Canada: CRA Issues Proposed Guidelines For GST/HST Voluntary Disclosures

On June 9, 2017, the Canada Revenue Agency (CRA) invited public comment on a number of proposed changes to the Voluntary Disclosure Program (VDP). The changes are outlined in Draft Information Circular IC00-1R6 (applicable to income and payroll taxes), and Draft GST/HST Memorandum 16.5 (applicable to GST/HST, excise tax and certain other taxes). Information on the current VDP guidelines, the proposed changes (including downloadable versions of the draft documents) and how Canadians can provide their comments can be found by clicking here.

The proposed changes are intended in part to tighten the existing guidelines to address the perception that by granting similar relief to both an absent-minded taxpayer and a taxpayer who willfully sought to circumvent Canada's tax laws, the VDP created an unfair advantage for the latter. As expected, the proposals are based, in part, on the recommendations made by the Offshore Compliance Advisory Committee (OCAC), which was set up in April 2016 by the CRA to provide advice on improving the CRA's administrative ability to deal with offshore compliance.

Currently combined guidelines will be separated

The original VDP guidelines were developed over two decades ago and focused almost exclusively on submissions in respect of income tax matters. Over time, the language has remained the same, even as the coverage of the existing guidelines was extended to encompass submissions in respect of other types of taxes. The release of two sets of proposed guidelines, one to deal with income and payroll taxes and one to deal with VDP submissions in respect of GST/HST, excise tax, excise duty, softwood lumber products export charges and the air travellers security charge will lead to better alignment with the applicable legislation. Our comments regarding changes to the VDP guidelines for income and payroll tax submissions can be found here.

Proposed changes to the VDP guidelines for GST/HST, excise tax and other taxes

The establishment of a separate set of VDP guidelines for disclosures involving GST/HST, excise tax and other taxes is a welcome development since it allows the guidelines to be better aligned with the applicable legislation. The proposed amendments to the guidelines themselves will likely be greeted with less enthusiasm, as they will reduce the level of relief currently available.

Highlighted below are the key elements of the proposed guidelines:

Implementation of a three-track classification system – Under the proposed guidelines, VDP submissions will be accepted into one of three tracks based on specific classification criteria. This approach mirrors the establishment of a two-track system in the guidelines for the VDP for income tax matters.

Track 1 exclusively for GST/HST wash transactions – Track 1 will be reserved for disclosures involving GST/HST wash transactions. A wash transaction is a transaction where a supplier has not charged or collected the GST/HST from a customer where the customer is a registrant and would be entitled to claim an input tax credit equal to the uncollected GST/HST. Successful Track 1 submissions will receive full relief from any interest and penalties associated with the disclosure.

Track 2 General Program provides limited relief – Track 2 will be used for most instances of non-compliance or errors, other than those involving major non-compliance. Common examples would include: wash transactions that for some reason didn't qualify for Track 1, reasonable errors, failure to file information returns, transactions not involving gross negligence or deliberate avoidance and over-claimed rebates. Successful Track 2 submissions would gain 50% relief from applicable interest and 100% relief from applicable penalties.

Track 3 Limited Program offers very limited relief for situations involving major non-compliance – Major non-compliance generally involves one or more of the following:

  • Non-remission of charged and collected GST/HST;
  • Active efforts to avoid detection;
  • Large dollar amounts;
  • Multiple years of non-compliance;
  • Sophisticated taxpayers;
  • Disclosures made subsequent to the CRA indicating their intent to focus on the types of transactions the taxpayer is disclosing;
  • Deliberate or willful default or carelessness amounting to gross negligence; and
  • Other circumstances that demonstrate a high degree of registrant culpability as contributing to the failure to comply.

Successful Track 3 submissions will only be shielded from the application of a gross negligence penalty. All other applicable penalties and interest will be assessed.

Submissions must also include a list of all previously inaccurate, incomplete or unreported information regarding its tax affairs. In order to make a valid submission, taxpayers will now be required to provide the CRA with a list of all previously inaccurate, incomplete or unreported information on their tax affairs for a specified period of time. For Track 1 submissions, the period includes the four years before the application is filed. For Track 2, this period is extended to six years. For Track 3, the period will include all relevant years before the date the application is filed.

It should be noted that the disclosure periods for Tracks 2 and 3 exceed the normal four-year period during which a business may be subjected to a GST/HST audit.

Estimated tax must be paid at the time the VDP is submitted – Taxpayers will now be required to include payment of the estimated tax with their submission. This may prove problematic in some instances, as the amount of tax might change once the CRA looks at the submission. This might occur where what was thought to be a wash transaction is assessed as a regular transaction.

Use of subjective measures – Both sets of proposed guidelines make use of subjective measures, in order to separate out those submissions that will only qualify for limited relief. This approach makes it very easy to treat each submission on a case-by-case basis, thereby resulting in uncertainty regarding which Track will apply to the submission.

The CRA indicates that the proposed guidelines will become effective after December 31, 2017.

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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