Introduction – Correcting Your Taxes
Under Canada's federal tax system, taxpayers are required to calculate, report and pay their taxes in accordance with the applicable deadlines. According to the CRA, while most Canadian taxpayers are compliant with the law, there are taxpayers who do not file or pay their taxes on time. In response, the CRA created the Voluntary Disclosures Program, also known as VDP or tax amnesty, which aims to encourage non-compliant taxpayers to voluntarily get their tax affairs in order. The incentive for the program is that non-compliant taxpayers are invited to proactively pay off their outstanding taxes, including potentially reduced interest, while avoiding the risks associated with their non-compliance including criminal prosecution and penalties that would otherwise be imposed.
On the one hand, the Voluntary Disclosures Program gives non-compliant taxpayers a second chance to voluntarily step forward and correct their errors or omissions. On the other hand, participation in the Voluntary Disclosures Program is restricted and applicants must meet certain criteria to be accepted and access relief. Voluntary disclosures are a complex area of law that requires detailed analysis and advice from an experienced Canadian tax lawyer.
The Voluntary Disclosures Program
The purpose of the Voluntary Disclosures Program is the avoidance of "tax evasion and aggressive tax avoidance to ensure a system that is responsive and fair for all Canadians". Canada's Voluntary Disclosures Program promotes compliance with the law and allows taxpayers the opportunity to voluntarily:
- Correct inaccurate or incomplete information; or
- Disclose to the CRA information which was not previously reported.
According to the CRA (Information Circular IC00-1R6), the Voluntary Disclosures Program applies to disclosures relating to income tax, source deductions, excise duties under the Excise Act, 2001, excise tax and GST/HST under the Excise Tax Act, as well as charges under the Air Travellers Security Charge Act and Softwood Lumber Products Export Charge Act, 2006.
A valid Voluntary Disclosures Program application must:
- Be "voluntary";
- Be "complete";
- Include payment of the estimated taxes owing. A taxpayer who is not capable of making such payment at the time of the application may request consideration for a "payment arrangement";
- Include information pertaining to income tax that is at least one year past due;
- Include information pertaining to GST/HST for at least one reporting period that is past due.
To qualify for the relief under the Voluntary Disclosures Program, the taxpayer must submit a complete application to the program and meet its requirements. The CRA's intent for the "narrow eligibility criteria to access the program" is to close the gap for taxpayers attempting to use the Voluntary Disclosures Program as a ticket out of jail with respect to their non-compliant tax affairs and their failure to meet their statutory tax obligations. This has been an ongoing trend in the history of the program as the CRA updates its information circular to make the qualification for relief more restrictive.
In this context, a taxpayer includes an individual, corporation, employer, partnership, trust or GST/HST registrant/claimant.
Applications & Relief Under the Voluntary Disclosures Program
Applications Relating to Income Tax Disclosures
Applications relating to income tax disclosures may fall under two tracks (1) general program or (2) limited program.
The General Program
Applications under the general program are eligible for penalty relief and partial interest relief. Under this program, applications are also eligible for relief from reference for criminal prosecution in relation to the information disclosed in the application.
The Limited Program
Applications under the limited program are eligible for partial or reduced relief. Such relief is available for applicants who disclose non-compliance where, based on the facts, there appears to be an "element of intentional conduct" by either the applicant or a "closely related party" to the applicant. Under this limited program, the applicant is also relieved from gross-negligence penalty charges and from reference for criminal prosecution in relation to the information disclosed in his or her application. However, other penalties and charges, such as late-filing penalties, that are relevant to the applicant's tax liability, will apply. Limited program applicants are required to "sign a waiver of their right to object and appeal in relation to the specific issue disclosed".
Applications Relating to GST/HST Disclosures
A Voluntary Disclosures Program application relating to GST/HST may fall under one of the following (1) Wash Transactions (2) Limited Program (3) General Program.
A wash transaction occurs where a supplier failed to charge or collect GST/HST from a Registrant who is entitled to a "full input tax credit". If accepted under the wash transaction program, such applications are eligible for 100% relief. This means that registrants are relieved from penalty charges and from reference for criminal prosecution in relation to the information disclosed in the application. Registrants are required to disclose information pertaining to non-compliance that occurred during the four years prior to their application submission.
This program grants partial relief for applicants who disclose non-compliance where, based on the facts, there appears to be an "element of intentional conduct" by either the registrant or a "closely related party" to the registrant. Under this limited program, registrants are relieved from penalty charges and from reference for criminal prosecution in relation to the information disclosed in his or her application. However, other penalties and charges, that are relevant to the registrant's tax liability, will apply.
Generally, applications by large corporations with gross revenue exceeding $250 million in "at least two of their last five taxation years" are considered under this limited program. Participants under this limited program are also obligated to "sign a waiver of their right to object and appeal in relation to the specific issue disclosed".
Applications accepted under this general program are eligible for penalty relief and partial interest relief. Applications will also be eligible for relief from reference for criminal prosecution in relation to the information disclosed under this category. A registrant is required to disclose information pertaining to any non-compliance during the four taxation years prior to filling the application.
Selecting the Appropriate Track – Limited Program OR General Program?
Under both income tax and GST/HST disclosures, deciding whether to proceed under the limited program or the general program is determined, by the CRA, on a case by case basis. The CRA will consider certain factors including:
- the efforts made to avoid the tax deduction;
- dollar amounts;
- number of years of non-compliance;
- taxpayer/registrants tax knowledge and sophistication;
- the point of time at which disclosures are made (for instance, whether (or not) disclosures are made following a public CRA correspondence and a CRA statement indicating its "specific focus of compliance".
This list of factors is non-exhaustive. As previously mentioned, consideration is made by the CRA on a case by case basis. As well, the existence of a single factor does not necessarily mean that the applicant is eligible for the Voluntary Disclosures Program or any of its benefits. When submitting a voluntary disclosure or tax amnesty application our experienced Canadian tax lawyers specify in detail the facts in support of general program eligibility.
Where Relief May be Considered Appropriate
There are certain circumstances under which relief may (or may not) be considered under the Voluntary Disclosures Program. As well, there are circumstances, under the limited program, where reduced relief may be considered.
Relief may be considered under the Voluntary Disclosures Program where a taxpayer:
- failed to comply with his or obligations under Canada's tax act;
- failed to report taxable income that he or she received;
- claimed ineligible expense on his or her tax return;
- failed to remit source deduction of its employees;
- failed to file an information return;
- failed to report foreign income source that is taxable in Canada;
- under-reported his or her income.
Relief will not be considered under the Voluntary Disclosures Program where:
- a taxpayer makes an income tax disclosure application however there are no taxes owing;
- the applicant has become bankrupt;
- the application was submitted after the CRA received information pertaining to the taxpayer's non-compliance.
Subsequent Applications by the Same Taxpayer
Generally, a taxpayer is entitled to the benefits under the Voluntary Disclosures Program only once. As well, applicants are expected to remain compliant with their tax affairs after receiving relief under the Voluntary Disclosures Program. However, there are circumstances where the CRA may accept a second Voluntary Disclosures Program application by the same taxpayer. The CRA may (but is not obligated to) accept a subsequent Voluntary Disclosures Program application from the same taxpayer where "the circumstances surrounding the second application are not under the taxpayer's control and are related to a different matter than the first application". This subsequent application seems to shed light on the CRA's efforts in maintaining fairness for all Canadians and in allowing taxpayers subsequent opportunities to get their tax affairs in order, particularly in unforeseen circumstances. Our certified specialist in taxation Canadian tax lawyers have successfully submitted second applications on behalf of taxpayers.
To Proceed (or to Not Proceed) Under the Voluntary Disclosures Program
Meeting the requirements of the Voluntary Disclosures Program can be strenuous for taxpayer. As well, this complex area of law can create challenges for Canadians in understanding their personal tax affairs and the risks associated with their participation in the Voluntary Disclosures Program, as well as deciding whether (or not) to proceed under the Voluntary Disclosures Program. To help alleviate some of the challenges associated with the Voluntary Disclosures Program, the CRA implemented the "pre-disclosure discussion" services.
The "pre-disclosure discussion" services permits a taxpayer (or his or her authorized representative) to participate in a preliminary discussion with a CRA representative on an anonymous basis. In particular, this allows the taxpayer to get an insight into the Voluntary Disclosures Program process, a better understanding of the risks associated with remaining non-compliant, the relief available under the program and to discuss his or her personal situation, with the CRA, on an anonymous basis. However, such discussion does not guarantee an acceptance into the Voluntary Disclosures Program, nor does it impact the CRA's power to "audit, penalize or refer a case for criminal prosecution". It is also been the experience of our Canadian tax law firm that the level of CRA employees providing these discussion services is very low and there is minimal benefit in this service.
Voluntary Disclosures Program Application & Ministerial Power
The Minister of National Revenue (the Minister) is not obligated to accept a Voluntary Disclosures Program. The Minister's decision whether (or not) an application made to the Voluntary Disclosures Program is accepted is determined on a case-by-case basis. According to the CRA, in exercising this ministerial discretion, the Minister is guided by the "principles of procedural discretion" which are (1) decisions are to be made in good faith, and (2) decisions are to be made in such a manner that promotes the objectives of Canada's federal Income Tax Act.
If the application is accepted by the CRA, the application taxpayer will be obligated to pay any taxes owing including interest. However, the taxpayer would be eligible for relief from criminal prosecution and in certain circumstances from penalties that he or should would otherwise be obligated to pay pursuant to the "legislation administered by the CRA".
If the Voluntary Disclosures Program application is denied, the CRA should provide the taxpayer the reasons and explanations for the denial. However, even in circumstances where an application is denied or information is not accepted by the CRA, "the CRA reserves the right to audit or verify any information provided" in any Voluntary Disclosures Program application. Below, this article will discuss a taxpayer's administrative and judicial review options where an application is denied relief or only allowed partial relief.
Where the CRA finds any "misrepresentation due to neglect, carelessness, wilful default, or fraud, a reassessment can be issued at any time" for any tax year that is relevant to the misrepresentation. As well, relief that may have been previously granted will be "cancelled" if it is subsequently discovered that an application was intentionally submitted incomplete due to misrepresentation.
The CRA also has the power to refer any information in any application to any other CRA program. This power is granted to the CRA regardless of whether (or not) the Voluntary Disclosures Program application is accepted into the program. As a result, the taxpayer may be assessed or reassessed, subject to penalties or interest, and potentially subject to further investigation and prosecution.
Despite the aforementioned discretionary powers granted to the CRA, there is a limitation period on the CRA's discretion for "relief of penalties and interest". Pursuant to subsection 220(3.1) of the Income Tax Act, the CRA can "waive or cancel all or any portion of any penalty or interest" during the past ten taxation years prior to the during which the application is submitted. This means that the Minister's ability to grant penalty relief is limited to the penalty that could apply to any taxation period falling with the previous 10 years prior the calendar year in which the application was submitted. As well, the Minister's ability to grant interest relief is limited to the interest that accrued during any of the previous 10 years prior to the year in which the application was submitted.
The Date of Disclosure
The date of effective disclosure is crucial for taxpayers as the discrepancy before and after this date could amount to thousands of dollars in taxes, interest and or penalty. According to the CRA, disclosure is effective as of the date that the CRA receives the completed and signed Voluntary Disclosures Program application. Provided that the application is valid and qualifies for relief, the taxpayer is protected from the "initiation of a prosecution action related to the disclosure and penalty relief" with respect to amounts included in the disclosure. This can be problematic if the application is lost in the mail or if the CRA receives information pertaining to the applicant's non-compliance yet before the effective date of disclosure. As previously mentioned, relief under the Voluntary Disclosures Program will not be considered where an application is received after the CRA has knowledge and information pertaining to the non-compliance.
Where necessary, the CRA may grant the taxpayer additional time to furnish further information to complete the application. Upon written request, the CRA may, but is not obligated to, extend this period. Generally, this additional time period is up to 90 days from the effective date of the initial disclosure. Where a taxpayer fails to provide the CRA with additional information requested in the specified time frame, the CRA may enforce penalties or interests against the taxpayer. As well, an investigation or subsequent prosecution may be initiated.
The Benefits & Challenges of the Voluntary Disclosures Program
The Voluntary Disclosures Program creates many benefits for all noncompliant Canadian taxpayers. Particularly, the program can be beneficial for taxpayers who owe taxes and wish to correct their affairs proactively. For the rest of Canada's taxpayers, the advantage of course is that the tax burden is shared more equally the more taxpayers come into voluntary compliance with their obligations.
As previously mentioned, this program allows taxpayers a second chance to correct their "errors or omissions" and in the interest of promoting fairness among Canadians. On the one hand, the Voluntary Disclosures Program "narrow eligibility criteria" makes it difficult for taxpayers who are intentionally avoiding their tax obligations to access its benefits. On the other hand, the program benefits those who are fulfilling their tax obligations. For Canadian taxpayers, the Voluntary Disclosures Program helps them correct their wrongs, get their tax affairs in order, and it provides relief from certain penalties as well as investigation and criminal prosecution. For the CRA, this program can help increase its tax collection success rate and reduce the amount of taxes owing by Canadian taxpayers.
However, where an application is accepted into the program, the CRA can still deny it, partial or full relief, on the basis that the disclosure is involuntary. In this context, the taxpayer may submit a written request for a "second administrative review" asking the Assistant Director to review and reconsider. Should the taxpayer still be unsuccessful, they always have the right to seek judicial review at the Federal Court of Canada. On the one hand, this demonstrates that acceptance into the Voluntary Disclosures Program does not guarantee the taxpayer relief nor does it guarantee access to the benefits under the program. On the other hand, this demonstrates how the CRA's Voluntary Disclosures Program is a tool that creates numerous avenues for taxpayers to correct and address their tax affairs.
The Voluntary Disclosures Program as currently constituted is fairly new and as a result there may be unforeseen challenges to the program that haven't surfaced yet. For instance, a taxpayer may wish to request a "second administrative review" of an application that was denied because the disclosure is deemed involuntary by the CRA. Currently, the CRA will not accept a request for "second administrative review" where relevant and complete information was not submitted within the specified time period.
Further, the CRA's jurisdiction under the Voluntary Disclosures Program applies only to penalty and interest (it does not apply to taxes). This means that the CRA cannot waive a taxpayer's taxes because it lacks jurisdiction to do so.
It is also important to realize that a voluntary disclosure application is a legal process. Although some CPAs will submit VDP applications on behalf of their clients, a taxpayer who uses a CPA without the benefit of a tax lawyer faces risks. Should the voluntary disclosure be rejected the files of the CPA can be seized since there is no solicitor client privilege protecting any information divulged by a taxpayer to an accountant. Furthermore, the ability to apply for second level review or for judicial review may be compromised if the voluntary disclosure application was not drafted in an appropriate legal way.
Tax Tips – Voluntary Disclosures Program
Understanding the Voluntary Disclosures Program process and restrictions is significant for taxpayers. Taxpayers should familiarize themselves with the aforementioned factors that the CRA will consider in evaluating a Voluntary Disclosures Program application to ensure that they make informed decisions regarding their tax affairs.
If you have questions regarding the Voluntary Disclosures Program and its process, or for inquiries regarding voluntary disclosures, please contact our office to speaking with one of our experienced Canadian tax lawyers.
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.