Canada: CRA Proposes Substantial Changes To Voluntary Disclosure Program

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.

VDPs involving GST/HST, excise tax and certain other taxes

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. As noted above, the CRA has released a separate set of proposed guidelines for VDP submissions in respect of GST/HST, excise tax, excise duty, softwood lumber products export charge and the air travellers security charge. Our comments regarding those changes can be found here.

Proposed changes to the VDP guidelines for income tax and payroll matters

Broadly speaking, the proposed amendments will change who gets to use the program, which disclosures they get to use it for and how much relief they will be entitled to if successful. A closer examination shows that along with some minor tweaks to the existing guidelines, the CRA is also proposing to make structural changes that will include establishing two tracks: the General Program and the Limited Program, both of which are detailed below.

One of the more significant changes proposed by the CRA will see the end of universal access to the VDP for all taxpayers. Once the new guidelines become effective at the start of 2018 (per the CRA), a corporation with gross revenue in excess of $250 million in at least two of their last five taxation years will no longer be eligible for the VDP. At the same time, the CRA is proposing to add disclosures involving transfer pricing or proceeds of crime to the list of situations that do not qualify for VDP relief.

Of equal significance, taxpayers that continue to be eligible under the proposed guidelines will then have their submissions placed into one of two proposed tracks to be known as the General Program and the Limited Program. This is a significant departure from the current one-size-fits-all approach, but it provides a way for the CRA to limit the relief available to disclosures that are the result of more than just absentmindedness.

More specifically, the Limited Program would be reserved for disclosures involving major non-compliance, which the draft proposals define as disclosures that include one or more of the following elements:

• An active effort to avoid detection through the use of offshore vehicles or other means;
• Large dollar amounts;
• Multiple years of non-compliance;
• Sophisticated taxpayers;
• Disclosures made after the CRA announces its intent to focus on the type of transaction being disclosed; and
• Other situations where a high degree of taxpayer culpability contributed to the compliance failure.

While the attempt to differentiate between an absent-minded taxpayer and a taxpayer who clearly intended to evade paying taxes is admirable, using subjective measures – such as the level of taxpayer intent – introduces uncertainty into how the tax system is administered. When coupled with a list of elements that are themselves open to interpretation, it will make it harder for taxpayers to clearly understand when their disclosure might not fall within the General Program.

There is little doubt that taxpayers would rather have their submission qualify for the General Program based on a review of the available relief under each of the General and Limited Programs. The VDP has historically offered relief with respect to criminal prosecution, penalties and interest. While the areas of relief will not change under the proposed guidelines, the extent of relief in each area will now vary based on which track is involved.

In terms of criminal prosecution, taxpayers making a successful disclosure in either program will not be referred for criminal prosecution with respect to the disclosure. However, under the proposed guidelines, the CRA will have the ability to cancel VDP relief previously granted where they subsequently determine that the disclosure involved a misrepresentation attributable to willful default.

Disclosures under the General Program will continue to be eligible for full relief from the assessment of penalties related to the disclosure being made for any taxation year that ends in the previous 10 years before the calendar year in which the VDP is filed. Under the Limited Program, relief will be limited to the assessment of a gross negligence penalty; all other penalties that may apply will be assessed.

The assessment of both taxes and penalties in respect of prior taxation years will result in large interest balances accruing on unpaid balances that can often exceed the original taxes. The relief from interest offered by making a successful VDP submission is a key consideration for many taxpayers. Under the proposed guidelines for the General Program, relief may be granted for up to 50% of any applicable interest that would otherwise be incurred by the taxpayer on amounts assessed under the disclosure during the 10 previous calendar years before the calendar year in which the application is filed. Under the Limited Program, no interest relief would be available.

Finally, the CRA is proposing to add a fifth condition to the four that must currently be met in order for a submission to qualify for consideration under the VDP. In addition to a submission being made on a voluntary basis, involving the potential assessment of a penalty, being in relation to information that is at least one year past due and being complete, taxpayers will now have to include payment of the estimated taxes owing with their submission.

As noted above, the CRA has stated that these proposed guidelines will become effective after December 31, 2017. Taxpayers contemplating making a submission that might be impacted by any of the proposed restrictions should consult their professional advisors regarding the timing of their submission.

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.