CRA Voluntary Disclosure Program: Track 1 vs Track 2

The CRA Voluntary Disclosure Program (VDP) allows taxpayers who have unreported income, unfiled returns, or incorrect information on prior returns to come forward and correct the record. In exchange for voluntary disclosure, CRA provides relief from prosecution and, depending on the track, partial or full relief from penalties.

The program was overhauled in 2018 and now operates with two tracks. Track 1 (Limited Relief) is the general program for most disclosures. Track 2 (Wash Transactions) applies to narrow circumstances where the tax owing is minimal or zero. The 2018 changes made the program significantly less generous than it was before, particularly for large tax debts and for disclosures involving income from offshore sources.

The VDP is the Canadian companion to the IRS Streamlined Procedures. Cross-border taxpayers who need to come into compliance in both countries often use the IRS Streamlined program for the US side and the CRA VDP for the Canadian side.

The four conditions

CRA accepts a VDP application only if all four conditions are met:

1. Voluntary. The disclosure must be made before CRA contacts the taxpayer about the issue. If CRA has already started an audit, sent a request for information, or initiated enforcement action related to the unreported income, the disclosure is not voluntary. The timing matters: once CRA’s letter arrives, the VDP door closes for that issue.

2. Complete. The disclosure must include all relevant information for all tax years affected. A partial disclosure (revealing some unreported income but not all) does not qualify. CRA expects full cooperation, including providing supporting documents.

3. Penalty. There must be a penalty that would otherwise apply. If the correction would not result in a penalty (e.g., a minor adjustment that does not trigger late-filing or gross negligence penalties), the VDP is not the right mechanism; just file an adjustment request (T1-ADJ).

4. Payment. The estimated tax owing must be included with the application, or a reasonable payment arrangement must be proposed. CRA does not accept VDP applications without a plan to pay.

Track 1: Limited Relief (general program)

Track 1 applies to most disclosures: unreported income, unfiled returns, unreported foreign property (T1135), unreported foreign trust income (T1141/T1142), and other omissions that would result in penalties.

What you get:

• Gross negligence penalties (ITA 163(2)) are waived. These are the severe penalties (50% of the tax underpaid) that apply when the taxpayer knowingly or recklessly omitted income.
• Late-filing penalties (ITA 162(1)) may still apply (5% of the balance owing plus 1% per month, up to 12 months). The VDP committee has discretion to reduce these.
• Interest is NOT relieved. Interest runs from the original due date of the tax to the date of payment. For disclosures covering many years, the interest can be substantial (compounding at the prescribed rate, which has been 5-8%+ in recent years).
• Prosecutorial immunity: CRA will not refer the case for criminal prosecution.

What you owe:

• The full tax on the unreported income
• Interest on the tax from the original due date
• Potentially reduced late-filing penalties

The 2018 change: before 2018, the VDP provided full penalty and interest relief (interest was charged only for the most recent 3 years). The 2018 overhaul removed interest relief, making Track 1 significantly more expensive for disclosures covering multiple years.

Track 2: Wash Transactions

Track 2 applies to narrow situations where the tax consequence is minimal or zero:

• Income was reported by the wrong entity (e.g., reported personally instead of through a corporation, or vice versa)
• Income was reported in the wrong year (timing difference that washes over time)
• The amounts offset (e.g., an unreported deduction offsets unreported income)

What you get:

• Full penalty relief (all penalties waived)
• Full interest relief
• Prosecutorial immunity

Track 2 is genuinely no-cost (other than the professional fees to prepare the disclosure), but the qualifying circumstances are narrow. Most cross-border disclosures (unreported foreign income, unfiled information returns) do not qualify for Track 2.

The no-name pre-screening

The VDP allows a no-name pre-screening: you describe the situation to CRA’s VDP unit without identifying the taxpayer. CRA reviews the facts and tells you whether the disclosure would be accepted and under which track. If the answer is favorable, you proceed with the full application, identifying the taxpayer. If the answer is unfavorable, you walk away without having identified the taxpayer.

This is a risk-reduction mechanism. It prevents the taxpayer from revealing their identity to CRA and then being denied VDP relief (which would leave them exposed to the full penalties and interest, plus CRA now knows about the issue).

The no-name process is not binding on CRA: the final determination is made after the full application is reviewed, and CRA can change its position. But in practice, the no-name pre-screening provides a reliable indication of the outcome.

Cross-border VDP + IRS Streamlined

For cross-border taxpayers who need to come into compliance in both countries:

US side: the IRS Streamlined Foreign Offshore Procedures cover 3 years of delinquent returns and 6 years of delinquent FBARs, with no penalties if the failure was non-willful. The Streamlined program is more generous than the CRA VDP: no interest on the back tax (if zero tax was owed, which is common for Americans in Canada where the FTC covers everything), no penalties, and a simpler certification process.

Canadian side: the VDP covers as many years as are delinquent. Interest runs for the full period. Late-filing penalties may apply. The VDP is less generous but still preferable to CRA discovering the issue independently (which triggers full penalties, interest, and potential prosecution).

Coordination: the two programs can be run simultaneously. The IRS Streamlined submission covers the US filings; the VDP application covers the Canadian filings. The professional fees for both are an investment in compliance that is less than the penalties for either.

Common cross-border VDP scenarios:

• A Canadian who moved to the US years ago and never filed a Canadian departure return (ITA 128.1)
• A Canadian resident who had US-source income and never reported it on the T1
• A Canadian who failed to file T1135 (foreign property over $100,000 CAD) for years when they held US brokerage accounts or US real estate
• A US citizen in Canada who never filed T1135 or T1141/T1142 for US-reported accounts that also needed Canadian reporting

What should I do next?

If you have unreported Canadian income, unfiled Canadian returns, or missing information returns (T1135, T1141, T1142), consult a cross-border CPA before making a disclosure. The no-name pre-screening lets you test the waters without committing. Calculate the estimated tax, interest, and penalties to understand the total cost. If you also have US compliance issues, coordinate the VDP with the IRS Streamlined program.

• IRS Streamlined procedures: what do they cost?, the US compliance companion
• I’ve never filed a US return from Canada, for US citizens catching up
• I’m a dual US-Canada citizen: what do I file?, the annual obligations that should have been met

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.