Canada: Taxation Law @ Gowlings - August 11, 2008

Last Updated: August 18 2008

Edited by Marc L. Siegel

Contents:

  • Closure Through Disclosure: An Update On The CRA's Voluntary Disclosure Program

Closure Through Disclosure: An Update On The CRA's Voluntary Disclosure Program

In the early 1990s, the Canada Revenue Agency introduced a cure for Canadian taxpayers who suffer from insomnia and/or night terrors: the Voluntary Disclosure Program (VDP).

This program allows taxpayers to come forward and confess their sins without fear of facing penalties or prosecution. A valid disclosure will allow the taxpayer to appease his conscience by paying the money owed plus interest. Filing a mistake in your tax returns is a common occurrence. Unfortunately, many Canadians are unaware of the existence of the VDP, or lack the necessary knowledge to feel confident in going forward with a disclosure.

In January 2007, Taxation Law @ Gowlings featured an article on the VDP that looked over the general principles and requirements of the VDP. However, much has changed over at the CRA since that time. Most notably, an updated VDP Information Circular, IC00-1R2, was published in October 2007 in an attempt to clarify the CRA's current position on the VDP. This article will focus on the new Information Circular, and attempt to shed some light on certain aspects of the VDP, such as the no-name disclosure policy.

Limitation Period On Discretion

The CRA's VDP allows taxpayers to correct errors or omissions from their previous dealings with the CRA that have been left undetected. A valid submission will allow the taxpayer to avoid penalties or prosecution. It is important to note that a limitation period on submissions must be taken into account. For income tax submissions made on or after January 1, 2005, the Minister's ability to grant relief is limited to any taxation year that ended within the previous 10 years before the calendar year in which the submission is filed. Therefore, a submission on May 1, 2008 would only grant relief for the 1998 and subsequent taxation years.

Minister's Discretion

Because of the serious consequences at stake, a taxpayer debating the merits of a disclosure should know that the Minister is under no obligation to grant relief under the VDP provisions. Every submission will be evaluated on a case-by-case basis. If relief is denied or partly granted, the CRA will provide the taxpayer with an explanation of the reasons and factors behind the decision. Information Circular IC00-1R2 lists a broad range of examples showcasing in which instance relief is likely to be considered or denied.

Disclosure Methods

Bearing in mind the possible consequences resulting from a submission being denied, a taxpayer might hesitate to take advantage of the Voluntary Disclosure Program. This is where the most intriguing part of the program comes into play: The No-Name disclosure. Taxpayers can opt to come clean in a forthright manner with a named disclosure where their name is stated on the original submission. The alternative is to test the waters first by receiving an evaluation of the strength of their submission without ever revealing their identity. The taxpayer, or more likely their representative, partakes in discussions with a VDP officer that are informal, non-binding and general in nature. According to the Information Circular, if all the required information for a complete disclosure, except for the identity of the taxpayer, has been submitted, the CRA can advise, without prejudice, on the possible tax implications of the disclosure. If there is any discrepancy between the information that is provided and the information that is verified once the taxpayer is identified, this preliminary advice may be invalidated.

A determinative decision on a no-name disclosure will only be given by the CRA once the identity of the taxpayer is revealed. The taxpayer must provide their identity within 90 days of the Effective Date of a Disclosure(EDD). There will be no extensions to the timeframe for providing the identity of the taxpayer. The EDD is the earliest of the date the CRA receives a completed and signed Form RC199, Taxpayer Agreement, or the date a letter, signed by the taxpayer or the taxpayer's authorized representative and containing similar information to Form RC199, is received by the CRA.

The CRA will not consider a second no-name disclosure by a taxpayer for the same information. In such circumstances, taxpayers will need to identify themselves in order to take advantage of the Voluntary Disclosure Program.

Conditions Of A Valid Disclosure

Four conditions must be met in order for a submission to qualify as valid.

  1. Voluntary

  2. As the name suggests, the disclosure must be voluntary. This means that a disclosure submitted after the taxpayer has gained knowledge of an audit, investigation or other enforcement action set to be conducted with respect to the information being disclosed to the CRA cannot qualify as a valid disclosure. This also applies in the case where an enforcement action is underway against an associate, a person related to the taxpayer (corporations, shareholders, spouses, etc.) or a third party, where the purpose and impact of the enforcement action against the third party is sufficiently related to the present disclosure. A list of examples of enforcement actions can be found in the Information Circular on the CRA website.

  3. Complete

  4. The submission must also be complete, which, according to the Information Circular, means that the taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer is associated.

  5. Penalty

  6. A disclosure must involve the application, or potential application of a penalty. The penalty type may be a late filing penalty, a failure to remit penalty, an installment penalty, or a discretionary penalty, such as an omission penalty or a gross negligence penalty.

  7. One Year Past Due

    In general, a submission must be made for a return that is at least one year past due. However, in the event where a taxpayer submits a submission for several tax returns including one that is less than one year past due, the entire submission will still be qualified as valid. Paragraph 40 of the Information Circular offers this example: A taxpayer had not filed tax returns for the years 2000 to 2004. On November 10, 2005, the taxpayer submitted all of the tax returns requesting they be considered under the VDP. Although the 2004 tax return is less than one year past due (filing deadline of April 30, 2005), the CRA will consider the 2004 return as part of this disclosure, provided that all other conditions have been met.

Second Disclosure By The Same Taxpayer

As was previously mentioned, in order to qualify as a valid disclosure, a submission must be complete. Taxpayers who have utilized the benefits of the VDP are expected to remain compliant after the fact. Therefore, a second disclosure for the same taxpayer will only be considered by the CRA if the circumstances surrounding the second disclosure are beyond the taxpayer's control. When making a second disclosure, taxpayers must reveal their identity and previous disclosures. If the CRA discovers that the taxpayer failed to divulge a previous disclosure, the submission may be deemed invalid for VDP purposes.

Approach With Caution

A valid disclosure should leave all parties satisfied with the outcome, whereas an invalid one could lead to serious consequences for the taxpayer. Therefore, before coming forward with a disclosure, the taxpayer should possess a complete understanding of the VDP. This article only serves as a brief overview of some facets of the VDP. Gowlings lawyers deal with the CRA on behalf of the taxpayer using the no-name disclosure method when requested. For more information on the VDP policy, consult Information Circular IC-00R2, accessible through the CRA website.

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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