved, are generally not eligible.
• The CRA may audit any information in an application whether or not relief is granted, and if it finds fraud or misrepresentation it may assess any year.
• For foreign property, the reassessment period is extended by three years if income from specified foreign property was not reported and Form T1135 was not filed, not filed on time, or filed inaccurately.

Relief is also limited by the ten-calendar-year window in subsection 220(3.1) of the Income Tax Act, so older years may get reduced or no relief.

What to do next

Start by gathering records for each affected year, including statements, slips, foreign tax paperwork and anything showing what you earned and when. If records are missing, a lawyer or accountant can help you work out how to present reasonable estimates.

If you are unsure whether to apply, you may hold preliminary discussions with the CRA on an anonymous basis. These are informal and non-binding. An anonymous discussion is not an application, and relief requires a signed Form RC199 with full documents and payment.

• Confirm you have received no CRA audit or investigation notice on this information.
• List every year with unreported foreign income or an unfiled T1135.
• Gather records for those years and estimate the tax owing.
• Plan how you will pay, or whether you will request a payment arrangement.
• Speak with a lawyer or accountant before you file.

Frequently asked questions