Voluntary disclosure for unreported rental income

After filing the personal tax returns one year for a married couple, one spouse casually mentioned that they owned three rental properties in Toronto.  These investments had never been mentioned to anyone at our firm, and when questioned why, the client stated that “we are not making any money on them after all our expenses, so I didn’t think we needed to report anything”.  This of course, is not a valid reason to not report rental income or losses.  Even if losses were incurred, they could have been used against other income earned by the clients.

Worried about the risk of an audit which could result in penalties for unreported income, we quickly suggested to the client that they file a voluntary disclosure with the Canada Revenue Agency (CRA) and report the rental income going back to when they bought the first property 4-5 years ago.

The client was worried that with their busy schedule, it could take them a month or two to gather all the income and expenses for the properties, as well as the purchase documents for each of them.

Within a week of this discussion, we filed a voluntary disclosure on what is called a “no-names” basis.  A “no-names” voluntary disclosure allows a taxpayer to provide the CRA with facts relating to their case, without providing any information about themselves (aside from their gender and first three characters of their postal code).  This bought the taxpayer more than 90 days to gather the rental income information, as well as receive confirmation that the voluntary disclosure file has been opened.  If the client was randomly audited for the years in question, penalties would not have applied due to the voluntary disclosure filing.

Fast forward about three months where the client provided us with all the information needed to complete the voluntary disclosure filing.  Approximately nine months after our tax-time meeting with the client where we learned of the unreported income, the voluntary disclosure was accepted by the CRA, and the clients’ personal tax returns were being adjusted by the CRA to include the rental income and losses.

As a result of this assignment, we were able to achieve the following for the client:

Avoid CRA penalties for unreported income
Correct all prior year personal tax returns where there was rental activity
Ensure the rental income and expenses were claimed in the most tax efficient matter.  Once all the tax returns were adjusted, the client actually received a refund of taxes due to losses in certain year.
Restore their peace of mind with respect to CRA (i.e., from their tax obligations).