Introduction – Voluntary Disclosures Program Proposed Changes
The Voluntary Disclosures Program (VDP or tax amnesty) is a Canada Revenue Agency (CRA) program that allows Canadian taxpayers to come forward and correct their tax mistakes provided that certain requirements are met. Currently, in order for a taxpayer’s voluntary disclosure to be accepted, four requirements must be met. First, there cannot be any ongoing enforcement action in place against the taxpayer with respect to the issues being disclosed. Second, the disclosure must be complete. Third, the disclosure must involve the application of a penalty or the potential application of a penalty. Fourth, the disclosure must include information that is at least one year past due. If these requirements are met and the taxpayer’s voluntary disclosure is accepted, then the CRA will provide full penalty relief, partial interest relief and refrain from pursuing criminal charges against the taxpayer.
On June 9, 2017 the Canada Revenue Agency released proposed changes to the Voluntary Disclosures Program and is currently soliciting comments from the public on the proposed changes. The CRA’s rules for the voluntary disclosure program are laid out in its voluntary disclosures program information circular. The Canada Revenue Agency has released a draft version of a new information circular implementing the proposed changes. These changes are said to be motivated by a desire to crack down on “tax cheats” by tightening the criteria for acceptance and limiting the scope of relief. This article will focus on the circumstances where relief or limited relief is available under the proposed changes to the Voluntary Disclosures Program.
Circumstances Where Relief is Available – Voluntary Disclosures Program Proposed Changes
The draft information circular published by CRA only makes minor changes to the general circumstances where relief under the VDP may be considered. Under both the draft information circular and the Canada Revenue Agency’s current information circular relief under the voluntary disclosure program may be considered if a taxpayer:
- failed to fulfill their obligations under the Canadian Income Tax Act,
- failed to report any taxable income they received,
- claimed ineligible expenses on a tax return,
- failed to remit source deductions of their employees,
- failed to file information returns, or
- failed to report foreign sourced income that is taxable in Canada.
The only change on this topic in the draft information circular is that voluntary disclosures for a failure to report an amount of GST/HST are now covered by a separate CRA policy document, the draft GST/HST memorandum on voluntary disclosures. The current voluntary disclosures information circular covers both income tax and GST/HST and includes failures to report GST/HST in the list of circumstances where relief may be considered.
Circumstances Where Only Limited Relief is Available – Voluntary Disclosures Program Proposed Changes
The current voluntary disclosures program offers the same level of relief to every taxpayer whose voluntary disclosure is accepted by the program. Specifically, taxpayers receive full relief from penalties and partial interest relief. The CRA also will not pursue criminal charges against taxpayers who successfully submit a voluntary disclosure. Under one of the most significant proposed changes, there will be two different streams, the General Program and the Limited Program, in the VDP that will offer different levels of relief. The General Program will offer full penalty relief and partial interest relief. Taxpayers whose disclosures are approved under the Limited Program will only receive partial penalty relief and no interest relief.
The Limited Program is intended to cover applications that disclose “major non-compliance”. The draft information circular provides the following list of situations where relief may be offered under the Limited Program:
- active efforts to avoid detection through the use of offshore vehicles or other means,
- large dollar amounts,
- multiple years of non-compliance,
- a sophisticated taxpayer,
- the disclosure is made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns,
- any other circumstances in which a high degree of taxpayer culpability contributed to the failure to comply.
The Canada Revenue Agency also provides the specific example of a taxpayer who has been transferring undeclared business income earned in Canada to an offshore bank account since 2010. This example highlights the active efforts to avoid detection and multiple years of non-compliance situations mentioned above. Ultimately, the list of situations provided leaves a lot of uncertainty about when relief will be supplied under the Limited Program instead of the General Program since many of the situations listed are inherently vague.
Circumstances Where No Relief is Available – Voluntary Disclosures Program Proposed Changes
The other major change is there are circumstances where the voluntary disclosures program will not consider granting tax penalty relief at all. Under both the current and draft information circular, taxpayers in the following circumstances will not be able to access relief under the voluntary disclosures program:
- taxpayers filing returns with no taxes owing or with refunds expected,
- taxpayers filing elections (including late elections),
- taxpayers disclosing transfer pricing issues covered by an advanced pricing arrangement,
- taxpayers filing returns required to be filed by the taxpayer in the year of bankruptcy, and
- post-assessment requests for penalty and interest relief.
Every one of the above circumstances ineligible for relief under the current voluntary disclosures program information circular is also ineligible for relief under the draft information circular. However the draft information circular reduces the scope of relief further by specifying that taxpayers applying in the following circumstances will not be considered for tax penalty relief under the voluntary disclosures program:
- Applications where the taxpayer is disclosing income from the proceeds of crime,
- Applications by corporations with gross revenue in excess of $250 million in at least two of its last five taxation years,
- Applications relating to transfer pricings adjustments or the penalties levied on large transfer pricing adjustments under subsection 247(3) of the Canadian Income Tax Act,
- Applications where the taxpayer is in receivership or has become bankrupt, and
- Applications that depend on an agreement being made at the discretion of the Canadian competent authority under a provision of a tax treaty.
Second Voluntary Disclosures – Voluntary Disclosures Program Proposed Changes
Taxpayers are expected to remain compliant after using the voluntary disclosures program. The current voluntary disclosure program does not allow a taxpayer to benefit from the relief offered by the program more than once except in unusual situations. Specifically, if the circumstances surrounding the second disclosure are beyond the taxpayer’s control, the voluntary disclosures program may accept the second voluntary disclosure. This aspect of the program was not altered by the proposed changes.
Tax Tips – Providing VDP Relief – Voluntary Disclosures Program Proposed Changes
The proposed changes to the voluntary disclosures program significantly narrow the scope of relief available to taxpayers. Under the proposed changes taxpayers in certain situations will no longer be eligible for relief or will only be eligible for relief under the Limited Program. If you fall into one of these categories, it will be beneficial to apply for relief from the voluntary disclosures program prior to these changes being implemented. If you are a “sophisticated” taxpayer, were non-compliant for many years, actively took steps to avoid detection, or have a large amount of money to disclose, you are at risk only being able get limited relief once the proposed changes are implemented. If your disclosure involves income from the proceeds of crime, transfer pricing, or an agreement being made at the discretion of the Canadian competent authority then you will not be able to qualify for relief once the proposed changes are implemented. Taxpayers who are bankrupt or are corporations earning revenues over $250 million in two of the last five years will also be unable to access relief under the voluntary disclosures program when the proposed changes are made.