The Voluntary Disclosure Program
The Canada Revenue Agency’s (CRA) voluntary disclosure program (VDP) allows taxpayer’s to correct inaccurate or incomplete information or disclose unreported information for up to 10 previous years. If a taxpayer’s disclosure meets the CRA’s conditions for the VDP, the taxpayer is not assessed penalties or criminally prosecuted with respect to the disclosure and the CRA charges reduced interest.
The program is intended to promote compliance with Canada’s tax laws.
On December 5, 2016, the Offshore Compliance Advisory Committee (OCAC) presented its report on the VDP to the CRA. The OCAC proposed that the VDP be continued, but with some changes to make it more effective and fair. In response to this report, the CRA announced its intention to implement some of the OCAC’s recommendations.
The changes take effect on March 1, 2018.
The changes do not take effect until March 1, 2018. Taxpayers who have unreported income or past filings that need to be corrected and are concerned that their VDP may fall into the new Limited Program, should consult a tax lawyer immediately to take advantage of the VDP program as it currently stands.
The VDP will now have two tracks: the General Program and the Limited Program.
Under the General Program, taxpayers will be eligible for the relief available under the VDP as it is currently constituted. Under the General Program, the applicant will not be assessed with any penalties, will be granted interest relief (generally, 50 percent of the applicable interest) and will not be prosecuted criminally for the content of the disclosure.
The Limited Program is reserved for applications that disclose “major non-compliance” where there is an element of intentional conduct on the part of the taxpayer. In determining whether there has been major non-compliance (with an element of intentional conduct), the CRA’s considers the following factors:
- Active efforts to avoid detection using offshore vehicles or other means;
- Large dollar amounts;
- Multiple years of non-compliance;
- A sophisticated taxpayer;
- The disclosure is made after an official CRA statements regarding its intended focus of compliance or following CRA correspondence or campaigns; and
Corporations with gross revenue in excess of $250 million in at least two of their last five taxation years will be considered under the Limited Program.
VDP applications relating to transfer pricing agreements may be accepted under the VDP, although this point remains unclear.
Taxpayer’s whose applications are accepted under the Limited Program will only be given relief from gross negligence penalties and criminal prosecution. All the applicable interest and other applicable penalties will be assessed.
The CRA’s stated aim is to promote compliance with Canada’s tax laws and prevent the VDP from being abused by sophisticated taxpayers. However, the Limited Program may catch those who ought to have their application processed under the General Program. The CRA has not defined “large dollar amount.” VDP applications often include large dollar amounts (whatever the definition). Taxpayers who have underreported their income by thousands of dollars may be more likely to file an adjustment request and the CRA would be unlikely to assess a gross negligence penalty. Moreover, there is usually multiple years of non-compliance. If one or two tax years is at issue, the taxpayer, again, may be more likely to file an adjustment request. The CRA often abuses the concept of “sophisticated taxpayer” and includes anyone with any level of education.
Narrower Objection Rights
If a VDP application is accepted under the Limited Program, the taxpayer will be required to waive their rights to object and appeal in respect of the specific matter disclosed in the VDP application. The waiver, however, will not prevent a taxpayer from objecting where the assessment includes a calculation error, relates to a characterization issue (eg, income versus capital gain treatment), or relates to an issue other than the matter disclosed in the VDP application.
Under the current VDP, there are two disclosure methods: the named VDP and the no-name VDP. Under the no-name VDP, taxpayers provide preliminary information to the CRA (which does not include the taxpayer’s identity) and the CRA confirms whether there is anything that would immediately disqualify the taxpayer from participating in the program. If there isn’t, the taxpayer usually provides his/her identity and any other information required for the VDP application.
The CRA has eliminated the no-name VDP. Once the changes take effect, taxpayers not sure about whether they want to participate in the VDP program are given the opportunity to discuss their situation with the CRA on a no-name basis. These discussions are informal, non-binding and general. Moreover, the pre-disclosure discussions will have no impact on CRA’s ability to audit, penalize, or refer a case for criminal prosecution.
Conditions for a Valid Disclosure
The CRA has changed the conditions for a valid disclosure.
There were four requirements to qualify for the VDP:
- It is voluntary. This means that the taxpayer is not aware of any audit, investigation or enforcement action with respect to the disclosure.
- The disclosure is complete.
- There must be a penalty for the inaccurate or incomplete information. In this case, a penalty includes a discretionary penalty, such as a gross negligence penalty.
- The information being disclosed must be one-year overdue.
The CRA has added a fifth requirement—that taxpayers include payment of the estimated tax owing with their VDP application. Taxpayers unable to provide payment may attempt to enter into a payment arrangement with the CRA.