Introduction: What is a Voluntary Disclosure Application in Canada?
A Voluntary Disclosure Application, also commonly known as a VDP application in Canada, is a formal process administered by the Canada Revenue Agency (CRA) that allows Canadian taxpayers to correct previously inaccurate or incomplete information, to disclose information they should have provided to the CRA, and to obtain relief from penalties, interest, or potential prosecution. Many other countries also have similar programs, although the eligibility criteria, administration, and applicable rules can be very different. For more information on similar programs around the world, check out our mini-series on this topic: Canadian Tax Lawyer Analyzes Tax Voluntary Disclosure Programs Around the World.
The primary purpose of the CRA's Voluntary Disclosure Program (VDP) is to promote compliance with Canada's tax laws. The VDP encourages taxpayers who have made errors or omissions in their tax filings to come forward voluntarily and rectify the situation before the CRA becomes aware of or takes action regarding the non-compliance issues. This program provides relief from penalties, interest, and prosecution, subject to relevant limitation periods.
Créations Guimel Inc. v. Canada (National Revenue): A Voluntary Disclosure Application Can Be Denied Due To Incompleteness.
Créations Guimel Inc., the Applicant in this case, submitted a Voluntary Disclosure Application in June 2019 to request relief under the CRA's Voluntary Disclosures Program (VDP) for the Applicant's 2008 through 2017 taxation years. This application was related to the Applicant's proceeds from a 2007 sale of assets that were invested in Luxembourg and later used to purchase property in France. The Canada Revenue Agency (CRA), after more than 4 years of processing, denied the VDP relief primarily due to the Applicant's failure to provide a T2 return for the 2007 taxation year in October 2023.
The Applicant sought judicial review of the CRA's decision to deny relief under the Voluntary Disclosure Program. The Applicant argued that its 2007 tax return was outside the scope of the VDP application and claimed that the CRA breached procedural fairness without issuing the Applicant a "final delay" notice before denying the Applicant's Voluntary Disclosure Application. The Applicant asserted that there existed a legitimate expectation of receiving a "final delay" notification by letter, consistent with prior CRA practice, before a decision was made.
The CRA argued that the Applicant's 2007 tax return was indeed relevant to the Voluntary Disclosure Application as that the application requires disclosure of the Applicant's all prior non-compliance. The CRA further contended that the officer reviewing the Applicant's VDP application acted reasonably in denying the application due to the incomplete information provided by the Applicant, after giving the Applicant multiple extensions of time and opportunities to provide the required 2007 T2 return.
The Federal Court sided with the CRA and dismissed the Applicant's application for judicial review. The Court found that the Applicant's 2007 tax return was relevant to the VDP application and that the CRA's decision to deny relief was reasonable. Furthermore, the Court noted that there was no breach of procedural fairness, stating that the level of procedural fairness owed in the CRA's processing of a VDP application is minimal because the program offers discretionary relief from penalties for non-compliance with the Income Tax Act. The case thereby establishes that the level of procedural fairness owed to applicants within the Voluntary Disclosures Program is minimal. This is due to the program's discretionary nature, as it provides relief from penalties for existing non-compliance with tax laws.
Finally, the Court concluded that the CRA was entitled to deny an incomplete Voluntary Disclosure Application without issuing a "final delay" notice or warning the Applicant after the CRA had provided the Applicant an extended period of time to provide the requested document. The Court also commented that "when a delay has lapsed and the document was not provided, a taxpayer must seek an extension of time to provide documents, which may be refused."
Consequently, it is the applicant's responsibility to address deadlines imposed by the CRA in relation to a Voluntary Disclosure Application and to explicitly request an extension of time if the applicant requires additional time to respond to a CRA's request. The CRA is not required to provide extensions of time absent a request from the taxpayer, although the CRA can exercise its discretionary power to extend the deadline without such a request.
Examining The Criteria For A Successful Voluntary Disclosure Application: Voluntariness, Completeness, Application of Penalty, and the One-Year Rule
After a taxpayer submits a Voluntary Disclosure Application, the CRA will issue an acknowledgement letter, confirming the receipt of the application and the effective date of disclosure (EDD). The CRA considers the EDD to be the earlier of two dates:
- The date the CRA receives a completed and signed Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement.
- The date the CRA receives a letter, signed by the taxpayer or their authorized representative, that contains information similar to that requested on Form RC199. This could be an initial submission outlining the nature of the non-compliance and the intent to file a full VDP application.
The EDD is critical for establishing the "voluntariness" condition of the VDP. As long as the CRA has not initiated any enforcement action (like an audit or investigation) related to the disclosed information before this effective date, the disclosure is considered voluntary. If the CRA initiates actions after the EDD but before the full disclosure is complete, it will generally not invalidate the taxpayer's VDP application.
For a VDP application to be accepted, the taxpayer's disclosure must meet the following criteria:
- Voluntariness: The CRA must not have initiated any enforcement action (e.g., audit, collection action, demand letter) related to the information being disclosed, and the CRA must not have been aware of the information included in the disclosure prior to the effective date of disclosure.
- Completeness: The application must include all prior non-compliance for all relevant tax years
- Application of Penalty: There must be a penalty that would otherwise apply if the VDP application were denied by the CRA. However, there can be no penalty or interest owing once the VDP application is accepted by the CRA and penalties are waived entirely.
- The One-Year Rule: The disclosure must involve information that is at least one year past due (if it is related to income taxes) or information that is at least one reporting period past due (if it is related to GST/HST payable).
Pro Tips – Balancing The Voluntariness and The Completeness of A Voluntary Disclosure Application
Balancing the voluntariness and completeness requirements in a Voluntary Disclosure Application is a delicate act, as both are foundational to a successful application. The voluntariness requirement dictates that the taxpayer must come forward before the CRA has initiated any enforcement action related to the non-compliance. This creates a time-sensitive window: the sooner a taxpayer initiates a disclosure, the less likely the CRA is to have already begun a tax audit or investigation into the specific issues included in a taxpayer's disclosure. This urgency might pressure taxpayers to submit an application quickly, even if all supporting documentation is not yet fully prepared.
However, a premature or incomplete submission risks failing the completeness requirement. The CRA demands that a VDP application be complete and thorough, providing all relevant facts, returns, and supporting documents for all affected tax years. If the initial submission is too sparse, or if the taxpayer fails to provide the requested information within the stipulated deadlines, the CRA can deem the application incomplete, potentially denying relief and subjecting the taxpayer to full penalties, interest, and even prosecution. This means that while speed can secure voluntariness, rushing can jeopardize the ultimate acceptance of the disclosure.
If you believe that you need assistance to prepare a Voluntary Disclosure Application or to complete a Voluntary Disclosure Application that you have already filed with the CRA, you should engage with one of our expert Canadian tax lawyers. Our expert Canadian tax lawyers can help determine the scope of disclosure, advise on how to remedy the non-compliance issues, prepare, file, or amend the Voluntary Disclosure Application, and review any documents and returns to be provided to the CRA.
FAQ
Can I Submit A Voluntary Disclosure Application Anonymously?
Unfortunately, Canadian taxpayers can no longer submit an anonymous (also known as "no-name") Voluntary Disclosure Application as of March 1, 2018. A Voluntary Disclosure Application in Canada now requires the applicants to provide their identification information at the time of application. Instead, the CRA provides the option for taxpayers and their representatives to use the CRA's Pre-Disclosure Service to anonymously participate in preliminary discussions about potential disclosures. The discussions are meant to be informal, non-binding, and anonymous. We recommend that you speak with an experienced Canadian tax lawyer before engaging in such a discussion with the CRA to avoid unintentional disclosure of your identity, which will likely jeopardize your chance to qualify for relief under the Voluntary Disclosure Program.
What Happens If My Voluntary Disclosure Application is Incomplete At the Time of Filing?
It is usually recommended that a Voluntary Disclosure Application should be complete before an applicant submits the application. However, at times, it may be necessary to submit the application without all of the required documents or returns. For example, a Voluntary Disclosure Application may need to be submitted before the end of a calendar year to qualify for the maximum interest relief, which is subject to a 10-year limitation period. Another common situation that may justify the submission of an incomplete application is that the disclosure involves a significant number of tax years and faces the risk of the CRA becoming aware of the prior non-compliance.
The best way to make sure that your Voluntary Disclosure Application is not rejected due to incompleteness is to provide the required documentation and returns as soon as possible, preferably even before the CRA requests you to provide them. Once an application is submitted, paragraph 33 of the Voluntary Disclosure Program guidelines provides that a period of no more than 90 days from the effective date of disclosure (EDD) is normally provided for an applicant to submit additional documents and information. If you require assistance in completing your Voluntary Disclosure Application, please contact our expert Canadian tax lawyers to assist you with your application.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.