Tax

Full disclosure crucial when filing VDP amid program tightening

By AdvocateDaily.com Staff

With the taxman recently taking a wider stance in aggressively pursuing past non-compliers, taxpayers making an application under the Voluntary Disclosures Program (VDP) should be sure to divulge all relevant information to their lawyer to avoid being reassessed beyond the scope of the program, says Canadian tax lawyer David J. Rotfleisch.

As Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, explains, the VDP is a Canada Revenue Agency (CRA) program that allows taxpayers to correct inaccurate or incomplete information and disclose information not reported in a tax return that had previously been filed or should have been filed.

“Those who file under a VDP application that is accepted by the CRA would need to submit any taxes owing plus any applicable interest but would generally be provided relief from prosecution and, in some cases, interest and penalties that would have been applied if the taxpayer had not come forward under the VDP,” he tells AdvocateDaily.com.

Ultimately, says Rotfleisch, the Income Tax Act (ITA) states that the CRA can waive or cancel all or part of any penalty and interest otherwise payable within a 10-year limit from the relevant tax year.

However, trends show that the CRA has tightened the way it runs the program, as shown in one recent case.

In the matter, the taxpayer had transferred $300,000 to a bank account in the Caribbean. Years later, in an effort to put his affairs in order, the taxpayer made a VDP application concerning the bank account for the 2005 to 2014 tax years, which was within the normal 10-year limit. The CRA accepted the disclosure and provided relief from penalties and interest for those taxation years.

However, says Rotfleisch, using the information provided in the voluntary disclosure, the CRA chose to reach beyond the 10-year limitation period to reassess the taxpayer’s account from 2004 to as far back as 1980.

“Consequently, it imposed penalties and interest for unreported income and failure to file tax returns for those years,” he says.

Rotfleisch says ss. 152(4) of the ITA authorizes the CRA to assess or reassess and add interest or penalties to the taxpayer at any time for a taxation year if the individual has made any misrepresentation that is attributable to neglect, carelessness, wilful default or fraud.

“In this case, the CRA seems to have decided the taxpayer’s inability to provide support for the initial transfer of $300,000 was sufficient to deem it as such,” he says.

The taxpayer objected to the use of his disclosure to reassess previous taxation years, noting that it was against the CRA’s common practices to reach beyond the period covered by the voluntary disclosure.

“Traditionally, it has been the CRA’s common practice to not apply penalties and interest for years before those covered by the voluntary disclosure. The reasons for doing so are presumably similar to that of most limitation periods, that as long periods of time pass, documentation ends up being lost or disposed of which often means the taxpayer could have a harder time objecting to the reassessment,” Rotfleisch says.

As the jurisdiction of the Tax Court of Canada does not include judicial review of the CRA’s discretionary decision-making, the taxpayer applied to the Federal Court seeking an injunction prohibiting the CRA from reassessing the earlier years.

The taxpayer argued that issuing any assessment concerning the adjustment proposal prepared by the CRA would be contrary to the agreement entered into following the voluntary disclosure. The CRA disputed the taxpayer’s argument that the alleged agreement and the additional circular constituted an agreement.

The Federal Court agreed with the CRA that there was insufficient evidence to find a binding agreement, adding that “The public interest — i.e. the orderly application of the ITA — takes precedence here over the financial and other inconveniences that the applicant may face by having … to follow the normal challenge procedure set out in the ITA.”

Rotfleisch notes that the implications of this case are disturbing for taxpayers.

“It suggests that applying under the VDP is an admission of guilt to either neglect, carelessness, wilful default or fraud to past filings. It’s a catch-22 in which the taxpayer applying for the VDP application to avoid penalties automatically ends up being penalized and effectively punished for participating, he says.

If the CRA and the courts continue to hold this position, says Rotfleisch, it will likely have a chilling effect on the VDP in the future.

“These reassessments add significant uncertainty to the VDP. It’s just one more reason to disclose to your Canadian tax lawyer all relevant tax information during the VDP application including information from tax years not covered by the program,” he says.

“The information you disclose is protected by solicitor-client privilege and will allow your tax lawyer to help you navigate the process to get the best possible result from a VDP application,” he adds.

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