Proposed Changes To The Canada Revenue Agency's Voluntary Disclosures Program - Tax Authorities

Introduction

On June 9, 2017, the Canada Revenue Agency (the "CRA") proposed significant changes to the Voluntary Disclosures Program (the "VDP"), which, if implemented, will have the effect of significantly narrowing the criteria for eligibility under the VDP and reducing the extent of penalty and interest relief under the VDP in some cases. The proposed changes are set out in Draft Information Circular IC00-1R6¹ (generally applicable to income tax disclosures) and Draft GST/HST Memorandum 16.5² (generally applicable to GST/HST disclosures). If implemented, the proposed changes will take effect January 1, 2018.

The Current VDP

The VDP offers taxpayers who have previously failed to disclose information to the CRA or have provided inaccurate or incomplete information to the CRA the opportunity to make a disclosure to the CRA to correct the prior inaccurate or incomplete information without being subject to penalties or charges under the Income Tax Act (Canada) (the "Act").³ The stated objective of the VDP is to "[encourage] taxpayers to voluntarily come forward and correct previous omissions in their dealings with the CRA".⁴

The requirements for the current VDP (applicable to income tax and GST/HST disclosures) are set out in Information Circular IC00-1R5.⁵

Named and No-Name Disclosures

Disclosures under the current VDP may be made on a named or a no-name basis.

A "named disclosure" is a disclosure in which the identification of the taxpayer is provided in the initial submission to the CRA. Generally, a named disclosure must include the name, address, contact information and identification tax number (i.e., social insurance number, business number, trust account number, etc.) of the taxpayer.

A "no-name disclosure", on the other hand, does not provide any information as to the taxpayer's identity, other than the first three characters of the taxpayer's postal code, and, where the taxpayer is an individual, the taxpayer's gender and age. The main advantage of the no-name disclosure is that it gives the taxpayer the opportunity to engage in initial discussions with the CRA on an anonymous basis. Based on the information provided in the no-name disclosure, the CRA may confirm that there is nothing in the submission that immediately disqualifies the taxpayer from the VDP.

In a no-name disclosure, the identity of the taxpayer must be provided to the CRA within 90 days. However, before the 90-day period elapses, the taxpayer may decide not to proceed with the disclosure.⁶

Under the current VDP, the effective date of disclosure (the "EDD") is generally the date the CRA receives the named or no-name disclosure, provided that the disclosure contains the requisite information and meets the conditions of a valid disclosure (discussed in further detail below). From the EDD, the taxpayer is granted protection against penalties and prosecution under the Act. By contrast, under the current VDP, it is possible for a taxpayer to make a no-name disclosure to the CRA and obtain protection from penalties or prosecution under the Act before the taxpayer's identity is provided to the CRA.

Conditions of a Valid Disclosure

Under the current VDP, a disclosure will qualify as a "valid disclosure" if: it is voluntary; it is complete; it relates to information that is at least one year past due; and it involves the application or potential application of a penalty.

In general, a disclosure will be considered "voluntary" unless enforcement action relating to the disclosure has been initiated by the CRA (or another authority or administration) and the taxpayer was aware of or had knowledge of the enforcement action at the time of making the disclosure. For the purposes of the VDP, "enforcement action" includes requests, demands or requirements issued by the CRA to the taxpayer or to persons related to or associated with the taxpayer for the purposes of the Act, and any audit, investigation or other enforcement action by another authority or administration (e.g., a provincial securities commission).

A disclosure will generally be considered "complete" if the taxpayer provides full and accurate facts and documentation to the CRA for all taxation years where there was previously inaccurate, incomplete or unreported information. However, a disclosure will generally not be disqualified on the basis that it is "incomplete" simply because it contains minor errors or omissions.

Relief from Penalties, Interest and Charges

Under the current VDP, if the CRA accepts a taxpayer's disclosure as having met the conditions of a valid disclosure, applicable penalties (including late-filing penalties) will be waived or cancelled. Accordingly, a taxpayer who makes a valid disclosure will have to pay any outstanding taxes plus interest, but will not be subject to penalties under the Act. However, relief from penalties in respect of disclosures made on or after January 1, 2005 is limited to taxation years that ended within the previous 10 years. A taxpayer who makes a valid disclosure will also not be subject to prosecution under the Act.

In addition to penalty relief, if a disclosure is accepted as a valid disclosure, the taxpayer may be granted relief from interest in respect of taxation years before the three most recent taxation years (subject to the 10-year limitation period). However, such relief is discretionary.

Circumstances Where No Relief is Available

There are some circumstances where a taxpayer will not be eligible for relief under the current VDP, including: elections which entitle the taxpayer to choose or elect certain tax treatment under the Act (e.g., section 216 elections); advance pricing arrangements; rollover provisions under the Act (e.g., subsection 85(1) rollovers); and, bankruptcy returns.

The Proposed VDP

The proposed changes generally have the effect of limiting which taxpayers will be eligible for relief under the VDP, and the extent of penalty and interest relief available under the VDP.

Elimination of No-Name Disclosures

The proposed VDP eliminates the ability of a taxpayer to make a no-name disclosure to the CRA and be granted protection from penalties or prosecution under the Act before the taxpayer's identity is provided to the CRA.

Under the proposed VDP, a taxpayer will still be able to participate in preliminary discussions on a no-names basis with the CRA; however, such discussions will be non-binding. Draft IC00-1R6 confirms that preliminary, no-name discussions with the CRA "do not constitute acceptance into the VDP and have no impact on the CRA's ability to audit, penalize or refer a case for criminal prosecution".⁷ Rather, such discussions are intended to provide the taxpayer with information about the VDP process, the risks of non-compliance and the available relief.

Under the proposed VDP, the taxpayer's EDD (i.e., the date after which the taxpayer is granted protection from penalties and prosecution under the Act) will be the date on which the taxpayer files the prescribed form providing, inter alia, the taxpayer's name, address, contact information and identification tax number. Additionally, a taxpayer will be required to disclose the name of any advisor who provided assistance in respect of the subject matter of the disclosure.

Payment of Taxes Required

As discussed above, under the current VDP, a disclosure must be voluntary, complete, relate to information that is at least one year past due and involve the application or potential application of a penalty in order qualify as a "valid disclosure" that is eligible for relief.

The proposed VDP adds a fifth requirement for a "valid disclosure", namely, that the disclosure must also include payment of the estimated taxes owing.

Draft IC00-1R6 states that, where a taxpayer is unable to pay the estimated taxes owing, the taxpayer may provide security to the CRA and enter into a payment arrangement for the outstanding amount. However, such an arrangement will only be considered in "extraordinary circumstances" and must be supported by evidence of the taxpayer's income, expenses, assets and liabilities.

Limited Relief from Penalties and Interest for "Major Non-Compliance"

Under the proposed VDP, there will be two tracks for disclosures: the "General Program" and the "Limited Program".

If a taxpayer's disclosure is processed under the General Program, the taxpayer will be eligible for penalty relief (including late-filing penalties), and will not be subject to prosecution under the Act. Additionally, the CRA may grant partial interest relief (generally 50%) in respect of taxation years before the three most recent taxation years.

Similarly, if a taxpayer's disclosure is processed under the Limited Program, the taxpayer will not be subject to prosecution under the Act. However, penalty relief will be limited to gross negligence penalties. Other penalties, such as late-filing penalties, will continue to apply. Furthermore, the taxpayer will be ineligible for interest relief.

Additionally, if a taxpayer's disclosure is processed under the Limited Program, the taxpayer will be required to waive objection rights relating to the disclosure and the assessed taxes. Objections in this case will only be permitted in respect of calculation errors, characterization issues (e.g., income vs. capital gains treatment) or matters that are unrelated to the disclosure.

Under both the General Program and the Limited Program, the 10-year limitation period for penalty and interest relief will continue to apply.

Draft IC00-1R6 states that the determination of whether a disclosure should be processed under the General Program or the Limited Program will be made on a case-by-case basis. Disclosures in respect of "major non-compliance" will be processed under the Limited Program, including:

situations where the taxpayer made "active efforts to avoid detection" through the use of offshore vehicles or other means;
disclosures involving large dollar amounts or multiple years of non-compliance;
situations where the taxpayer is "sophisticated";
disclosures that are made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns; and
any other circumstance in which a "high degree of taxpayer culpability" contributed to the failure to comply.

Notably, the above-listed factors can be interpreted quite broadly and require subjective assessments which introduce uncertainty as to how the proposed VDP will be administered. Without further guidance from the CRA, this change will make it more difficult for taxpayers and their advisors to determine whether a disclosure will be processed under the Limited Program.

Additional Circumstances Where No Relief Is Available

The proposed VDP also introduces new restrictions on which taxpayers and types of omissions will be eligible for relief under the proposed VDP.

In particular, corporations with gross revenue in excess of $250 million in at least two of the last five taxation years and persons who are in receivership or have become bankrupt will no longer be eligible to make a disclosure under the proposed VDP.

Relief under the proposed VDP will also be unavailable where the disclosure involves:

the reporting of income from the proceeds of crime;
transfer pricing adjustments or penalties; and
applications which depend on an agreement being made at the discretion of the Canadian competent authority under the provisions of a tax treaty.

Changes to the VDP for GST/HST Disclosures

The proposed VDP for GST/HST disclosures introduces three tracks for disclosures: "Track One", "Track Two" and "Track Three".

Disclosures involving GST/HST "wash transactions"⁸ that are eligible for a reduction of penalties and interest under the CRA's policy on wash transactions will generally be processed under Track One. If a registrant's disclosure is processed under Track One, the registrant will generally be eligible for 100% relief from penalties and interest.

Disclosures involving wash transactions that are not eligible under Track One, reasonable errors, failures to file information returns, no gross negligence or avoidance of tax, or over-claimed rebates, will generally be processed under Track Two. If a registrant's disclosure is processed under Track Two, the registrant will generally be eligible for 100% relief from any penalties and 50% relief from interest.

Disclosures involving "major non-compliance" will be processed under Track Three. Such disclosures include:

situations where GST/HST was charged or collected but not remitted;
situations where the registrant made "active efforts to avoid detection" (e.g., through the underground economy);
disclosures involving large dollar amounts or multiple years of non-compliance;
disclosures involving "sophisticated" registrants;
disclosures made after an official statement from the CRA with respect to a focus of compliance or following CRA correspondence or campaigns;
situations involving "deliberate or wilful default or carelessness amounting to gross negligence"; and
situations where "a high degree of culpability" contributed to the failure to comply.

If a registrant's disclosure is processed under Track Three, the registrant will be required to waive objection rights relating to the disclosure and the assessed taxes. Objections in this case will only be permitted in respect of calculation errors, characterization issues (e.g., taxable supplies vs. exempt supplies) or matters that are unrelated to the disclosure.

The 10-year limitation period for penalty and interest relief applies under all three Tracks. Additionally, under all three Tracks, the registrant will not be referred for prosecution under the Act.

Conclusion

The proposed changes to the VDP, if implemented, will come into effect on January 1, 2018. As a result of these changes, the criteria for eligibility under the VDP will be significantly narrowed and the extent of penalty and interest relief will be significantly reduced in some cases, as compared to the current VDP. Additionally, the concept of "major non-compliance" will introduce a significant degree of uncertainty as to how a taxpayer's disclosure will be dealt with under the proposed VDP.

In light of these changes, taxpayers who wish to make a voluntary disclosure to the CRA should consider doing so before December 31, 2017.

Footnotes

1 Canada Revenue Agency, Draft Information Circular – IC00-1R6, "Voluntary Disclosures Program" (June 2017)[Draft IC00-1R6].

2 Canada Revenue Agency, Draft GST/HST Memorandum 16.5, "Voluntary Disclosures Program (June 2017).

3 Income Tax Act, RSC 1985, c 1 (5th Supp).

4 Canada Revenue Agency, Information Circular – C00-1R5, "Voluntary Disclosures Program" (January 2017) at para 8.

5 Ibid.

6 In this case, however, the taxpayer remains at risk of the CRA subsequently finding the omission and assessing the applicable taxes, penalties and interest, in addition to prosecution under the Act.

7 Draft IC00-1R6, supra note 1 at para 39.

8 Generally, a "wash transaction" is a transaction where the GST/HST may not have been collected but the payor (i.e., the recipient of the supply) should be entitled to full input tax credits in respect of such tax, if applied correctly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Canada: Proposed Changes To The Canada Revenue Agency's Voluntary Disclosures Program