August 2025 Changes: Launch of the Israeli Voluntary Disclosure Procedure (VDP)
In August 2025, the Israel Tax Authority (ITA) launched a comprehensive Voluntary Disclosure Procedure (VDP), designed to encourage taxpayers to regularize previously undeclared income or assets. The program, available until August 31, 2026, offers participants immunity from criminal prosecution if they make full, truthful, and timely disclosure.
For Canadian taxpayers with financial, business, or personal ties to Israel, this program provides an important compliance opportunity—particularly given the automatic exchange of financial data between Israel and Canada under the OECD’s Common Reporting Standard (CRS).
Key features of the 2025 Israeli VDP include:
- Elimination of anonymous filings: Taxpayers must fully identify themselves, eliminating prior mechanisms for preliminary anonymous submissions.
- Two disclosure tracks: A Regular Track for comprehensive cases supported by documentation, and a Green Track for smaller or less complex cases where documentation is limited.
- Applicability to foreign residents: Non-Israeli taxpayers—including Canadians with Israeli assets or income—are explicitly included.
- Global reporting obligation: Disclosures must include all worldwide income and assets, covering real estate, business interests, digital or crypto holdings, and foreign bank accounts.
- Green Track thresholds: Financial assets under ILS 4,000,000; rental income up to ILS 250,000 annually; digital asset income up to ILS 500,000; and total digital asset value capped at ILS 1,500,000 as of December 31, 2024.
- Eligibility conditions: Applicants cannot be under CRA audit or investigation and must have no prior criminal convictions for tax offences.
October 2025 Clarifications from the Israel Tax Authority
In response to practitioner inquiries and taxpayer feedback, the ITA issued formal clarifications in October 2025. These address questions of eligibility, documentation standards, and penalty mitigation. Canadian taxpayers should take note of the following:
- Mandatory full disclosure: Submissions must include complete identification, tax years covered, all relevant income and asset details, and supporting documentation. Like Canada’s Voluntary Disclosure Program, incomplete or partial filings are rejected.
- Eligibility limitations: Taxpayers currently under Israeli or foreign investigation—even for unrelated issues—may be deemed ineligible.
- Documentation flexibility: Where original records are unavailable, professional affidavits (from accountants or Canadian tax lawyers) estimating income or asset values are acceptable but subject to ITA scrutiny.
- Penalty relief: Good-faith participants who pay all assessed taxes within prescribed timelines are generally exempt from civil or criminal penalties beyond the tax owed.
- Deductibility of professional fees: Only 50% of professional fees related to VDP assistance are deductible under Israeli tax law.
- Foreign tax credits: Credits are available solely for tax years covered by the VDP and must be substantiated with proof of taxes paid abroad.
Cross-Border Risks and Considerations for Canadian Taxpayers
Canadian residents with Israeli investments or income streams must coordinate disclosures carefully to ensure compliance under both Israeli and Canadian tax regimes.
- Information sharing: Israel and Canada exchange taxpayer data through the Canada–Israel Tax Treaty and the OECD’s CRS. Disclosures made under the Israeli VDP may become visible to the Canada Revenue Agency (CRA).
- Canadian reporting obligations: Filing Form T1135 (Foreign Income Verification Statement) remains mandatory for Canadians with foreign property exceeding CAD 100,000. Participation in Israel’s VDP does not replace Canadian reporting.
- Crypto and valuation consistency: Digital asset valuations must comply with both CRA and ITA standards; mismatches could trigger reassessments or penalties.
- No dual immunity: Israel’s criminal immunity does not extend to Canada. Any misrepresentation could still expose the taxpayer to CRA penalties or prosecution.
- Foreign tax credits: Because Israel’s clarifications limit allowable credits, Canadian residents should consult experienced cross-border tax lawyers to structure filings that minimize double taxation.
Pro Tax Tips
- Begin gathering records early—especially for accounts or properties held in Israel—and ensure both Canadian and Israeli disclosure requirements are satisfied.
- Determine whether the Green Track or Regular Track applies based on asset value and record availability.
- Coordinate your Israeli disclosure with experienced Canadian tax lawyers to avoid duplicate taxation and ensure CRA compliance.
- Maintain thorough records and independent valuations for digital assets, real estate, and securities.
- Track professional fees carefully, as only 50% are deductible under Israeli law.
- Confirm that you meet eligibility requirements—any existing audits or criminal proceedings may disqualify you from the program.
FAQs
Who is eligible for Israel’s Voluntary Disclosure Procedure?
Individuals, corporations, and trusts that are not currently under audit or investigation and have no prior convictions for tax-related offences may apply. Full and honest disclosure is mandatory.
Can Canadian taxpayers participate?
Yes. Canadian residents with Israeli income or assets can use the Israeli VDP to regularize holdings. However, they must also remain compliant with Canadian reporting, including Form T1135 and foreign income declarations.
What if I lack documentation?
Applicants missing records can submit professional affidavits from qualified accountants or lawyers. However, the ITA may use discretion to assess taxes on estimated values, potentially increasing liability.
Does the Israeli VDP protect against CRA review?
No. The VDP only offers protection under Israeli law. The CRA may still review or reassess a taxpayer if discrepancies arise between Israeli and Canadian filings.
How are foreign tax credits handled?
Credits are limited to years covered under the VDP and require verifiable evidence of taxes paid. Coordination between jurisdictions is crucial to avoid double taxation.
When does the program end?
The Israeli VDP remains open until August 31, 2026. Late or incomplete submissions may be rejected or redirected to the Regular Track.
Disclaimer: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of an experienced Canadian tax lawyer.