Canada: Don't Delay, Disclose Today: Substantial Changes To The Voluntary Disclosures Program To Be Effective March 1, 2018

On December 15, 2017, the Canada Revenue Agency ("CRA") released two highly-anticipated policy statements outlining several changes to its Voluntary Disclosures Program (the "VDP"). By and large, the changes narrow the application of the program, limit — and in some cases, eliminate — relief available in various circumstances, and introduce more onerous criteria for access to the program.

Key changes to the VDP include:

  • The introduction of a two-track program for income tax disclosures and a three-track program for GST/HST disclosures;
  • A general requirement that estimated taxes be paid when a disclosure is made;
  • An expansion of the circumstances in which a voluntary disclosure will not be considered or will be considered only with limited benefits; and
  • The elimination of the "no-names" disclosure program.

These changes, which apply to disclosures relating to income tax, GST/HST and other taxes, will come into effect on March 1, 2018. Applications received by the CRA before February 28, 2018 will be processed under the current VDP only if the name of the disclosing taxpayer is provided by that date. Given the significantly reduced relief and the increased uncertainties created by the new VDP, non-compliant taxpayers are encouraged to act quickly to benefit from the existing program.

The Current VDP

The VDP is a form of amnesty program which allows taxpayers to voluntarily come forward to correct omissions or errors in their prior tax reporting in exchange for immunity from prosecution and relief from penalties and potentially some interest. Since its inception, the program has generated significant interest. In the 2014-2015 year alone, more than 19,000 voluntary disclosure applications were made, and more than $1.3 billion of previously unreported income was disclosed.1

In its current form, the VDP is generally available to all taxpayers regardless of the reason for their non-compliance, so long as the following four conditions are met:

  • the disclosure is voluntary — that is, the disclosing taxpayer must initiate the disclosure process before becoming aware of an enforcement action which would (or would be likely to) reveal the error or omission to CRA;
  • the disclosure involves the application (or potential application) of a penalty;
  • the disclosure includes information that is at least one year past due; and
  • the disclosure is complete, in that it provides full and accurate facts for all taxation years or reporting periods for which there was tax non-compliance, across all of the accounts associated with the disclosing taxpayer.

Under the current VDP, a disclosure can be initiated on a "named" basis, by which the name of the disclosing taxpayer is provided at the time the application is commenced, or on a "no-name" basis, by which only general information is provided to the CRA about the non-compliance at the time the disclosure is commenced. If the taxpayer wishes to proceed with implementation of a no-name disclosure, the taxpayer is required to reveal their identity to the CRA within 90 days. In either case, disclosing taxpayers generally receive immunity from prosecution and penalties (and possibly relief from some interest) from the effective date of the disclosure.

The New VDP

On June 9, 2017, as part of the CRA's increased efforts to crack down on aggressive tax avoidance and evasion, the CRA released proposed changes to the VDP. The proposals would have drastically curtailed the relief available to many non‑compliant taxpayers. Reaction from tax professionals and the public was negative. The proposed changes were heavily criticized as vague, imprecise and harsh, potentially discouraging many non-compliant taxpayers from coming forward at all.

Following consultations with stakeholders, the CRA released Information Circular 1C00-1R6 and GST/HST Memorandum 16-5, establishing the framework for the VDP effective March 1, 2018.

Two (or Three) Tracks for Voluntary Disclosures

For income tax disclosures, IC00-1R6 preserves the concept of a "two-track" system proposed in June 2017. Under the new VDP, income tax disclosures will be streamed into either the "Limited Program" or the "General Program".

For disclosures involving GST/HST or other taxes, the Memorandum introduces three tracks: "Category 1", which deals with disclosures involving certain eligible so-called wash transactions; "Category 2", which deals with certain non-eligible wash transactions, reasonable errors, failures to file information returns or over-claimed rebates; and "Category 3", which provides limited relief in respect of applications that disclose non-compliance with an element of intentional conduct on the part of the registrant or a closely related party.

The following highlights some of the key features of each program track:

Category 1 (GST/HST)

  • Provides relief for applications that involve "wash transactions"2 that are eligible for a reduction of penalties and interest under the Memorandum.
  • Entitles applicants to relief from all otherwise applicable penalties and 100 per cent of the applicable interest.
  • According to the Memorandum, the CRA will consider granting penalty and interest relief in wash transactions where the following conditions are met:
    • the taxable supply in question was made to a registrant who would have been entitled to a full input tax credit ("ITC") had the tax been applied correctly, or to a federal department or participating provincial government entity;
    • in cases where the ITC was claimed by the wrong member of a closely related group or by an associated person, it must be demonstrated that the person who was actually entitled to claim the ITC is a registrant that would have been entitled to a full ITC;
    • the person being assessed must have a history of voluntary compliance with their GST/HST obligations, and must not have been previously assessed for the same mistake;
    • the person being assessed must have implemented corrective measures to ensure that tax is properly collected and ITCs properly claimed on future supplies of a similar nature; and
    • the person being assessed must not have been negligent or careless in carrying out its GST/HST obligations.

General Program/Category 2

  • Any disclosure that is not a Limited Program disclosure or a Category 1 (GST/HST) disclosure will be subject to the General Program.
  • Provides immunity from prosecution, relief from applicable penalties and possibly some interest relief.
  • Unlike the proposed changes released in June 2017, IC00-1R6 does not specifically preclude "sophisticated taxpayers" from accessing relief under the General Program for income tax disclosures.

Limited Program/Category 3

  • Provides limited relief for VDP applications where the taxpayer's non-compliance involves what CRA describes as "an element of intentional conduct" on the part of the disclosing taxpayer or a closely related party.
  • Relief limited to immunity from prosecution and relief from gross negligence penalties (but no relief from otherwise applicable penalties or interest);
  • Disclosing taxpayers must agree to waive their rights of objection and appeal relating to the substance of the disclosure and any related tax assessment.
  • Whether a disclosure will be a Limited Program disclosure will depend on some or all of the following factors:
    • whether the taxpayer made efforts to avoid detection through offshore vehicles, the underground economy or other means;
    • the dollar amounts involved;
    • the number of years of non-compliance;
    • the sophistication of the taxpayer; and/or
    • whether the disclosure was made after an official statement from the CRA regarding an intended specific focus of compliance (i.e. a publicly-announced program in relation to a particular compliance issue).

Elimination of No-name Disclosures

The new VDP will no longer allow taxpayers to make a disclosure (in respect of either income tax, GST/HST or other taxes) on a no-name basis. However, taxpayers may engage in "pre-disclosure discussions" with the CRA to test the facts of their situation and assess the likely outcomes of a disclosure. It is important to note, however, that although these discussions can be undertaken anonymously and may help to provide some comfort, the discussions are non-binding and do not constitute an acceptance of the taxpayer's disclosure.

"Voluntariness" of a Disclosure

Under the new VDP, a disclosing taxpayer will not be eligible for consideration under the VDP if the CRA has already received information regarding that taxpayer's potential involvement in non-compliance. This is a change from the existing program, which requires only that a taxpayer not be aware of any enforcement action against them.

This change may lead to harsh results, as in many cases it will be impossible for a taxpayer to know what information the CRA has with respect to their affairs before commencing the disclosure.

Interestingly, however, the CRA has indicated that a taxpayer could be eligible to make a voluntary disclosure if the CRA "invites" them to do so, subject to the caveat that a disclosure invited by the CRA would likely be considered only under the Limited Program.

No Automatic Exclusion for Large Corporations

Under the new VDP, disclosures by large corporations will be eligible for consideration, though generally only under the VDP's Limited Program for income tax purposes and under Category 3 for GST/HST and other tax disclosures. This is a significant change from the draft VDP guidelines issued in June, which completely disqualified large corporations having gross revenues in excess of $250 million in at least two of the last five taxation years, from accessing the VDP program for disclosures involving income tax.

Disclosures Involving Transfer Pricing

Although the draft VDP guidelines issued in June 2017 proposed to do away with relief under the VDP for disclosures relating to transfer pricing issues, the new VDP indicates that the CRA may consider applications relating to transfer pricing adjustments. These disclosures will now be handled by the Transfer Pricing Review Committee of the CRA. Note that applications relating to advance pricing arrangements will not be considered for VDP relief.

Mandatory Payment of Estimated Tax

Although the new VDP has added a fifth condition of a valid disclosure application, namely, that the disclosure application must include payment of the estimated tax owing, the CRA is allowing taxpayers to request to be considered for a payment arrangement, perhaps with adequate security. This is an improvement over the June 2017 proposals, by which CRA would only have considered a payment arrangement "in extraordinary circumstances". 

Discussion

Information Circular IC00-1R6 and GST/HST Memorandum 16-5 reflect a significant narrowing of the benefits and advantages of a voluntary disclosure, and a broadening of the conditions that must be met for a valid voluntary disclosure. Under the new regime, disclosing taxpayers will have less certainty and be much less able to predict in advance the benefits of a disclosure. It is quite possible that the changes to the VDP will discourage many taxpayers from accessing the program.

There is still time for taxpayers to correct their mistakes and benefit from the current, more permissive VDP regime. If you are considering making an application under the VDP, do not delay and ensure your application is complete (including the identity of the disclosing taxpayer) and is filed with the CRA before March 2018.

Footnotes

1 Canada Revenue Agency, "Annual Report to Parliament, 2014-2015", https://www.canada.ca/content/dam/cra-arc/migration/cra-arc/gncy/nnnl/2014-2015/ar-2014-15-eng.pdf, p. 59.

2 In general terms, a wash transaction occurs where a supplier fails to remit an amount of net tax on a taxable supply (other than a zero-rated supply) as a result of failing to correctly charge and collect tax from the recipient, and the recipient is a registrant who would have been entitled to claim a full ITC in respect of the tax, if the tax had been correctly applied and collected by the supplier.

About BLG

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions