Canada: 405 Canada Inc v MNR

Last Updated: January 30 2019

Introduction – The Voluntary Disclosures Program, CRA Discretion, and Judicial Review

40538993 Canada Inc. v the Minister of National Revenue (2019 FC 51) demonstrates why you should consult an experienced Canadian tax lawyer before relying on any publication from the Canada Revenue Agency—especially a publication relating to the Voluntary Disclosures Program (VDP).

The Canada Revenue Agency's Voluntary Disclosures Program gives Canadian taxpayers an opportunity to come forward and correct previously deficient or incorrect tax filings. A valid voluntary disclosure must meet five conditions. First, it must be voluntary in the sense that the Canada Revenue Agency hasn't already contacted you about the information. Second, it must be complete: you can't pick and choose the non-compliance you opt to disclose; you must disclose all non-compliance and submit the tax returns required to correct that non-compliance. Third, the disclosed information must carry a penalty or a potential penalty. Fourth, the disclosure must include information that is at least one year past due. Finally, the disclosure must include a payment for the estimated tax owing on the disclosed information (a payment arrangement may be possible if the taxpayer can't afford to make full payment).

If a taxpayer's application meets the VDP's conditions for valid disclosure, the Canada Revenue Agency won't pursue criminal prosecution and will waive gross-negligence penalties that would otherwise apply. In addition, if the CRA accepts the taxpayer's disclosure under the VDP's more lenient General Program, it will waive all otherwise applicable monetary penalties and most otherwise applicable interest arising within the 10 prior calendar years of the taxpayer's VDP application.

For a more detailed look at the Voluntary Disclosures Program, see our article "CRA Voluntary Disclosure Program."

The CRA's legislative power to grant relief under the Voluntary Disclosures Program comes from subsection 220(3.1) of Canada's Income Tax Act. This legislation endows the Canada Revenue Agency with discretionary power to waive a taxpayer's interest or penalty otherwise payable either at will or on the taxpayer's request. (For voluntary disclosures involving GST/HST matters, the CRA's power to grant relief comes from similar discretionary sections of the Excise Tax Act—namely, sections 88, 281.1, 284, and 284.1 of the Excise Tax Act.) As a result of this empowering legislation, the CRA has complete discretion on whether to grant relief under the Voluntary Disclosures Program.

The CRA must, however, exercise this discretionary authority in a manner that is fair—both procedurally and substantively. For example, a CRA agent cannot arbitrarily deny a disclosure that meets the conditions under which the Canada Revenue Agency says it shall grant relief. By invoking a process called judicial review, one may ask the Federal Court of Canada to ensure that the Canada Revenue Agency has in fact fairly exercised its discretion when rendering a decision.

So, you have at least two options should a CRA agent unfairly deny your VDP application. First, the Canada Revenue Agency allows you to request a second internal review of a denied VDP application. Second, you may, under section 18.1 of the Federal Courts Act, apply for judicial review of the CRA's decision to deny your VDP application.

This article examines one such application for judicial review. In 4053893 Canada Inc. v The Minister of National Revenue, the Canada Revenue Agency denied a taxpayer's VDP application on the basis that the disclosure wasn't voluntary. The taxpayer successfully challenged this decision by relying on the CRA's own publication.

4053893 Canada Inc. v The Minister of National Revenue (2019 FC 51)

Brent Harris was the sole director and shareholder of 4053893 Canada Inc. (the "Corporation"). Mr. Harris hadn't filed personal tax returns from 2006 to 2015, and the Corporation hadn't filed corporate tax returns from 2003 to 2016.

In August 2016, the CRA sent Mr. Harris a letter asking him to file his personal tax returns. A few days after receiving the letter, Mr. Harris had a phone conversation with a CRA agent. During that phone call, Mr. Harris confirmed that the Corporation was still active, and the CRA officer told Mr. Harris that he had to file both personal and business tax returns.

In January 2017, the Corporation filed a no-name voluntary disclosure. (You can no longer file a no-name voluntary disclosure. 4053893 Canada Inc. occurred before the Canada Revenue Agency completely revamped the Voluntary Disclosures Program in early 2018.) A few months later, the Corporation completed its VDP application by revealing its identity to the CRA and submitting tax returns for the 2006 through 2016 taxation years.

The Canada Revenue Agency acknowledged that the Corporation's effective date of disclosure was January 17, 2017.

In September 2017, however, the CRA sent a letter denying the Corporation's VDP application. The CRA's letter claimed that the Corporation's disclosure wasn't voluntary because, before receiving the Corporation's disclosure, the CRA "started contacting [the Corporation] for the same matter or information being disclosed."

The Corporation asked the Canada Revenue Agency to conduct a second review of the VDP application. In particular, noting the lack of detail in the CRA's September 2017 letter, the Corporation explained that the CRA hadn't contacted the Corporation before its effective date of disclosure on January 17, 2017.

But a delegate of the Minister of National Revenue confirmed the denial. In support of the decision, the delegate pointed to the August 2016 phone conversation between Mr. Harris and the CRA officer, during which Mr. Harris confirmed that the Corporation was still active, and the CRA officer told Mr. Harris that he had to file both personal and business tax returns. The delegate concluded that this phone call rendered the Corporation's VDP application invalid.

The phone call, reasoned the delegate, disqualified the Corporation's disclosure because it constituted an enforcement action on a related party that would likely have uncovered the information that the Corporation sought to disclose.

The delegate's reasoning hinged on IC00-1R5, which, at the time, encompassed the Canada Revenue Agency's administrative guidelines on the Voluntary Disclosures Program. Paragraph 32 of these guidelines said that a VDP application was involuntary and thus invalid if both:

(1) "enforcement action relating to the disclosure was initiated by the CRA [...] on a person related to the taxpayer"; and

(2) "the enforcement action is likely to have uncovered the information being disclosed."

In response, the Corporation applied to the Federal Court of Canada for judicial review of the delegate's decision. The Corporation argued that the delegate's decision was unreasonable because the delegate hadn't explained why the enforcement action against Mr. Harris was likely to have uncovered the information that the Corporation sought to disclose.

The Federal Court of Canada sided with the Corporation and concluded that the delegate's decision was unreasonable. In particular, while the court agreed that the CRA had initiated enforcement action on a person related to the Corporation—i.e., its sole shareholder, Mr. Harris—the court found that the delegate had failed to analyze whether the enforcement action against Mr. Harris was likely to have uncovered the information that the Corporation disclosed. Reviewing the delegate's notes, the court saw that the delegate had focused only on the relationship between Mr. Harris and the Corporation:

I am of the view that the Delegate erred. The decision is best described as sparse in support of the conclusion that enforcement action against Mr. Harris personally was likely to have uncovered the information that was the subject of the applicant's voluntary disclosure. A mere description of the contents of the phone call between Mr. Harris and the CRA officer, even assuming the notes are accurate, does not address the concern raised. Neither the decision letter nor the "memo to file" engages in any analysis as to how the enforcement action against Mr. Harris would likely have uncovered the information disclosed by the applicant. The respondent's submissions to the effect that the Delegate could reasonably conclude, based on Mr. Harris's role as the sole owner, director, and employee of the applicant alone, that the applicant's information would have been uncovered in the course of the enforcement action against Mr. Harris is inadequate. Simply looking at the relationship between the parties is insufficient [4053893 Canada Inc, at para 22].

As a result, the Federal Court of Canada granted the Corporation's judicial-review application and ordered a different decision maker to review the VDP application.

Voluntariness Condition & Changes to the Voluntary Disclosures Program: Is 4053893 Canada Inc. Still Relevant?

It remains unclear whether the Federal Court's decision in 4053893 Canada Inc. remains relevant given the subsequent changes to the Voluntary Disclosures Program. On March 1, 2018, the Canada Revenue Agency overhauled the Voluntary Disclosures Program. These new VDP rules applied to all disclosure applications submitted on or after March 1, 2018. For a more general overview of the Voluntary Disclosures Program, see our VDP webpage. And for a more detailed review of the new VDP rules that took effect on March 1, 2018, see our article "Upcoming Changes to the Voluntary Disclosures Program (VDP)." To this end, the CRA released a new Information Circular for the post-March 2018 Voluntary Disclosures Program: IC00-1R6. The decision and reasoning in 4053893 Canada Inc. were based on the prior VDP Information Circular: IC00-1R5. One notable difference between the two Information Circulars concerns the conditions in which enforcement action on a related party will render a taxpayer's disclosure invalid. Paragraph 32 of the old Information Circular—i.e., the one at issue in 4053893 Canada Inc.—said that a VDP application was involuntary and thus invalid if both:

(1) "enforcement action relating to the disclosure was initiated by the CRA [...] on a person related to the taxpayer"; and

(2) "the enforcement action is likely to have uncovered the information being disclosed."

But the current Information Circular, IC00-1R6, excludes the second requirement—i.e., that the enforcement action on a related party "is likely to have uncovered the information being disclosed." In other words, if 4053893 Canada Inc. had been decided under the current version of the Voluntary Disclosures Program, the Federal Court may very well have upheld the CRA's decision to deny the disclosure.

Tax Tips – Judicial Review on Voluntary Disclosure Applications

If you're non-compliant with your tax obligations, you risk triggering the Income Tax Act's or the Excise Tax Act's various monetary and criminal penalties. An application under the Canada Revenue Agency's Voluntary Disclosures Program may offer a remedy. But you lose this option if the CRA discovers your mistake beforehand. So, speak with one of our experienced Canadian tax lawyers today. We can review your situation and discern whether you're indeed non-complaint. If so, we will carefully plan and prepare your disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will accept your disclosure but also—as demonstrated in 4053893 Canadian Inc.—lays the groundwork for a judicial-review application to the Federal Court should the Canada Revenue Agency unfairly deny your disclosure.

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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