Voluntary Disclosures Program Consultations

August 11, 2017

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For many years now, the Voluntary Disclosures Program (VDP) has provided taxpayers with an opportunity to voluntarily come forward and correct previous omissions in their dealings with the Canada Revenue Agency (CRA). Under the current VDP, taxpayers can request that the CRA provide relief from prosecution and penalties. A review of the VDP has been undertaken recently and it may result in significant changes being made to the program.

Why are changes to the VDP being proposed?

In a report to the federal government in October 2016, the House of Commons Standing Committee on Finance recommended that the CRA undertake a comprehensive review of the VDP. On December 5, 2016, the Offshore Compliance Advisory Committee (OCAC), an independent committee composed of tax experts, presented a report to the Minister of National Revenue containing recommendations on how to improve the VDP to make the program more effective and fair. The OCAC recommended the continuation of the VDP, but proposed that the criteria for acceptance into the program be tightened up. In response, the CRA conducted a review of the VDP and in June 2017 they released information regarding proposed changes to the VDP. The CRA also recently undertook consultations with the public on the proposed changes to the program. It is expected that formal changes to the program will be announced in the fall of 2017 and that the changes will be effective after 2017.

Draft Information Circular released

On June 9, 2017, the CRA released “For discussion purposes only – Draft Information Circular – IC00-IR6 – Voluntary Disclosures Program (IC00 – IR6)”. This document outlines the CRA’s revised policy for disclosures involving income tax matters and also source deductions. The proposals retain much of the current VDP, including the key requirements that:

  • the taxpayer must be in the situation that if the CRA were to re-assess the taxpayer without the benefit of the VDP, a penalty would apply, or would have the potential to apply. The penalty type may be a late filing penalty, a failure to remit penalty, an instalment penalty, or a discretionary penalty, such as an omission penalty or a gross negligence penalty. (In the event a penalty is not applicable without the benefit of the VDP, the taxpayer cannot seek relief through the VDP.)
  • the disclosure is voluntary, which means that it is made before the taxpayer is aware of the CRA taking any compliance action against them,
  • the information in question is at least one year overdue, and
  • the voluntary disclosure includes all relevant information.

Similar to the existing program, taxpayers will be expected to remain compliant after being granted relief under the VDP and a taxpayer will generally be entitled to obtain the benefits of the VDP only once.

Note that disclosures involving GST/HST and excise tax matters are addressed in a new draft GST/HST Memorandum released in June for discussion purposes. This separate document has been released in order to better address the different circumstances and complexities arising under transaction-based tax systems. The related proposals are beyond the scope of this article.

Proposed changes to “tighten up” the VDP

Of considerable interest, the proposed changes narrow eligibility for the VDP and impose additional conditions on taxpayers applying under the program. Proposed changes outlined in draft IC00 – IR6, which are designed to “tighten” the program, include the following measures:

  • Require the payment of the estimated taxes owing as a condition of qualifying for the program. The taxpayer will be required to include payment of the estimated taxes owing with their VDP application. Only in extraordinary circumstances will a request to enter the VDP be granted without payment of the anticipated taxes. This change effectively takes away the ability to apply for relief anonymously, which is possible under the current program.
  • Exclude applications that involve transfer pricing and applications from corporations with gross revenue in excess of $250 million from VDP relief. Specifically, applications by corporations with gross revenue in excess of $250 million in at least two of its last five taxation years and applications relating to transfer pricing adjustments or a related penalty will generally not be accepted under the VDP.
  • Change the way the amount of interest relief available is calculated. The Minister may grant partial relief in the application of interest against a taxpayer in respect of assessments for years preceding the three most recent years of returns required to be filed. Generally, this interest relief will be 50% of the applicable interest for those periods. Full interest charges will be assessed for the three most recent years of returns required to be filed. The Minister’s ability to grant interest relief is limited to the interest that accrued during the ten previous calendar years before the calendar year in which the application is filed.
  • Cancel VDP relief if it is subsequently discovered that a taxpayer’s VDP application was not complete due to a misrepresentation attributable to wilful default. The CRA reserves the right to audit or verify any information provided in a VDP application whether it is accepted under the VDP or not. If the CRA finds there is any misrepresentation due to neglect, carelessness, wilful default, or fraud, a reassessment can be issued at any time for any tax year, not just those years included in the disclosure. Furthermore, any relief that may have been granted under the VDP will be cancelled as a result of the misrepresentation.
  • Exclude certain other applications. In addition to the exclusions for large corporations and transfer pricing adjustments, the draft Information Circular will not allow a voluntary disclosure application that depends on an agreement being made at the discretion of the Canadian competent authority under a provision of a tax treaty.
  • Exclude applications that disclose income from the proceeds of crime from VDP relief.

As noted, under the proposals taxpayers will no longer be able to make a voluntary disclosure application on a no-names basis. Having said that, the CRA will allow taxpayers to enter into a “Pre-Disclosure Discussion” on a no-names basis. Such discussions with a CRA official are intended to be informal, non-binding, and are to be done before the identity of the taxpayer is revealed. In addition, they are intended to provide insight into both the VDP process and the risks involved in remaining non-compliant, as well as provide information about the relief available under the VDP. Of importance, these Pre-Disclosure 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.

New “Limited Program” – second track proposed

As part of the tightening of measures, the CRA has proposed a second track for VDP applicants, the “limited program”. If an application meets the parameters for acceptance into the VDP, but the application relates to an incidence of major non-compliance, as such as those listed below, then it may be processed under the limited program. The limited program is limited in that there is no interest relief available – there is only relief of certain penalties. This is in contrast to the first track or “General Program”, which can provide eligible applicants penalty relief and partial interest relief. The distinction between the two programs will be made by the CRA, once an application has been made. Under the limited program, the taxpayer will not be referred for criminal prosecution with respect to the related tax offence, and will not be charged a gross negligence penalty even where the facts establish that the taxpayer is liable for such a penalty. Note however, that other penalties may still apply. As set out in draft IC00 – IR6, one or more of the following situations would constitute major non-compliance:

  • 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; and
  • any other circumstance in which a high degree of taxpayer culpability contributed to the failure to comply.

Summary

While the changes to the VDP are only in the proposal stage, it is important for you to consider how they may impact you and your business if you need to make a disclosure. Consideration should be given to making any disclosures under the VDP this year before the more restricted rules come into effect in 2018. Consult with your local BDO advisor for assistance with making a disclosure or for more information about the proposed VDP changes.

 

The information in this publication is current as of August 10, 2017. 

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.