Proposed Changes to the Voluntary Disclosures Program (VDP) – How to Submit a Voluntary Disclosure – A Canadian Tax Lawyer Analysis
Proposed Changes to the Voluntary Disclosures Program (VDP)
On Friday June 9 CRA released proposed changes to the Voluntary Disclosures Program (VDP or Canadian Tax Amnesty). These proposed changes are contained in Draft Information Circular - IC00-1R6 - Voluntary Disclosures Program and the new rules are expected to take effect in the fall of 2017 or the beginning of 2018. The new rules significantly reduce the availability of tax amnesty under the VDP. To discuss the proposed changes and how they could affect your circumstances, make an appointment with one of our experienced Canadian tax lawyers.
Current Rules – Submitting a Voluntary Disclosure to the CRA
Under the current rules of the VDP, there are two ways to initiate a voluntary disclosure, on a named basis or on an anonymous basis, of which the latter are typically referred to as no-name voluntary disclosures. Under a named voluntary disclosure, an individual taxpayer coming forth must provide a wide range of identifying information, including but not limited to their name, address, social insurance number, in addition to information. Corporations and trusts making a named voluntary disclosure must similarly provide substantial identifying information. The voluntary disclosure must also include details relating to the information being disclosed, including a description of the specific non-compliance, the taxation years involved, what type of returns or information returns are affected and an explanation of how the particular taxpayer meets the four pre-requisites of the VDP. A named voluntary disclosure must also include a completed Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, signed by the taxpayer.
In contrast, to make a no-name voluntary disclosure, the only identifying information a taxpayer must provide to the VDP is their gender, year of birth and the first three characters of their postal code. For corporations and trusts, our tax law firm typically provides the first three digits of the entity’s postal code, in addition to their territory of incorporation or situs, whichever is applicable.
Other than the identifying information included, the initial submissions for a named and no-named voluntary disclosure are identical, save for the fact that a signed RC199 is obviously not included with a no-name voluntary disclosure. Our office’s current practice, both for named and no-name voluntary disclosures, is to request ninety (90) days, from the date of the VDP’s letter acknowledging the disclosure, in which to provide the required filings and, for no-name voluntary disclosures, to release the identity of the taxpayer. While the VDP will routinely grant extensions to allow for the preparation and submission of proper filings, the VDP requires that the identity of an anonymous taxpayer be revealed within the 90 day timeframe. The VDP will not give a definitive ruling on a taxpayer’s disclosure until all filings are received and the identity of the taxpayer is released to the VDP.
Under the current rules, the Effective Date of Disclosure (“EDD”), the date from which a taxpayer submitting a valid voluntary disclosure will be granted interest relief and protection from potential penalties and prosecution, is the earlier of the following:
- the date the CRA receives a completed and signed Form RC199, or
- the date a letter, signed by the taxpayer or the taxpayer's authorized representative and containing similar information to Form RC199, is received by the CRA.
Therefore, the EDD for a named voluntary disclosure is simply the date on which a complete voluntary disclosure application is submitted to the VDP along with Form RC199 via registered mail. However, for a no-named voluntary disclosure, the EDD is the date on which the no-name voluntary disclosure is submitted to the VDP via registered mail by the anonymous taxpayer’s representative. As a result, it is possible to obtain protection from penalties and/or prosecution under the VDP prior to the taxpayer’s identity being revealed to the VDP. This makes a no-name voluntary disclosure a particularly useful tool when there are clear examples of non-compliance by a given taxpayer, but the availability of records, or extent of the non-compliance, cannot be ascertained with any sort of detail at the time the taxpayer makes the non-compliance known to his or her advisor. In such a case, filing an extremely detailed no-name voluntary disclosure, including all potential examples of non-compliance, with the VDP is a great way of achieving protection under the VDP while documentation is requested and the specific details are worked out.
Proposed Changes – Submitting a Voluntary Disclosure to the Voluntary Disclosures Program (VDP)
In our tax law firm’s view, the proposed changes to the VDP contained in draft IC00-1R6 represent a fundamental shift in the aims of the VDP and will significantly reduce both the attractiveness and utility of the VDP, and may mark the start of the end of the VDP program. Paragraphs 38 and 39 of IC00-1R6 introduce the concept of a “Pre-disclosure Discussion”. Our Canadian tax lawyers view this as one of many changes that will undermine the attractiveness of no-name voluntary disclosures. Quite simply, these paragraphs seek to make it clear that a no-name voluntary disclosure is not a disclosure at all, but merely a non-binding discussion. As opposed to the currently in force provisions of the VDP, which at paragraph 26 of IC0-1R5 nonetheless still make it clear that discussions in the no-name sphere that take place prior to the identity of the taxpayer are informal and non-binding, paragraph 39 of proposed IC00-1R6 has this to say about the effect of a “Pre-disclosure Discussion”:
- These discussions do not constitute acceptance into the VDP and have no impact on CRA’s ability to audit, penalize, or refer a case for criminal prosecution.
Those words remove almost all benefits that are currently associated with no-name voluntary disclosures. If above-noted paragraph 39 of IC00-1R6 leaves any doubt in one’s mind about the policy shift in the VDP’s treatment of no-name voluntary disclosures, paragraph 48 of IC00-1R6 radically alters the definition of the EDD:
- The EDD is the date the CRA receives a completed and signed Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement.
This proposed change also serves to significantly curtail the benefits of coming forward on a no-names basis. Under the proposed rules, taxpayers are not offered any protection, whatsoever, by coming forward through the VDP on a no-names basis. Our Canadian tax lawyers routinely advise clients who have provided evidence of non-compliance to file a no-name disclosure on a priority basis in order to obtain protection under the VDP. If such a client is later (but before the release of their name) the subject of enforcement action by CRA for a matter related to the information disclosed, we release the client’s identity and advise CRA that our client has taken active steps to come clean under the VDP. While it will no doubt take years to determine how CRA will interpret and administer the VDP under the proposed regime, the strict meaning of the words used in IC00-1R6 suggest that such a strategy will no longer be available.
The subject matter of a voluntary disclosure will in all likelihood remain the same. Individual taxpayers and entities alike will still have to provide a substantial amount of identifying information, while also providing details about the specific non-compliance. One key difference between the VDP system and the proposed changes is that a taxpayer must provide explanation of how the particular taxpayer meets each of the five pre-requisites of the VDP, instead of the previous four. The implication of this is that a taxpayer making a disclosure to CRA must include payment of the estimated taxes owing with the disclosure, or propose an acceptable payment arrangement to CRA that is supported by “adequate security”. This is another factor that impacts the current flexibility of the VDP.
Tax Tip - Taking Advantage of the Current VDP Rules
The proposed changes to the VDP promise to be far less friendly to taxpayers who wish to voluntarily come forward to report non-compliance to CRA than the rules currently in place. In particular, it appears that the benefits currently associated with no-name voluntary disclosures will be significantly curtailed. Taxpayers with offshore bank accounts or with multiple years of non-compliance, in particular, will feel the downside of the proposed changes. It is imperative that taxpayers take advantage of the current, more favourable VDP regime currently in place prior to the proposed changes coming into effect. Our team of experienced Canadian tax lawyers are experts on the VDP and can provide you with concise advice on how to best rectify any previous non-compliance with Canadian tax law obligations.
"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."