CRA Plans to Strengthen Its Voluntary Disclosure Program

The Voluntary Disclosure Program (VDP) will no longer be “one size fits all.”

The Canada Revenue Agency (CRA) says it is planning major changes to the program and has launched an online consultation allowing taxpayers to have a say about the proposals.

The disclosures program gives taxpayers an opportunity to voluntarily come forward and correct previous omissions in their dealings with the CRA. As a result, they may, under certain conditions, avoid prosecution, penalties and possibly interest on the amounts owed.

The CRA conducted an extensive review of the program in response to a recommendation by the House of Commons Standing Committee on Finance. The agency also benefited from the advice and recommendations by the Minister’s Offshore Compliance Advisory Committee, an independent committee of tax experts.

Recommended Changes

Here are some of the instances where that panel of tax experts urged a reduction in a taxpayer’s relief from interest and penalties:

• Deliberate or willful default or carelessness amounting to gross negligence,
• Active efforts to avoid detection through offshore vehicles or other means,
• Large dollar amounts of tax avoided,
• Multiple years of noncompliance,
• Repeated use of the VDP,
• A disclosure motivated by CRA statements regarding its intended focus of compliance or by broad-based CRA correspondence or campaigns,
• Avoidance transactions undertaken or continued after implementation of the Common Reporting Standard, or
• Any other circumstance in which a high degree of culpability contributes to the failure to comply.

The committee stated that tax relief could be reduced by increasing the period for which full interest must be paid or by denying relief from civil tax penalties.

Actual Proposed Changes

The most significant policy change follows the committee’s first recommendation that the VDP should offer less generous relief in certain circumstances. Major cases of noncompliance that are disclosed won’t receive the same level of relief as they would through the current program.

A number of other tightening measures are being proposed, including measures that would:

• Require the payment of the estimated taxes owed as a condition of qualifying for the program,
• Exclude applications that involve transfer pricing,
• Eliminate applications from corporations with gross revenue exceeding $250 million,
• Exclude applications that involving income from crimes,
• Change the way the amount of interest relief is calculated, and
• Cancel relief if it’s discovered that a taxpayer’s application wasn’t complete due to a misrepresentation attributable to willful default.

“Our government has made cracking down on tax cheats a priority, because when everyone pays their fair share, we all continue to benefit from the social programs that improve our quality of life,” Minister of National Revenue Diane Lebouthillier said in announcing the plan to amend the program.

The VDP applies to disclosures relating to income tax, excise tax, excise duties under the Excise Act, 2001, source deductions, GST/HST and charges under the Air Travellers Security Charge Act and the Softwood Lumber Products Export Charge Act, 2006.

How the Program Currently Works

The VDP has two tracks for income tax disclosures. The first is a General Program. If accepted, these applications will be eligible for penalty relief and partial interest relief.

The second track is a Limited Program, which provides limited relief for applications that disclose major non-compliance, including one or more of the following situations:

• Active efforts to avoid detection through the use of offshore vehicles or other means,
• Large dollar amounts,
• Multiple years of noncompliance,
• Disclosures made after an official CRA statement regarding its intended focus of compliance, and
• Any other circumstance in which “a high degree of taxpayer culpability contributed to the failure to comply.” For example, a taxpayer who has been transferring undeclared business income earned in Canada to an offshore bank account since 2010.

Relief Provided Under the VDP

1. Penalty Relief. If a VDP application is accepted as having met all required conditions, the taxpayers won’t be charged penalties. The agency’s ability to grant penalty relief is limited to any taxation year that ended within the previous 10 years before the calendar year in which the application is filed.

Taxpayers also won’t be referred for criminal prosecution with respect to their disclosure (such as for tax offences) and won’t be charged a gross negligence penalty even where the facts establish that the taxpayer is liable for such a penalty. However, taxpayers will be charged other penalties when they apply.

2. Interest Relief. In addition to penalty relief, if an application is accepted, taxpayers may receive partial relief from interest related to assessments for years preceding the three most recent years of returns required to be filed (subject to the limitation period).

Generally, 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. No interest relief will be provided to taxpayers whose application is accepted under the Limited Program.

The CRA urges taxpayers to participate in the consultation, saying everyone has a role to play to ensure the tax system is more innovative, responsive and fair for all Canadians. The consultation allows taxpayers to have their voices heard and to play a role in shaping policy.

Questions to Consider

Among the questions the CRA would like taxpayers to address in the online consultation are:

1. Is VDP the right program for taxpayers to fix mistakes? The CRA wants to know if the VDP should apply to those who make errors on their income tax returns, or just to those who knowingly choose to avoid paying taxes.

2. Do the changes strike the right balance? When conducting its review, the CRA considered comments made by the Offshore Compliance Advisory Committee about striking the right balance between helping those who were fully compliant and having appropriate consequences for those who were seriously breaking the rules.

You can find out more by going to CRA’s web page.

Next Steps

Comments are requested by August 8, 2017. The CRA plans to announce changes to the program in the autumn of 2017. The consultations will assist the Government of Canada on determining the next steps for the VDP policy.