Unreported Rental Income: Can the VDP Fix It in Canada?

Many landlords start renting out a basement, a condo or a second property and simply do not report it. Years later they worry about what the CRA might do. The Voluntary Disclosures Program (VDP) is the CRA's route for coming forward before it finds the issue.

This article walks through how rental income is calculated, what the program can and cannot do, and what to expect on tax, interest and penalties. It is general information; your own facts may change the picture.

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

Does the VDP cover unreported rent?

The CRA lists not reporting or under-reporting income among the income tax situations that may be eligible for the program. Unreported rent fits that general description, but how the program applies to your case depends on your facts, so it is worth confirming with a tax professional.

The VDP lets you come forward to correct errors or omissions, such as unreported income or unfiled returns. If your application is accepted, the CRA may give penalty and interest relief and will not refer the disclosed matter for criminal prosecution.

How rental income is worked out

Rental income is reported for the calendar year, January 1 to December 31, on a statement of income and expenses. Reasonable expenses incurred to earn the rental income are deductible, and net rental income is gross income minus deductible expenses.

This is good news for a disclosing landlord. You are not taxed on every dollar of rent received. When you prepare the corrected returns, you can claim reasonable expenses you actually incurred to earn the rent, so keep receipts and statements. Claiming ineligible expenses is itself listed as a possible VDP situation, so be careful and accurate here.

Tax, interest and penalties: what to expect

The CRA says the VDP provides relief on penalties and interest, not on the tax itself. The tax owing must be paid.

How much relief depends on whether your 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.

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. Eligible applicants are protected from prosecution for the disclosed information, and gross negligence penalties do not apply to it.

What the application needs

Your application needs a completed, signed Form RC199, all returns, forms and schedules needed to correct the non-compliance, and payment or a request for a payment arrangement for the estimated tax owing. The CRA says it will consider fully completed applications only.

• Supporting documents 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.
• The application must be voluntary and complete, involve interest, penalties or both, and include information at least one year past the filing due date.
• It is not voluntary if an audit or investigation has already been initiated against you or a related taxpayer for the disclosed information, including one by law enforcement, a securities commission or another federal or provincial regulator, not just the CRA.
• If you cannot pay in full, you may request a payment arrangement, but approval is not guaranteed.
• If your sale of a property is also involved, the principal residence exemption is allowed only if the sale and designation are reported on the return.

The CRA also reserves the right to audit any information in a VDP application whether or not relief is granted.

What to do next

• List each property, the years it was rented, and the rent received in each calendar year.
• Gather leases, bank deposits, and receipts for expenses tied to earning the rent.
• Check whether you have received any CRA letter about the issue, since that affects whether you are prompted or unprompted.
• Prepare the corrected returns and estimate the tax owing, then plan payment or a payment arrangement.
• Speak with a tax lawyer or accountant before filing, so that the application is complete the first time.

Frequently asked questions