Proposed changes to the Canada Revenue Agency’s (CRA) Voluntary Disclosure Program (VDP) will significantly limit benefits of the program in many circumstances.

This past summer has been laden with numerous proposals put forth by the Ministry of Finance and Canada Revenue Agency, effectively resulting in an overhaul to multiple areas of Canada’s taxation regime. Understandably, many stakeholders feel overwhelmed by the bombardment of changes which were proposed during the very short Canadian summer season, a time when many prefer to set aside the complexities of their tax situation to focus on more relaxing activities.

However, as we settle back into our general routines, it is important to revisit these proposals, review their potential impacts, and consider opportunities where it may be prudent to act before it’s too late.

Early this summer, the CRA released a Draft Information Circular – IC00-1R6 containing proposals which amount to a significant overhaul of CRA’s well established VDP.   If the proposals are implemented, the new program will apply starting January 1, 2018.

The VDP is an initiative designed to encourage taxpayers to correct inaccurate or incomplete information, or to disclose information not previously reported to CRA, with respect to various areas of taxation, including income tax and GST/HST.

By enticing taxpayers to voluntarily come forward and correct any previous errors or omissions in their tax affairs without fear of prosecution or civil penalties, the system provides an avenue for taxpayers to put an end to spiraling delinquencies, make amends for past delinquencies, and move forward in compliance. The current program has been effective in bringing significant dollars back into the Canadian Tax System, particularly with respect to offshore compliance matters, where it is naturally more difficult for CRA enforcement activities to identify instances of non-compliance.

The current VDP program which will be effective until the end of the year offers an opportunity for unlimited relief  from penalties and partial interest relief for first time disclosures in which the delinquency occurred in the prior 10 years. The current program’s guidelines do not discriminate based on the size or type of taxpayer or nature of the delinquency, provided the following basic criterion to qualify is met and CRA approves the VDP application: 

1. The disclosure must be voluntary: CRA must not have already commenced enforcement action or audit activity that would likely uncover the delinquency at the time the application is made.
2. The disclosure must be complete: Full and accurate facts and supported information must be provided for all years in which there were known delinquencies associated with any and all tax accounts with which the taxpayer is associated.
3. Penalty: A disclosure must involve the application, or potential application of a penalty.
4. The disclosure must generally include information that is at least one year past due: Information related to a delinquency which is less than one year past due will only be accepted if it is a component of a complete disclosure that does contain information which is at least one year past due, or where the information corrects a previously filed return.

The program currently offers taxpayers the ability to submit a disclosure on a no-name (i.e. anonymous) basis, allowing taxpayers to receive feedback from CRA whether any information provided might disqualify the taxpayer from relief under the program as well as the implications of the disclosure prior to revealing their identity.

What is expected to change? 

However, the proposals released in June 2017 indicate that circumstances that will qualify for relief under the VDP program will be significantly curtailed as of January 1, 2018. In addition to limiting the circumstances qualifying for the VDP program, the release also indicates that the CRA intends to abolish the comfort afforded by an anonymous pre-review described above under the no-names disclosure program.

Notably, CRA intends to create two “tracks” of disclosures, differentiating between what they consider on a case by case basis inadvertent and minor non-compliance (i.e. General relief track) and Major non-compliance infractions (i.e. Limited relief track).

Circumstances qualifying under the general track will continue to qualify for relief from criminal prosecution, penalties, and partial relief from interest. However, circumstances considered under the limited track will be scrutinized more closely for completeness before being accepted, and will not be spared from applicable penalties and interest. The only protection the program will provide to those determined to be eligible for limited relief will be from criminal prosecution and specific gross negligence penalties that would otherwise apply.

CRA has provided guidance in their draft circular on what they intend to consider instances of Major Non-compliance that would only apply for limited relief.

Circumstances of “Major non-compliance” in which CRA would only apply limited relief (proposed):

1. Disclosures involving large dollar amounts;
2. Disclosures involving multiple years of non-compliance;
3. Disclosures that involve those CRA considers to be “sophisticated taxpayers”;
4. Disclosures where active efforts to avoid detection through the use of offshore vehicles or other means are apparent;
5. Disclosures made after an official CRA statement or correspondence regarding an intended focus  or campaign in a particular area of compliance; and/or
6. Any other circumstance in which a high degree of taxpayer culpability contributed to the compliance failure.

Also, as of January 1, 2018, all applications under either the General or limited program, will need be accompanied by full payment of the estimated taxes owing for consideration. Only in extraordinary circumstances and with approval from CRA collections officials will a voluntary disclosure be considered under the program with a payment arrangement supported by adequate consideration.

Furthermore, CRA has identified additional circumstances which they indicate would no longer qualify for any relief under the program.

Circumstances when VDP relief will not be considered after January 1, 2018 (proposed):

1. Applications by corporations with gross revenue over $250 million in at least two of its last five taxation years;
2. Situations involving transfer pricing adjustments and/or penalties and/or advanced pricing arrangements;
3. Applications submitted by bankrupts and/or persons in receivership; and
4. Applications reporting income from illegal activities.

CRA is expected to release their final draft of IC00-1R6 outlining the changes to take place effective next year, but the final version is greatly expected to reflect very closely the proposals outlined above. It would therefore be prudent for all taxpayers to review their tax position and enquire about any uncertain tax positions or items that may need to be corrected.