The Canada Revenue Agency’s (CRA) voluntary disclosure program (VDP) allows taxpayer to correct inaccurate or incomplete information or disclose unreported information for up to 10 previous years. On March 1, 2018, the program was divided into two tracks: the general program and the limited program. Taxpayer’s who fall under the general program will be granted interest relief, will not be criminally prosecuted (for the content of the disclosure) and will not be assessed any penalties. Taxpayer’s who fall under the limited program will not be criminally prosecuted (for the content of the disclosure) and will not be assessed gross negligence penalties (click here for recent changes to the VDP)
One of the conditions of a valid voluntary disclosure application is that the application is voluntary. According to the CRA’s VDP information circular, a VDP application will not be voluntary if “enforcement action relating to the subject matter of the VDP application has been initiated against the taxpayer, or a person associated with, or related to, the taxpayer…” and “the enforcement action is likely to have uncovered the information being disclosed.” In two recent cases, the CRA denied VDP applications because of enforcement action against the same or a related taxpayer and, in both cases, the federal court ruled against the CRA. Both cases turned on whether enforcement action would have uncovered the information being disclosed.
Matthew Boadi Professional Corporation v Canada (Attorney General)
In this case, the applicant, a Canadian corporation owned land in Ghana worth over $100,000. The Income Tax Act requires the corporation to file a tax return (form T1135) in each year it owns foreign property worth over $100,000. The applicant failed to file the return from 2005 to 2013.
In 2015, the applicant filed a VDP application for its failure to file the T1135 forms. The CRA denied the application on the basis that it was not voluntary because the applicant was subject to enforcement action which would have uncovered the failed disclosure obligations. The enforcement action was demand letters the CRA had sent the applicant to file T2 corporate income tax returns. The CRA argued that this enforcement action would have led it to uncover the failure to file the T1135 forms.
The court looked at the years in two batches: 2005 to 2010 and then 2011 to 2013. When the CRA received the VDP application, it was still seeking the 2011 to 2013 returns and the court sided with the CRA providing that it was reasonable for the CRA to conclude that “a CRA agent would seek to follow up with the Applicant regarding its obviously missing T1135 return.” With respect to the 2005 to 2010 years, the court sided with the applicant. When the applicant filed the VDP application, the CRA had already reviewed and assessed his late-filed 2005 to 2010 returns. The court held that there was “nothing in the [CRA’s decision] that supports that the [CRA’] conclusion that the CRA would have likely uncovered the Applicant’s requirement to file T1135 returns for 2005-2010.” In fact, the CRA assessed the 2005 to 2010 returns without discovering that T1135s ought to have been filed but were not.
4053893 Canada Inc. v Canada (National Revenue)
In this case, the CRA disqualified a VDP application by the applicant because of enforcement action against a related taxpayer (the company’s sole owner and director). The CRA wrote to 4053893 Canada Inc.’s (405 Canada) sole owner and director, Brent Harris, to remind him to file his personal tax returns, which he had not done for 2006 to 2015. 405 Canada had not filed its corporate income tax returns since 2003. 405 Canada filed a VDP application for the unfiled returns.
The CRA denied the VDP application because the CRA “started contacting you before the disclosure date for the same matter or information being disclosed.”
The applicant appealed the matter to the federal court. The court sided with the taxpayer. The court explained that the federal court has consistently “held that it is insufficient to simply conclude on the basis of an existing relationship that enforcement action against one taxpayer would uncover information contained in a second taxpayer’s voluntary disclosure.” The CRA must address how enforcement action against one taxpayer would “likely” uncover information that is the subject of voluntary disclosure by another taxpayer. The failure to do so undermines the “elements of justification, transparency, and intelligibility” (which affects whether CRA’s decisions are reasonable). The court held that the CRA’s file (which formed part of the record before the court) did not engage in any analysis with respect to how the enforcement action against Brent Harris would have uncovered the information disclosed by the applicant.
 See paragraph 29 of IC00-1R6 “Voluntary Disclosures Program.”
 2018 FC 53.
 See at para 26.
 See para 28.
 2019 FC 51.
 See para 8.