The Federal Court of Appeal (“FCA”) upheld the judicial review decision of the Federal Court (“FC”) in Livaditis v. Canada Revenue Agency,1 disallowing the taxpayer’s request for relief under the CRA’s voluntary disclosures program (“VDP”) on the basis that the taxpayer’s disclosure was not voluntary.  The FCA decision reaffirmed that for taxpayers contemplating coming forward to make a voluntary disclosure - time is of the essence.

Under the CRA’s VDP, taxpayers must satisfy four basic requirements to obtain relief from civil penalties, potential criminal tax evasion charges and in some cases interest relief.  To qualify, the disclosure must be voluntary, complete, involve the application or potential application of a penalty and include information that is more than one year overdue.  In Livaditis, both the FC and FCA were asked only to review the CRA’s decision in respect of the voluntariness requirement, which prevents protection under the VDP after a taxpayer or, in certain circumstances, a related person, has been contacted by a revenue authority for any reason related to non-compliance.

The facts in Livaditis were straightforward.  Mr. Livaditis was the president of LaCaille Fifth Avenue Inc., which was developing a condominium building in Calgary, called Five West.  In 2003, Mr. Livaditis and four family members acquired units in Five West prior to construction and resold them in 2006 at gains which were not reported.

On October 28, 2008, Mr. Livaditis received a call from a CRA official concerning records related to the first purchasers of units in the condominium.  Three days later, he disclosed to the CRA under the VDP that he had failed to report capital gains on the sale of his condo unit in 2006.

The nature of the phone call Mr. Livaditis received from the CRA official was disputed.  His affidavit stated that the discussion was brief and generally concerned with buyers of condominium units.  However, the CRA’s deponent swore that Mr. Livaditis was informed that the CRA had obtained an “unnamed person requirement” that it would serve on LaCaille to obtain the names of people who may have purchased and sold condominium units without declaring any gain.

The CRA rejected the disclosures filed by Mr. Livaditis and his family on the sole reason that they did not make them voluntarily.  Mr. Livaditis and his family members then applied to the FC for judicial review of the CRA’s decision.

The issue for the FC to decide was whether the CRA’s decision to refuse to grant Mr. Livaditis relief under the VDP was unreasonable.  According to the FC’s review of the CRA’s VD policy, “[a] disclosure may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation or other enforcement action that has been initiated by the [CRA] or other authorities or administrations with which the [CRA] has information exchange agreements.”

Based on the CRA’s VDP guidelines, the FC stated that in determining whether an enforcement action has occurred, the CRA must consider the following:

(a)  Whether there was any direct contact with the taxpayer by a CRA employee or other authority or administration for any reason related to non-compliance or the taxpayer was likely to have been aware of the enforcement action?

(b)  Whether any enforcement action had been initiated against a person associated with or related to the taxpayer or a third party and that enforcement action is sufficiently related to the disclosure in issue and is likely to have uncovered the information being disclosed?

The FC stated that a negative response to either of these questions would mean the disclosure would qualify as voluntary. However, the FC likely meant to state that a negative response to both of these questions is required for the CRA to accept the disclosure as voluntary, as was confirmed by the FCA.

With respect to the first question, the FC was critical of the CRA for placing significant weight on its own official’s version of events while discounting Mr. Livaditis’ side of the story.  In the absence of any genuine reason to favour one version over another, the FC concluded that the CRA’s decision was unfair and not deserving of its deference.  Had the only issue been whether the CRA’s conduct was reasonable in this regard, the FC would have held in Mr. Livaditis’ favour.

However, with respect to the second question, the FC sided with the CRA. It stated that this ground for rejecting a voluntary disclosure does not involve or require taxpayer awareness of any enforcement action.  Thus, once the CRA had begun enforcement against LaCaille, Mr. Livaditis was disentitled to protection under the VDP in relation to any issue connected to the enforcement action. The CRA’s move predated the disclosures and would have uncovered the same information they revealed.  Consequently, the FC held that the CRA’s action was not unreasonable and upheld the CRA’s decision to reject the disclosures.

While the FCA upheld the result of the FC, it did so on other grounds.  With respect to the first question, the FCA stated that the evidence on the record supported the CRA’s conclusion that Mr. Livaditis was aware of an enforcement action against LaCaille set to be conducted by the CRA with respect to the information being disclosed.  The FCA therefore found that there existed a reasonable basis upon which the CRA could have decided as it did and thus the FCA would not interfere.  The FCA upheld the FC and CRA decisions and declined to comment on the FC’s finding in respect of the second question.

While the Courts’ interpretation of the CRA’s policy is not strained, some reasonable criticisms may be made.  By holding that a disclosure is not voluntary where an enforcement action has been commenced against a related party, the Courts established the CRA’s policy as a guiding legal principle.  However, with the greatest of respect to the Courts, the CRA’s policy is merely policy and not law.  Consequently, a Court need not apply it strictly.

Thus even where a taxpayer is making a truly voluntary disclosure, by applying the CRA’s interpretation, the Courts have allowed for potentially anomalous outcomes in the future where a taxpayer’s disclosure may be ruled not voluntary because of some unknown pending enforcement action against someone else.

As a result, Livaditis highlights why taxpayers with undisclosed tax obligations need to move forward promptly before the CRA commences any kind of enforcement action that may preclude obtaining protection under the VDP.