In McCracken v. The Queen1 (“McCracken”), the Federal Court refused to overturn the Canada Revenue Agency’s (“CRA”) decision to reject a voluntary disclosure (“VD”) that was incomplete. The VD was incomplete because the taxpayer, Mr. McCracken, was waiting to get information to report his income from eBay, instead of reporting the income based on his banking records. The McCracken case provides taxpayers and counsel with guidance on the importance of managing and completing VDs in a timely manner.
The four requirements for a valid VD are:
- Voluntary: The VD must be initiated voluntarily and not as a result of a pending audit, investigation or other enforcement action.
- Complete: The taxpayer must provide full and accurate facts and documents for all taxation years for which there was previously inaccurate, incomplete or unreported information.
- Penalty: The VD must involve the application or potential application of a penalty.
- One Year Past-Due: The VD must include information that is at least one year past due.
Mr. McCracken was an eBay “Powerseller” with sales between 2000 and 2006 of approximately one million dollars.2 While Mr. McCracken had copies of his banking records, he requested further records from eBay to help him prepare amended income tax and goods and services tax returns. When eBay did not provide the requested records, Mr. McCracken’s counsel asked the CRA for an extension of time to complete the VD, which was granted. However, when the eBay records were still not forthcoming and a second extension was requested, the CRA refused. Mr. McCracken was accordingly denied relief under the CRA’s VD Program.
Mr. McCracken requested a “second level review” of the CRA’s decision to deny his VD and a further 60 days to complete the VD. Almost six months after requesting the further review, the VD had still not been completed, and in a conversation with Mr. McCracken’s counsel, the CRA indicated that it remained open to receiving Mr. McCracken’s amended tax returns based on his banking records. No returns and supporting documents were filed, ostensibly because eBay had not provided the requested records. Ultimately, the CRA’s patience simply ran out and the earlier decision to reject Mr. McCracken’s VD was maintained, thereby substantially increasing Mr. McCracken’s exposure for tax, interest and penalties.
Mr. McCracken brought an application before the Federal Court to challenge the CRA’s decision to reject his VD. The Court however held that Mr. McCracken and his counsel were given “ample opportunity” to provide information and make submissions and that the CRA’s decision to reject the VD was made fairly on the basis of the evidence and arguments provided. In the Court’s view, Mr. McCracken had the means at his disposal to make a reasonable effort to complete the VD. The Court further held that the CRA’s decisions on VDs should be shown deference and given “broad latitude”. The CRA’s decision was upheld as reasonable and the Court declined to intervene on Mr. McCracken’s behalf. The Court criticized some of the CRA’s apparent mistakes on the file which, although immaterial, were said to demonstrate incompetence and lack of attention. The Court also stated that the same criticism could be made of some of the actions taken on behalf of Mr. McCracken.
The McCracken case illustrates that although the CRA’s VD program is intended to provide taxpayers with relief, the onus remains on taxpayers and their counsel to provide required information and documents on a timely basis. A failure to do so within defined timelines can be fatal.