Canada: Treatment of GST/HST Under the Proposed VDP Changes

Last Updated: November 6 2017

Proposed Changes to the CRA Voluntary Disclosures Program (VDP) – Treatment of GST/HST Under the Proposed VDP Changes - A Canadian Tax Lawyer Analysis

CRA Voluntary Disclosures Program (VDP) – Current Rules

The CRA Voluntary Disclosures Program (VDP or Canadian Tax Amnesty) is a program administered by the Canada Revenue Agency (CRA). This program allows Canadian taxpayers to come forward and disclose any inaccuracies or incomplete information or omissions regarding their tax reporting. Under the current rules, the acceptance of a voluntary disclosure is predicated on the satisfaction of four requirements: 1) a penalty owing; 2) no ongoing enforcement actions; 3) the year in question must be at least one year old; and 4) the disclosure must be complete. If the VDP accepts a disclosure, the disclosing taxpayer will avoid criminal tax evasion prosecution and gain benefits from the waiver of civil tax penalties and partial interest relief. Call one of our top Canadian tax lawyers and find out how you can make a voluntary disclosure before the rules change.

Proposed Key Changes to the Voluntary Disclosures Program (VDP) in regards to GST/HST

On June 9, 2017, the CRA released proposed changes to the Voluntary Disclosures Program (VDP or Canadian Tax Amnesty) and released a draft information circular for the changes to the VDP for income tax and a separate draft information circular for the proposed treatment of GST/HST disclosures under the VDP. These changes were released for public comment and the new rules are expected to take effect in the fall of 2017. Under the existing rules there is no difference in the treatment of income tax and GST/HST voluntary disclosures.

In the proposals regarding GST/HST, the CRA is proposing to administer voluntary disclosures through three different tracks. Track 1 would apply only to eligible wash transactions and would grant full penalty and interest relief. A wash transaction is one where the supplier of a taxable supply has not remitted GST/HST because the supplier did not charge or collect the tax from the recipient and the recipient would have been entitled to a full input tax credit had the tax been applied correctly. In a wash transaction, the result in terms of tax to the CRA is nil because the tax that should have been remitted would have had a corresponding input tax credit; however, this is still considered incorrect reporting and normally carries an associated penalty. A wash transaction is eligible for Track 1 treatment where the taxpayer has not been previously assessed for the same mistake, has a satisfactory history of voluntary compliance, has remedied the situation to ensure that future tax is collected and remitted, and where the taxpayer was not acting negligently or carelessly in his conduct.

Track 2 is the general program and would apply to other wash transactions where one or more of the Track 1 eligibility requirements are not met, reasonable errors, failures to file information returns, over-claimed rebates, and where there was no gross negligence or deliberate avoidance of goods and services tax. Under Track 2, the taxpayer would be entitled to full penalty relief, but only 50% interest relief for years prior to the most recent three taxation years.

Track 3 is the limited program that would grant significantly more limited relief and will apply to situations where GST/HST was charged or collected but not remitted, where active efforts were made to avoid detection, where large dollar amounts or multiple years of non-compliance are involved, where the taxpayer is a sophisticated registrant, where the disclosure is made following certain CRA correspondence or campaigns, and where the taxpayer’s actions amounted to gross negligence or where there was a high degree of registrant culpability. For these circumstances, the disclosing taxpayer would still avoid criminal prosecution, but will receive neither penalty nor interest relief except for the non-application of the gross negligence penalty.

Another important change being proposed is that taxpayers will no longer be able to ask to limit the years being disclosed in order to meet completeness requirements. Instead, taxpayers will be required to estimate all unreported income with all reasonable efforts regardless of the availability of books, records, or documentation. Additionally, the VDP only has legal authority to grant penalty and interest relief in respect to the most recent ten years. As such, this change is particularly problematic where a taxpayer’s situation extends more than ten years prior because the taxpayer will be required to estimate his or her unreported income regardless of the availability of books and records, but also be ineligible for any penalty or interest relief for the years extending beyond the ten year period.

Furthermore, the current rules for the VDP allows a taxpayer to make a no-name voluntary disclosure whereby the taxpayer provides details of his situation minus any identifying information and is able to get a provisional ruling from the VDP regarding the eligibility of the particular fact scenario. Where a no-name voluntary disclosure is made, the effective date of disclosure is considered when the no-name voluntary disclosure is submitted and will protect the taxpayer if any enforcement action is taken after the no-name voluntary disclosure is submitted but before the identity is disclosed. Under the new rules, no-name voluntary disclosures will no longer be possible. Instead, the VDP will engage in pre-disclosure discussions with the taxpayer which is essentially equivalent to a no-name voluntary disclosure except that the taxpayer will receive none of the protection granted by the no-name voluntary disclosure and the effective date of disclosure will only begin once the taxpayer’s identity is revealed and the appropriate forms are filed.

The new rules will also impose an additional requirement that the taxpayer estimates the amount of tax that will be owed due to the voluntary disclosure and provide a payment of that amount with his voluntary disclosure application to the VDP. If a taxpayer cannot make the payment of the estimated tax owing, then the taxpayer must make a payment arrangement support by adequate security with CRA Collections officials in order to qualify. However, the guidelines indicate that a payment arrangement of this sort will only be accepted under extraordinary circumstances, thereby increasing the burden on the disclosing taxpayer.

Tax Tip - Make a Voluntary Disclosure Under the Current Rules

Although the proposed changes to the VDP do not change the fact that voluntary disclosures can be a useful and beneficial program for taxpayers in limited circumstances, allowing one to come forward and correct any past reporting deficiencies, it is clear that the CRA intends to heavily curtain the availability and benefits of the VDP. Making a disclosure after these changes come into effect will be significantly more burdensome for the taxpayer, particularly where the taxpayer expects that he or she will only qualify under the Limited Program. With the changes being expected to come into effect later this year, any taxpayers that are considering a voluntary disclosure should contact our experience Canadian tax lawyers immediately in order to qualify and take advantage of the current voluntary disclosure policy.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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