Canada: New Year's Resolution – Make A Voluntary Disclosure Now, Changes Could Be Coming

Last Updated: January 26 2017
Article by Aaron Schechter, CPA, CA

As 2017 is now almost a month old, many of us may have already forgotten those New Year's resolutions we made just before we said goodbye to 2016. Perhaps, for some people, it is not too late to add a new year's resolution. In fact, this resolution has tax implications that may be lost if action isn't taken very soon.

The Canada Revenue Agency's Voluntary Disclosures Program (VDP) provides opportunities for taxpayers who have previously provided incorrect or inaccurate information while preparing a tax return. It also allows taxpayers who have failed to report income in a return or simply failed to file a return or form to come forward and right their wrong. If the Canada Revenue Agency accepts a taxpayer's voluntary disclosure, the penalties associated with the previous omission will be waived, although any taxes, if applicable, will still be owed. In addition, as part of a valid voluntary disclosure, the Canada Revenue Agency has the discretion to grant partial relief of interest against a taxpayer for years preceding the three most recent years.

While there are some conditions to be met before the Canada Revenue Agency will accept a voluntary disclosure as valid, the general "friendliness" and leniency of the amnesty program has created an environment where many taxpayers are not afraid to come forward and fix their omissions. However, this may soon change.

On December 8, 2016, the Offshore Compliance Advisory Committee, an independent panel of legal and tax experts whose mandate is to advise the Minister of National Revenue and the Canada Revenue Agency on methods to tackle offshore tax evasion and tax avoidance, released a report on the subject of the VDP. The committee's recommendations included:

  • Less generous relief in certain circumstances – where there have been efforts amounting to gross negligence, the use of offshore vehicles, a significant amount of tax avoided, several years of non-compliance, repeated use of the VDP by a taxpayer, involvement of a sophisticated taxpayer, a taxpayer's disclosure being motivated by the Canada Revenue Agency's stated intended focus of compliance or by its broad-based correspondence or campaign or any other circumstance in which a taxpayer proactively contributed to the failure to comply, relief from penalties and interest should be reduced.
  • Repeat users – making it much more difficult, if not impossible, to grant relief under the VDP if a taxpayer has previously made a voluntary disclosure.
  • Payment of tax and interest – while collecting the tax and interest in connection with a valid VDP has not been an issue previously, the committee recommended that the estimated tax and interest payable, or acceptable security, should be paid at the time the documentation relating to the disclosure is provided to the Canada Revenue Agency.
  • Incomplete information – taxpayers who do not provide full and complete information related to a disclosure should be denied the full benefits of the VDP, with the exception of very limited circumstances.
  • Transfer pricing penalties – the VDP should not be available to multinational entities seeking relief from transfer pricing penalties.
  • Disclosure of advisors – the committee recommended that taxpayers should be forced to disclose the identity of any advisor who assisted with the non-compliance; for example, those that set up an offshore account or were involved in the planning and structuring.
  • Level of internal approval – higher level, senior approval should be required for disclosures involving significant amounts of tax, complicated situations, new areas of law and cases that have the potential to undermine the public's confidence in the VDP.
  • Review by specialists – consideration should be given to having offshore compliance and aggressive tax planning specialists review larger more complex disclosures before acceptance into the VDP.
  • Rights of objection – taxpayers should be prevented from filing an objection to an assessment or reassessment that stems from a voluntary disclosure.
  • Information returns – the Committee recognized that the VDP's resources may not be best utilized for failures to file Form T1135 – Foreign Income Verification Statement. These omissions should be handled by the Canada Revenue Agency's audit resources.
  • Different relief under the VDP for offshore non-compliance – the Committee believed that domestic and offshore non-compliance are equally objectionable and did not think it was necessary to treat either differently.

It is expected that these recommendations will result in changes being made to the VDP in 2017. If you were thinking about making a voluntary disclosure this year, it is strongly recommended that you make this disclosure sooner rather than later. If taxpayers continue to wait to come forward, they may find that the previously "friendly" and somewhat lenient amnesty program no longer provides the relief we have come to expect may no longer be a viable option.

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.

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Aaron Schechter, CPA, CA
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