The Canadian Bar Association
Tax

Proposed changes to the Voluntary Disclosures Program

By David J. Rotfleisch

Voluntary Disclosures Program (VDP) – current rules

The Voluntary Disclosures Program (VDP or Canadian Tax Amnesty) is a Canada Revenue Agency (CRA) program that allows Canadian taxpayers to come forward to correct any inaccurate or incomplete information or disclose information that was not previously reported. Currently, the acceptance of a voluntary disclosure is predicated on the satisfaction of four requirements: 1) a penalty owing; 2) no ongoing enforcement action; 3) the year in question must be at least one year old, and 4) the disclosure must be complete. If a disclosure is accepted under the VDP, the taxpayer will avoid criminal tax evasion prosecution and gain benefits from the waiver of civil tax penalties and partial interest relief.

The CRA has released its proposed changes to the VDP that are expected to come into effect later this year, subject to modifications based on public comments. Under the guise of improving fairness and accountability, the proposed changes look to narrow eligibility for the VDP, reduce benefits from disclosing, and impose additional requirements on applicants. Additionally, the VDP is expected to shift from the current “one size fits all” approach to a less generous two-track system. Call one of our Canadian tax lawyers and learn more about making a voluntary disclosure before the rules change adversely.

Proposed key changes to the VDP

On Friday, June 9, CRA released proposed changes to the VDP. These changes were released for public comment and the new rules are expected to take effect in the fall of 2017. The new rules significantly reduce the availability of tax amnesty under the VDP.

Under the current rules, as long as a taxpayer fits the four criteria set out above, the VDP does not restrict taxpayers based on the source of their unreported income or incorrect reporting. The new changes look to exclude, amongst other things, voluntary disclosures where the disclosed income is from proceeds of crime, where a corporation has gross annual revenues over $250 million, and where the disclosure relates to transfer pricing adjustments.

Furthermore, the VDP is proposing to administer voluntary disclosures through two different tracks. Track one is a general program that provides the maximum penalty and interest relief, while track two is a limited program that provides reduced relief. Under these changes, a disclosure accepted under the general program will allow a taxpayer to avoid criminal tax fraud prosecution, receive full civil tax penalty waiver, no reduction in interest for tax assessments in respect to the three most recent years, and a 50 per cent reduction in interest in respect to tax assessments preceding the most recent three years.

On the other hand, a disclosure under the limited program still allows a taxpayer to avoid criminal tax evasion prosecution, but will not provide any penalty relief except for the waiver of gross negligence penalties, and no interest relief for any years. Generally speaking, where a taxpayer is sophisticated, has made active efforts to avoid detection, has large dollar amounts of unreported income, has multiple years of non-compliance, or is in any way highly culpable in contributing to the failure to comply, then relief will only be granted under the limited program.

Of particular note is that the proposed changes appear to no longer allow taxpayers to ask to limit the years being disclosed in order to meet the completeness requirements. Under the new scheme, taxpayers will be required to make all reasonable efforts to estimate all unreported income regardless of the availability of books and records. This is particularly problematic because the VDP only has the legal authority to grant penalty and interest relief for assessments in respect to the most recent 10 years. Where a taxpayer’s situation extends past ten years prior, the taxpayer will be required to provide estimates of his unreported income regardless of the available books and records, yet be ineligible for penalty or interest relief for the years more than 10 years past.

An additional requirement that is being proposed will require a taxpayer to make a payment of the estimated amount of tax that will be owed with the disclosure application to the VDP. If a taxpayer is unable to make the payment of the estimated tax owing, then in order to qualify, the taxpayer must make a payment arrangement supported by adequate security with CRA collections officials; however, the guidelines provide that such an arrangement will only be made in extraordinary circumstances.

Moving forward with the VDP

While these proposed amendments do not change the fact that the VDP can be a useful and beneficial program for taxpayers to come forward with past reporting errors, there is no doubt that the CRA is proposing to heavily curtail the benefits and availability of the voluntary disclosure. Once these changes are in effect, making a disclosure will become significantly more burdensome on the taxpayer as well as provide less incentive to disclose, especially where the taxpayer expects that he may only qualify for the limited program.

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