Canada: Concealing Or Confessing: The Voluntary Disclosures Program

An ancient proverb helps us understand the Canada Revenue Agency's ("CRA") Voluntary Disclosures Program ("VDP"):

The VDP is a CRA fairness initiative designed to give taxpayers, who are not under audit, the chance to come forward and correct inaccurate or incomplete information, or to disclose previously unreported information, without penalty or prosecution. The VDP ensures there are adequate incentives for taxpayers to correct omissions and mistakes. Once the CRA accepts a disclosure as voluntary, no tax evasion charges will be laid and no gross negligence penalties will be imposed. Only the tax and interest must be paid. The CRA may also waive some of the accrued interest on the tax for years that are or would have been statute barred.

While this article focuses on the VDP under the Income Tax Act ("Act"), the VDP also applies to most taxes and duties administered by the CRA, including those imposed under the Customs Act, the Customs Tariff, and GST imposed under the Excise Tax Act. There are also VDPs for provincial taxes, but some provinces' programs are not as formalized as the CRA's.

Eligibility

For a voluntary disclosure to be valid, four conditions must be satisfied. First, the disclosure must be voluntary. It is essential that disclosure is made prior to any audit, investigation or other enforcement action being initiated by the CRA or other authorities or administrators with which the CRA has information exchange agreements, such as the other federal government departments and provincial revenue ministries. A supposed confession made only after being found out does not qualify as a confession.

Second, the disclosure must be complete. Generally, the CRA will consider a disclosure complete as long as it is "substantially" complete. Significant discrepancies between figures provided and verified figures, or a failure to disclose for a sufficient number of years, may render a disclosure incomplete. Interest and penalties can then be assessed on the entire amount of tax and prosecution may proceed. Whether a disclosure is accepted as complete is based on indications that the taxpayer made every attempt to provide correct and complete information. The confession must be thorough.

Third, the disclosure must involve a monetary penalty, which need only be applied to one reporting or accounting period. The omission must result in a penalty under the Act, otherwise the taxpayer need not seek penalty relief through the VDP.

Fourth, the disclosure must involve information that is one year or more overdue, or that is from a prior accounting period. Notwithstanding this condition, the CRA has announced it will accept disclosure of information less than one year overdue, provided the disclosure is not made to merely avoid late filing charges.

CRA policy permits voluntary disclosures to be submitted on a no-names (hypothetical) basis. This allows taxpayers and their representatives to gain insight into the implications of making a voluntary disclosure, before the taxpayer's identity is disclosed. However, a final determination of whether the CRA will accept a voluntary disclosure will not be confirmed until after the taxpayer's identity is disclosed and all the facts are verified.

Usually, the taxpayer must provide the CRA with its identity within 90 calendar days from the "effective date of disclosure", which is the date the CRA receives a written voluntary disclosure. During this 90-day period, the taxpayer is protected from penalties and prosecution. The CRA will close a no-names voluntary disclosure file, without further contact from the CRA, if at the end of this 90-day period the taxpayer's identity remains undisclosed. Generally, no extension to this 90-day period is allowed. However, the CRA will sometimes extend this 90‑day period to at least 120 days, to allow sufficient time to gather all the necessary information.

If a taxpayer does not complete a voluntary disclosure and is audited and subsequently assessed for unreported amounts, the taxpayer will be liable to pay the full amount of the taxes owing, plus interest and any penalties. The Act and other laws provide a wide range of penalties for offences, such as tax evasion, or failure to pay taxes, disclose income or file a return. The Act gives the CRA powers to impose fines, make third-party claims, seize property and even prosecute criminal charges.

Moreover, an officer, director, or agent of a corporation who acquiesces or participates in a corporation's tax evasion is also a party to and guilty of the offence and can be charged for the same offences. Where a corporation's income has been understated to evade tax, and a shareholder has appropriated all or part of the amount involved, both the corporation and the shareholder may be taxed on the amount and, in addition, each may face criminal charges.

Voluntary disclosures must be approached with utmost care and caution. On behalf of taxpayers, Gowlings usually initiates negotiations with the CRA by telephone and then provides a written submission, all on a no-names basis, to gauge the initial reaction. In the right situations, voluntary disclosures help taxpayers find mercy and avoid substantial penalties and interest.

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.