How Much Interest Relief Does the VDP Give in Canada?

If you owe back taxes, the interest can be a large part of the bill. Many people ask whether the CRA cancels it if they come forward on their own.

This article explains how much interest relief the Voluntary Disclosures Program (VDP) normally gives, what decides your level, and how older years are treated. It is general information, so confirm your own situation with a lawyer or accountant.

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

The normal levels of relief

Unprompted applications normally receive 100% relief of the applicable penalties and 75% relief of the applicable interest. Prompted applications normally receive up to 100% relief of the applicable penalties and 25% relief of the applicable interest.

So the CRA does not cancel all interest in a typical case. Some interest generally remains payable, and the tax itself must always be paid.

What makes an application prompted or unprompted

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

A CRA letter about a specific issue does not by itself end eligibility. The CRA treats such an application as prompted if you are not under audit or investigation. The decision letter states which type applied to you, along with the relief level and eligible tax years.

How older years affect relief

The CRA's legal basis for cancelling penalties and interest is subsection 220(3.1) of the Income Tax Act. It lets the Minister waive or cancel all or part of any penalty or interest, and the request must be made on or before the day ten calendar years after the end of the taxation year.

Because of that limit, older years may get reduced or no relief. The CRA also describes relief as covering information going back up to 10 years from the disclosure date, with older information possibly getting reduced relief.

Relief runs up to the effective date of disclosure, which the CRA sets out in its acknowledgement letter, if you qualify. Supporting documents for income tax applications generally cover the most recent six years, or ten years for assets or income located outside Canada, and years with no errors or omissions need not be included.

GST/HST and cases that do not qualify

For GST/HST, the relief matches income tax: unprompted gets 75% interest relief and 100% penalty relief, and prompted gets 25% interest relief and up to 100% penalty relief. GST/HST wash transactions that qualify under Memorandum 16-3-1 can receive 100% relief of applicable penalties and interest, whether the application is unprompted or prompted.

• 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.
• A disclosure is not voluntary if an audit or investigation has begun for the same information.
• There is no right of objection to a VDP decision, though other options include the taxpayer relief provisions.

What to do next

• Work out whether the CRA has already contacted you about the issue, since that drives the relief level.
• List the tax years involved and note how old they are, given the ten-calendar-year window.
• Prepare the signed Form RC199, the needed returns and the payment or payment arrangement request.
• Ask a lawyer or accountant to estimate the tax, interest and penalties before you file.

Frequently asked questions