The Income Tax Act (Canada) (the "Act") imposes a variety of technical rules, filing requirements and reporting requirements. Failure to comply can lead to interest charges, penalties and, potentially, criminal sanctions. The degree of non-compliance can range from something as simple as failing to submit a tax information slip to a much more serious level of non-compliance like a deliberate failure to report income or transactions or to file tax returns. For most matters, the normal limitation periods do not apply so issues do not go statute-barred.
Whether a deficiency is deliberate or inadvertent, a taxpayer may want to remedy it. The problem is that there may be significant penalties and even criminal prosecution once the matter is brought to CCRA’s attention whereas, unless the taxpayer voluntarily discloses, the risk of independent discovery by CCRA may be low.
In recognition of these issues, the Canada Customs and Revenue Agency (the "CCRA") developed a voluntary disclosure program ("VDP") to encourage voluntary compliance with accounting, filing, payment and remittance obligations under the Act and the Excise Tax Act in respect of goods and services tax ("GST"). The purpose of the VDP is to encourage taxpayers to disclose deficiencies and self-correct them, thus rendering themselves compliant. The incentive to use VDP is if a taxpayer "voluntarily" comes forward and admits a deficiency, the CCRA can and will waive penalties and prosecution if the taxpayer pays all taxes and interest owing.
The VDP can be used to make disclosure, to correct incomplete or inaccurate information or to disclose information not previously reported including:
- Failure to report income;
- Failure to file tax returns and other reporting forms;
- Claiming ineligible expenses;
- Failure to remit source deductions; and
- Failure to withhold a portion of purchase price on the acquisition of assets from non-residents under section 116 of the Act.
The VDP can be used by any delinquent taxpayer from an individual to a large corporation.
The relief that is provided is determined on a case-by-case basis, but generally involves an up-front waiver from the CCRA of any penalties and their agreement not to prosecute. Unpaid taxes and interest, however, must be paid.
In the past, the VDP was operated by the Special Investigations Unit ("SI") of the CCRA. SI is the unit responsible for criminal and quasi-criminal investigations. This, not surprisingly, led to a reluctance on the part of taxpayers to participate in the program. In 2000, however, the program was transferred to the Appeals Division of the CCRA and this had led to a significant increase in disclosures. In the fiscal year 2001, 4,700 cases were opened under the VDP and $230 million in tax revenue was collected.
By its very nature, a voluntary disclosure involves the disclosure of certain information, which could be grounds for imposition of penalties or a criminal prosecution. It is prudent, therefore, for any person considering making a voluntary disclosure to obtain advice with respect to their legal position and to retain a lawyer to review the case and, if desired, to make the disclosure on their behalf. Often, first contact with the CCRA officials is made on a completely "no names" basis until such time as CCRA has confirmed that the disclosure is voluntary and meets all the requirements for waiver of penalties and prosecution.
According to CCRA, a valid voluntary disclosure must meet four criteria.
1. The disclosure must be voluntary.
A disclosure must be truly voluntary. If a disclosure is made at a time when the person might expect that the CCRA will, or may, discover the deficiency in any event, the CCRA may not treat the disclosure as voluntary. This may be the case, for example, if an audit has already commenced or the taxpayer has knowledge that an audit will commence and CCRA will discover the omission. This may also be the case if another revenue authority or governmental organization (such as a provincial tax auditor) has commenced a review of the issue. Further, if there has been an announcement of increased audit profile in a certain area, a disclosure in that area may be treated as non-voluntary.
2. The disclosure must be complete.
As part of the VDP, the taxpayer must make a full and accurate reporting of all previously inaccurate, incomplete and unreported information. All required forms must be prepared and properly filed. The taxpayer also must comply with all legitimate requests for documents to verify the disclosure. If it turns out the disclosure contains material errors or omissions, the disclosure will be processed, but penalties and prosecution can be applied to the entire amount. If there are immaterial omissions, the disclosure will likely still be treated as voluntary. It may be that omissions or failures to file and pay taxes will have continued for a number of years and it is impossible to gather the information necessary to cure the problem for all years and make full disclosure. In these situations CCRA may agree to a cut-off date.
3. The disclosure must involve a penalty.
If no penalties are involved, the VDP is not applicable. Thus, issues such as late-filed elections are not dealt with under the VDP. Also, mistakes which give rise to increased taxes but not penalties cannot be covered under the VDP. For example, holding a non-qualified investment in an RRSP gives rise to Part XI.1 tax. Voluntary disclosure of this non-qualified investment at a later date will not avoid this tax, although any penalties could be waived.
4. The disclosure must contain information that is at least one year past due or, if less than one year past due, is not being disclosed solely to avoid a late filing penalty.
Permitting disclosure of deficiencies that are less than one year old is a recent policy change. The VDP cannot, however, simply be used to late file a tax return or late file instalments and avoid penalties.
If CCRA accepts a disclosure is voluntary, it generally expects all taxes and interest to be paid upon acceptance of the disclosure. However, often arrangements can be made to pay unpaid amounts over a period of time. In the case of GST, however, if payment is made over time, the 6% penalty under section 280 of the Excise Tax Act will still apply.
Usually at a first meeting involving a potential voluntary disclosure, legal counsel will take down brief details of the problem. These brief details will be forwarded to a CCRA appeals officer on a no-names basis. A number is assigned to the file so, if an audit is commenced at a later date, the disclosure can be treated as voluntary. A preliminary determination is then made by CCRA as to whether the disclosure will be treated as voluntary. Finally, names are disclosed and the complete submission and full disclosure is usually filed within 90 days. Generally, the whole process takes a minimum of 120 days and can take much longer.
The effective use of a voluntary disclosure can reduce the cost of non-compliance; however, the process can take time and involves some risk. If the disclosure is not accepted as voluntary, the taxpayer may have provided CCRA with all the information necessary to conduct an audit, impose penalties and, perhaps, prosecute. As such, a voluntary disclosure should never be made without legal advice and discussion about the ramifications of making or not making the disclosure.
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.