Effective March 1, 2018, updated rules apply to the Voluntary Disclosures Program (VDP). This program provides taxpayers the opportunity to voluntarily come forward and correct previous omissions in their dealings with the Canada Revenue Agency (CRA).
The new rules narrow the eligibility criteria to access the program and impose additional conditions on applicants. After a consultation period, the changed process was released in late 2017.
Changes to the VDP affect disclosures under both streams of the program:
- Income tax
- GST/HST and other indirect taxes.
This article takes a closer look at changes to income tax disclosures under the VDP. For more on changes to the GST/HST disclosure process, please see “New Voluntary Disclosures Program: GST/HST Stream."
Acceptance into the VDP for Income Tax Disclosures
If a taxpayer is accepted under the VDP, the CRA may grant partial relief of interest as well as relief from certain penalties, depending on which track the CRA assigns the application to. To be accepted under any of the tracks, the application must meet five conditions:
- Voluntary – The application must be voluntary, which generally means that no enforcement action (e.g., an audit, examination, or investigation by the CRA) has been initiated by the CRA with respect to the information being disclosed.
- Complete – The application must be complete, which requires that previously inaccurate, incomplete or unreported information be provided for all relevant taxation years.
- Penalty – The disclosure must involve the application or potential application of a penalty.
- One year past due – The application must include information that relates to a taxation year that is at least one year past the due date for filing.
- Payment – The taxpayer must include payment of the estimated tax owing with their VDP application. Note that this is a new requirement. If the taxpayer does not have the ability to make the payment with their VDP application, they may request to be considered for a payment arrangement subject to approval from CRA collections officials.
Due to the complexity of transfer pricing issues, these applications will be referred to an existing specialized Transfer Pricing Review Committee, which will review applications for relief of interest or penalties instead of the VDP followed in other situations.
Two tracks for income tax disclosures
Under the new VDP rules, an income tax disclosure can fall under two different tracks:
- General Program
- Limited Program.
General Program
The General Program provides relief to taxpayers who want to correct unintentional errors. Under the General Program, full penalty relief is available and partial interest relief may be granted.
Full interest charges will be assessed for the three most recent years of returns required to be filed. Partial interest relief may be granted in respect of assessments for years preceding the three most recent years of returns required to be filed. Interest relief is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed. This interest relief is generally 50 percent of the applicable interest for those periods.
Limited Program
The Limited Program provides limited relief for disclosures that include an element of intentional conduct on the part of the taxpayer or a closely related party. Under this new track, while relief from criminal prosecution is available, taxpayers will not be granted any interest relief, and penalty relief is restricted only to gross negligence penalties.
How the CRA accepts disclosures for the Limited Program
Acceptance under the Limited Program will be made by the CRA on a case-by-case basis. However, the CRA has indicated that the following factors may be considered in determining whether a disclosure should be processed under the Limited Program:
- the efforts made to avoid detection through the use of offshore vehicles or other means
- the dollar amounts involved
- the number of years of non-compliance
- the sophistication of the taxpayer
- whether disclosure is made after an official CRA statement regarding its intended specific focus of compliance or following broad-based CRA correspondence.
In addition, generally, applications made by corporations with gross revenues in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.
If a taxpayer's application is accepted under the Limited Program, the taxpayer will be required to waive their rights to object and appeal on the specific matter disclosed under the VDP and any specifically related assessment of taxes. This is a new requirement under the revised program, and taxpayers need to consider its ramifications — a BDO advisor can offer expertise in this area. Note that this waiver would not apply to calculation errors, characterization issues (such as income versus capital gains treatment), or matters other than those disclosed under the VDP application.
Elimination of the No-Name Disclosure Method
Previously, taxpayers had the option of making a disclosure under a “no-name,” or anonymous, basis. They were then provided with a 90-day period to decide whether to move forward and complete the application. This was a way for taxpayers to obtain some comfort as to whether their disclosure would be eligible for relief.
The revised VDP eliminates the no-name disclosure method. However, taxpayers still have the option of holding preliminary discussions with the CRA on an anonymous basis.
The preliminary discussions are designed to provide the taxpayer with insight into the VDP process, a better understanding of the risks involved in remaining non-compliant, and the relief available under the VDP.
However, these discussions do not constitute acceptance into the VDP and have no impact on the CRA's ability to audit, penalize, or refer a case for criminal prosecution.
Note that for complex technical reporting issues or questions, taxpayers will be referred to a CRA official in a specialized audit area to discuss their situation anonymously.
Making a Voluntary Disclosure
The CRA has made significant changes to tighten up the VDP, and the result may be increased uncertainty about the specific relief of interest and penalties that may be granted to taxpayers.
Contact a BDO tax advisor if you or your business are considering making a voluntary disclosure application.
Our trusted advisors can help you understand the new rules, complete an application that meets all the conditions of a valid disclosure, assess the likelihood of acceptance under the General Program rather than the Limited Program, and evaluate the merits of making a voluntary disclosure.
The information in this publication is current as of March 7, 2018.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.