CRA Foreign Income Matching and the Voluntary Disclosures Program: Why Acting Quickly Matters
The Canada Revenue Agency (CRA) is receiving increasing amounts of financial information from foreign governments and financial institutions.
In recent months, taxpayers have received CRA foreign income matching letters advising that CRA obtained information from foreign sources indicating that income may not have been reported on Canadian tax returns. In many cases, CRA has simply reassessed the taxpayer based on the information received.
What many taxpayers do not realize is that these letters often identify only one item of foreign income. The greater risk is that the information may prompt further CRA review, audit activity, or additional information exchanges that reveal other unreported foreign assets, investment accounts, rental properties, trusts, corporations, or sources of income.
For taxpayers with broader foreign reporting issues, acting quickly may preserve access to the Voluntary Disclosures Program (VDP).
CRA Is Receiving Information From Around the World
Canada participates in numerous international information-sharing agreements.
Through tax treaties, tax information exchange agreements, the Common Reporting Standard (CRS), and other information-sharing arrangements, CRA regularly receives information from foreign tax authorities and financial institutions.
Our office has recently seen CRA foreign income matching letters involving information obtained from countries including:
- United States;
- United Kingdom;
- Australia;
- United Arab Emirates;
- South Korea; and
- Peru.
In many cases, the CRA letter identifies a specific payment, such as foreign dividends, interest, investment income, or other amounts reported by a foreign institution. The letter may indicate that CRA has already reassessed the taxpayer to include the foreign income.
The Hidden Risk: CRA May Only Be Seeing Part of the Picture
A common mistake is assuming that the issue begins and ends with the amount identified in CRA’s letter. For example, CRA may receive information showing that a taxpayer received foreign dividends from a brokerage account.
However, the same taxpayer may also have:
- Unreported foreign rental income;
- Foreign bank accounts;
- Foreign corporations;
- Foreign trusts;
- Capital gains from foreign investments;
- Foreign pensions;
- T1135 reporting deficiencies; or
- Other foreign-source income that CRA has not yet identified.
The fact that CRA has identified one foreign reporting issue is often a reason to conduct a comprehensive review of all foreign income, assets, and reporting obligations before CRA expands its review.
Can You Still Make a Voluntary Disclosure After Receiving a CRA Letter?
In many cases, yes. A common misconception is that receiving a CRA letter automatically prevents a taxpayer from using the VDP. That is not necessarily correct.
CRA’s VDP contains both an Unprompted Program and a Prompted Program. Where CRA has already contacted a taxpayer regarding a compliance issue, the taxpayer may still qualify for relief under the Prompted Program, depending on the circumstances.
The key issue is timing.
Once CRA begins taking further compliance action, such as commencing an audit, issuing additional requests for information, or otherwise expanding its review, opportunities for voluntary disclosure may become more limited. As a result, taxpayers who receive a foreign income matching letter should act quickly to assess whether additional foreign income, foreign assets, or foreign reporting deficiencies exist.
A taxpayer who waits may find that CRA uncovers additional issues through audits, information requests, or foreign reporting exchanges before a disclosure is submitted, potentially limiting the relief available under the VDP. Determining whether a disclosure remains available requires a careful review of the CRA correspondence, the scope of the identified issue, and the taxpayer’s broader compliance history.
Foreign Reporting Issues Often Extend Beyond Income Tax
Foreign compliance issues frequently involve more than simply reporting income. Additional obligations may include:
- T1135 Foreign Income Verification Statements;
- T1134 filings relating to foreign corporations;
- Foreign trust reporting;
- Departure tax issues;
- Foreign tax credit claims;
- Reporting of foreign rental properties; or
- Cross-border residency issues.
A reassessment involving a single foreign dividend payment may therefore be only one part of a much larger compliance picture.
Kirshen Tax Law Can Help
Receiving a CRA letter regarding foreign income does not necessarily mean that all disclosure opportunities have been lost. However, it is often a warning sign that CRA has begun receiving information about the taxpayer’s foreign financial affairs.
A careful review can determine whether additional foreign income, assets, or reporting obligations remain eligible for relief through the Voluntary Disclosures Program and what steps should be taken before CRA obtains further information.
If you have received a CRA foreign income matching letter or are concerned about unreported foreign income, foreign assets, or T1135 reporting obligations, contact Kirshen Tax Law for a free consultation with a Toronto tax lawyer before CRA expands its review.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.