The Voluntary Disclosure Program (Canadian tax amnesty) allows the taxpayer to correct tax returns previously filed or, in certain circumstances, file a return that should have been filed. If the CRA accepts the disclosure application, the taxpayer is liable to pay the taxes they ought to have paid but would also be eligible for relief from prosecution and, in some cases, penalties that would otherwise have been levied. However, 2018 changes to the program have drastically altered the process of applying for voluntary disclosure.
What were the Changes to the Voluntary Disclosure Program?
To provide some brief context, in 2016 the federal budget promised to crack down on tax evasion and combat tax avoidance by providing the CRA with $444.4 million in additional funding over the next five years. As a part of this effort, in April 2016, the Minister of National Revenue established the Offshore Compliance Advisory Committee ("OCAC") for the purpose of providing recommendations on administrative policies in dealing with offshore compliance.
Amongst other proposed changes, the OCAC proposed drastically revising and tightening the Voluntary Disclosure Program. The Minister accepted the recommendations of the OCAC and on December 15, 2017, the Minister released a revised version of Information Circular IC00-1R6, Voluntary Disclosures Program which came into effect on March 1, 2018. IC00-1R6 included significant changes to the program, including;
- Requiring prospective applicants to pre-pay their estimated taxes owing, provide acceptable security or request to be considered for a payment arrangement to qualify,
- Requiring prospective applicants to file tax returns and additional documentation with the application,
- Splitting applications between the General and Limited Program; and
- Eliminating the "no-name" disclosure method, which previously allowed taxpayers who were uncertain about their tax positions to apply anonymously
What do VDP changes mean to Canadian Taxpayers?
These changes to the Voluntary Disclosure Program make filing a voluntary disclosure a more daunting prospect. Worse, while the OCAC's recommendations were primarily supposed to be aimed at improving enforcement action and increasing revenue, some of these changes are disproportionately punitive to middle-class taxpayers. For example, the new requirements for an applicant to pay taxes immediately upon filing the disclosure application or provide comparable security can have the effect of pricing out the program to less wealthy taxpayers who would have limited liquidity to pay their tax debts.
Additionally, eliminating the “no-name” disclosure method also erased one significant incentive of applying for the Voluntary Disclosure Program, risk-free compliance. Under the previous program, a taxpayer could submit relevant information to CRA without disclosing his or her name. The anonymous disclosure would allow the taxpayer to ascertain the CRA’s response position and what repercussions unfold from the information provided. Though the CRA would be under no obligation to commit to a binding outcome, if the taxpayer proceeded within 90 days by identifying themselves, and the information submitted was complete, the outcome would be as promised by CRA, subject to judicial review if the CRA were to “renege” on its promise.
Information Circular IC00-1R6 brought significant uncertainty to the new Voluntary Disclosure Program through changes like eliminating anonymous disclosure. On the topic of uncertainty, no other change better exemplifies these new uncertainties than the two-track system between the General and Limited programs.
Voluntary Disclosure General vs Limited Program
As of March 1, 2018, the Voluntary Disclosure Program for income tax has been split into a two-track system between the General and Limited Program. Under the General Program, taxpayers are provided relief from penalties and criminal prosecution in relation to the information disclosed. Additionally, taxpayers who qualify under the General Program can also receive partial relief from interest on amounts owed for tax periods beyond the three most recent tax years that were required to be filed. The General Program thus mirrors the relief that was available under the previous iteration of the program.
On the other hand, under the Limited Program, taxpayers are only provided relief from criminal prosecution and gross negligence penalties which are considered to be a quasi-criminal offence. However, they will still be charged with other penalties and full interest as calculated under the Income Tax Act.
According to Information Circular IC00-1R6, the General Program is intended to provide relief to taxpayers who want to correct unintentional errors while the Limited Program is to be applied to cases where there is an element of intentional conduct on the part of the taxpayer or a closely related party. Which track the applicant will be entered into also depends on a number of other factors including:
- the amounts involved;
- the period for which the taxpayer was non-compliant;
- the sophistication of the taxpayer; and
- whether or not the taxpayer made efforts to avoid detection
It seems that the adoption of a two-track Voluntary Disclosure Program was meant to be a punitive measure against taxpayers intentionally or carelessly misreporting or not reporting their income. However, the uncertainty of whether an applicant will qualify for the General or only the Limited program until the applicant has already disclosed all their information to the CRA ultimately disincentivizes participation and thus potential revenue in the new Voluntary Disclosure Program. Given how glaring the differences between the old and new programs are, the Minister could not have been ignorant of the fact that the use of the program would likely decline. It is possible that Minister made the calculation that the revenue gained from taking a stricter stance against misreporting or nonreporting taxpayers to discourage tax avoidance/evasion would ultimately outweigh the revenue gained from allowing taxpayers to willingly come into compliance under the Voluntary Disclosure Program. This is clearly specious reasoning as encouraging compliance through the program and the “no-fault” approach has led to the recovery of millions of dollars of uncollected taxes. Early anecdotal evidence of our seasoned Canadian tax lawyers is that the overall level of taxpayers taking advantage of the program has dropped precipitously since the changeover.
What are the Requirements to Apply for VDP Relief?
In order to be eligible to apply to the new Voluntary Disclosure Program, the application must meet the following five conditions:
- The application must be voluntary. The CRA will not consider any application to be voluntary if it has not been submitted prior to the CRA taking enforcement action based on the same error or omission.
- The application must be complete. The taxpayer must disclose ALL relevant information and documentation necessary to correct the error or omission in the application, including tax returns, to even be considered for the Voluntary Disclosure Program.
- The error or omission being disclosed must involve the application or potential application of a penalty.
- The application must include information that is at least one year past due. For example, if the taxpayer did not file a tax return for the tax year of 2018 and attempted to submit an application on September 20, 2019, for the 2018 year, it would not be accepted for consideration. However, if the taxpayer did not file tax returns for the years 2016 to 2018 and applied for those years on the same day as the previous example, the CRA will consider the 2018 return as part of this disclosure even though the 2018 return is less than one year past due.
- The application must include payment of the estimated tax owing.
Tax Tips – New Voluntary Disclosure Program
As you can see the new Voluntary Disclosure Program is far less lenient than its predecessors and applicants and applying to it can be a daunting prospect. Our experienced Toronto tax law firm can advise you on what you can expect from your dealings with the CRA’s Voluntary Disclosure Program. A professional Canadian tax lawyer at our firm will advise you whether you qualify to be a part of the program at all and if so under what track you are likely to be accepted. And of course, we are going to defend your rights while we are representing you in all dealings with the CRA.
What are my options if my application for the VDP is rejected by the CRA?
If your application for the VDP is rejected by the CRA you can ask for an administrative review of this decision. It is wise to hire an experienced tax lawyer to help you to do this. They will understand the full implications of the reason given by the CRA for denying your application. This will enable them to assess what the best course of action is.
Is it possible to make more than one disclosure to the VDP?
Each taxpayer can only make one VDP disclosure. The CRA expects taxpayers to remain compliant after they have straightened out their tax situation and paid all back taxes and fees. However, they may in exceptional circumstances accept a second application.
Is there a time limit for providing the additional information needed for the disclosure to be deemed complete by the CRA and therefore avoid rejection?
It is important to provide all of the necessary information when you fill out and file your VDP application. Failure to do so can result in rejection and, usually, you are not given the chance to update your application with the missing information. On the rare occasion that the CRA decides to let you provide it, they will tell you how long you have to do so. The absolute maximum is 90 days.
"These articles provide information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."