The Federal Court Decides that CRA Enforcement Action on a Related Person Doesn't By Itself Disqualify a Taxpayer from the Voluntary Disclosures Program. But Is 40538993 Canada Inc. Still Relevant? – A Canadian Tax Lawyer's Analysis
Introduction – The Voluntary Disclosures Program, CRA Discretion, and Judicial Review
40538993 Canada Inc. v the Minister of National Revenue (2019 FC
51) demonstrates why you should consult an experienced Canadian tax
lawyer before relying on any publication from the Canada Revenue
Agency—especially a publication relating to the Voluntary
Disclosures Program (VDP).
The Canada Revenue Agency's Voluntary Disclosures Program gives
Canadian taxpayers an opportunity to come forward and correct
previously deficient or incorrect tax filings. A valid voluntary
disclosure must meet five conditions. First, it must be voluntary
in the sense that the Canada Revenue Agency hasn't already
contacted you about the information. Second, it must be complete:
you can't pick and choose the non-compliance you opt to
disclose; you must disclose all non-compliance and submit the tax
returns required to correct that non-compliance. Third, the
disclosed information must carry a penalty or a potential penalty.
Fourth, the disclosure must include information that is at least
one year past due. Finally, the disclosure must include a payment
for the estimated tax owing on the disclosed information (a payment
arrangement may be possible if the taxpayer can't afford to
make full payment).
If a taxpayer's application meets the VDP's conditions for
valid disclosure, the Canada Revenue Agency won't pursue
criminal prosecution and will waive gross-negligence penalties that
would otherwise apply. In addition, if the CRA accepts the
taxpayer's disclosure under the VDP's more lenient General
Program, it will waive all otherwise applicable monetary penalties
and most otherwise applicable interest arising within the 10 prior
calendar years of the taxpayer's VDP application.
For a more detailed look at the Voluntary Disclosures Program, see
our article "CRA Voluntary Disclosure Program."
The CRA's legislative power to grant relief under the Voluntary
Disclosures Program comes from subsection 220(3.1) of Canada's
Income Tax Act. This legislation endows the Canada Revenue Agency
with discretionary power to waive a taxpayer's interest or
penalty otherwise payable either at will or on the taxpayer's
request. (For voluntary disclosures involving GST/HST matters, the
CRA's power to grant relief comes from similar discretionary
sections of the Excise Tax Act—namely, sections 88, 281.1,
284, and 284.1 of the Excise Tax Act.) As a result of this
empowering legislation, the CRA has complete discretion on whether
to grant relief under the Voluntary Disclosures Program.
The CRA must, however, exercise this discretionary authority in a
manner that is fair—both procedurally and substantively. For
example, a CRA agent cannot arbitrarily deny a disclosure that
meets the conditions under which the Canada Revenue Agency says it
shall grant relief. By invoking a process called judicial review,
one may ask the Federal Court of Canada to ensure that the Canada
Revenue Agency has in fact fairly exercised its discretion when
rendering a decision.
So, you have at least two options should a CRA agent unfairly deny
your VDP application. First, the Canada Revenue Agency allows you
to request a second internal review of a denied VDP application.
Second, you may, under section 18.1 of the Federal Courts Act,
apply for judicial review of the CRA's decision to deny your
VDP application.
This article examines one such application for judicial review. In
4053893 Canada Inc. v The Minister of National Revenue, the Canada
Revenue Agency denied a taxpayer's VDP application on the basis
that the disclosure wasn't voluntary. The taxpayer successfully
challenged this decision by relying on the CRA's own
publication.
4053893 Canada Inc. v The Minister of National Revenue (2019 FC 51)
Brent Harris was the sole director and shareholder of 4053893
Canada Inc. (the "Corporation"). Mr. Harris hadn't
filed personal tax returns from 2006 to 2015, and the Corporation
hadn't filed corporate tax returns from 2003 to 2016.
In August 2016, the CRA sent Mr. Harris a letter asking him to file
his personal tax returns. A few days after receiving the letter,
Mr. Harris had a phone conversation with a CRA agent. During that
phone call, Mr. Harris confirmed that the Corporation was still
active, and the CRA officer told Mr. Harris that he had to file
both personal and business tax returns.
In January 2017, the Corporation filed a no-name voluntary
disclosure. (You can no longer file a no-name voluntary disclosure.
4053893 Canada Inc. occurred before the Canada Revenue Agency
completely revamped the Voluntary Disclosures Program in early
2018.) A few months later, the Corporation completed its VDP
application by revealing its identity to the CRA and submitting tax
returns for the 2006 through 2016 taxation years.
The Canada Revenue Agency acknowledged that the Corporation's
effective date of disclosure was January 17, 2017.
In September 2017, however, the CRA sent a letter denying the
Corporation's VDP application. The CRA's letter claimed
that the Corporation's disclosure wasn't voluntary because,
before receiving the Corporation's disclosure, the CRA
"started contacting [the Corporation] for the same matter or
information being disclosed."
The Corporation asked the Canada Revenue Agency to conduct a second
review of the VDP application. In particular, noting the lack of
detail in the CRA's September 2017 letter, the Corporation
explained that the CRA hadn't contacted the Corporation before
its effective date of disclosure on January 17, 2017.
But a delegate of the Minister of National Revenue confirmed the
denial. In support of the decision, the delegate pointed to the
August 2016 phone conversation between Mr. Harris and the CRA
officer, during which Mr. Harris confirmed that the Corporation was
still active, and the CRA officer told Mr. Harris that he had to
file both personal and business tax returns. The delegate concluded
that this phone call rendered the Corporation's VDP application
invalid.
The phone call, reasoned the delegate, disqualified the
Corporation's disclosure because it constituted an enforcement
action on a related party that would likely have uncovered the
information that the Corporation sought to disclose.
The delegate's reasoning hinged on IC00-1R5, which, at the
time, encompassed the Canada Revenue Agency's administrative
guidelines on the Voluntary Disclosures Program. Paragraph 32 of
these guidelines said that a VDP application was involuntary and
thus invalid if both:
- (1) "enforcement action relating to the disclosure was initiated by the CRA [...] on a person related to the taxpayer"; and
- (2) "the enforcement action is likely to have uncovered the information being disclosed."
In response, the Corporation applied to the Federal Court of
Canada for judicial review of the delegate's decision. The
Corporation argued that the delegate's decision was
unreasonable because the delegate hadn't explained why the
enforcement action against Mr. Harris was likely to have uncovered
the information that the Corporation sought to disclose.
The Federal Court of Canada sided with the Corporation and
concluded that the delegate's decision was unreasonable. In
particular, while the court agreed that the CRA had initiated
enforcement action on a person related to the
Corporation—i.e., its sole shareholder, Mr. Harris—the
court found that the delegate had failed to analyze whether the
enforcement action against Mr. Harris was likely to have uncovered
the information that the Corporation disclosed. Reviewing the
delegate's notes, the court saw that the delegate had focused
only on the relationship between Mr. Harris and the
Corporation:
As a result, the Federal Court of Canada granted the Corporation's judicial-review application and ordered a different decision maker to review the VDP application.
Voluntariness Condition & Changes to the Voluntary Disclosures Program: Is 4053893 Canada Inc. Still Relevant?
It remains unclear whether the Federal Court's decision in 4053893 Canada Inc. remains relevant given the subsequent changes to the Voluntary Disclosures Program. On March 1, 2018, the Canada Revenue Agency overhauled the Voluntary Disclosures Program. These new VDP rules applied to all disclosure applications submitted on or after March 1, 2018. For a more general overview of the Voluntary Disclosures Program, see our VDP webpage. And for a more detailed review of the new VDP rules that took effect on March 1, 2018, see our article " Upcoming Changes to the Voluntary Disclosures Program (VDP)." To this end, the CRA released a new Information Circular for the post-March 2018 Voluntary Disclosures Program: IC00-1R6. The decision and reasoning in 4053893 Canada Inc. were based on the prior VDP Information Circular: IC00-1R5. One notable difference between the two Information Circulars concerns the conditions in which enforcement action on a related party will render a taxpayer's disclosure invalid. Paragraph 32 of the old Information Circular—i.e., the one at issue in 4053893 Canada Inc.—said that a VDP application was involuntary and thus invalid if both:
- (1) "enforcement action relating to the disclosure was initiated by the CRA [...] on a person related to the taxpayer"; and
- (2) "the enforcement action is likely to have uncovered the information being disclosed."
But the current Information Circular, IC00-1R6, excludes the second requirement—i.e., that the enforcement action on a related party "is likely to have uncovered the information being disclosed." In other words, if 4053893 Canada Inc. had been decided under the current version of the Voluntary Disclosures Program, the Federal Court may very well have upheld the CRA's decision to deny the disclosure.
Tax Tips – Judicial Review on Voluntary Disclosure Applications
If you're non-compliant with your tax obligations, you risk triggering the Income Tax Act's or the Excise Tax Act's various monetary and criminal penalties. An application under the Canada Revenue Agency's Voluntary Disclosures Program may offer a remedy. But you lose this option if the CRA discovers your mistake beforehand. So, speak with one of our experienced Canadian tax lawyers today. We can review your situation and discern whether you're indeed non-complaint. If so, we will carefully plan and prepare your disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will accept your disclosure but also—as demonstrated in 4053893 Canadian Inc.—lays the groundwork for a judicial-review application to the Federal Court should the Canada Revenue Agency unfairly deny your disclosure.
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.