The Canadian Government released a revised version of Information Circular IC00-1R6, Voluntary Disclosures Program, on December 15, 2017 (the "Circular") which will apply to voluntary disclosure applications received by the Canada Revenue Agency (the "CRA") on or after March 1, 2018.
The Circular describes the program by which the CRA administers the discretionary authority of the Canadian Minister of National Revenue (the "Minister") to grant relief from interest and penalties arising from errors and omissions relating to income tax and source deductions pursuant to subsection 220(3.1) of the Income Tax Act (Canada) (the "ITA").
For taxpayers considering making a voluntary disclosure application in respect of Canadian income tax issues, the changes will generally result in greater uncertainty as to the specific relief of interest and penalties that may be granted.
The changes to the voluntary disclosures program (the "VDP" or the "Program") include:
- requiring immediate payment of the estimated taxes owing as a condition to qualify for the program;
- removing the "no-name" disclosure method which had provided temporary anonymity to taxpayers who were uncertain about their tax positions;
- introducing a new Limited Program which provides reduced relief to taxpayers in cases where there is an element of intentional conduct in a taxpayer's failure to comply with tax obligations;
- referral of relief applications in respect of transfer pricing adjustments or penalties to the Transfer Pricing Review Committee;
- explicitly reserving the right of the CRA to audit or verify information provided in a VDP application and to cancel relief that would have been eligible for relief under the VDP if the error or omission resulted from misrepresentation due to neglect, carelessness, wilful default or fraud; and
- for the Limited Program, requiring that taxpayers waive their rights to object and appeal in relation to the specific matter disclosed and any related assessment of taxes.
Voluntary disclosure applications that are received on or before February 28, 2018 will be processed under the "old" Program. However, while some taxpayers may be tempted to rush to file applications by February 28, 2018 in order to participate in the old Program, consideration should be given as to whether there is sufficient time to do so properly and whether it may be advisable to submit an application under the new Program despite the drawbacks of the new regime.
In this regard, it is recommended that taxpayers who have sufficiently completed their analysis of the potential errors and omissions, the information and document gathering and return preparation, file an application under the old Program, as it will generally result in greater certainty with respect to the tax relief available. Also, having an earlier effective disclosure date (as discussed below) will almost always be beneficial to the taxpayer.
Overview of the New Voluntary Disclosures Program
The purpose of the CRA voluntary disclosures program is to encourage taxpayers to voluntarily come forward and correct errors and omissions in their tax affairs. If accepted into the Program, a taxpayer will generally have to pay the taxes owing, as well as full or partial arrears interest. Such taxpayers would also typically be eligible for relief from prosecution and certain penalties (see discussion of the General Program and Limited Program below).
In order to be accepted into the new Program, the following five conditions must be met:
- Voluntary: The disclosure must be "voluntary", which generally means that no "enforcement action" has been initiated with respect to the information being disclosed to the CRA. Furthermore, a disclosure will not be considered voluntary in cases where the CRA has received information regarding a specific taxpayers' potential non-compliance (for example, as part of a leak of offshore information such as in the "Panama Papers" or the "Paradise Papers"  );
- Complete: The disclosure must be "complete", which requires that accurate facts be disclosed for all relevant taxation years or reporting periods. If books and records no longer exist, the taxpayer should make reasonable efforts to estimate the income at issue for those years;
- Penalty: The disclosure must involve the application or potential application of a penalty;
- One Year Past Due: The disclosure must include information that is at least one year past due; and
- Payment: The taxpayer must either include payment of the estimated tax owing with the VDP application or make arrangements for payment with the CRA collections officials. Payment of the estimated tax was not a condition of acceptance under the old Program.
Making a disclosure application requires that the taxpayer: (i) provide the information in Form RC199, either on the form itself or other correspondence, (ii) file all relevant tax returns, forms and schedules (including amended returns) necessary to correct any non-compliance, (iii) name the advisor that assisted in the VDP application, and (iv) co-operate with any requests by the CRA for books, records or other documents.
The effective date of disclosure is the date that the CRA receives a completed and signed disclosure application. The taxpayer has up to 90 days (subject to an extension if available) from this date to complete the application. The taxpayer is also granted protection from the initiation of prosecution action related to the disclosure from this effective date.
The Circular explicitly states that a second application will not be accepted if it is made for the same issue that was previously denied for being incomplete due to outstanding information not being received by the required date.
Removal of No-Name Disclosure Method
Under the old Program, there was an option for the taxpayer to proceed under a "no-name" disclosure method. This "no-name" disclosure method typically required that the taxpayer reveal the taxpayer's identity within 90 days of the effective date of disclosure. If the taxpayer decided not to proceed, a subsequent opportunity to make a "no-name" disclosure would not be available and there would also be the risk of an enforcement action being made based on the incomplete details provided.
While the "no-name" disclosure method often provided comfort to taxpayers, the requirement to reveal the taxpayer's identity in 90 days often resulted in the taxpayer having to decide whether to proceed based on limited information. In practice, a taxpayer making a voluntary disclosure on a "no-name" basis generally would have been prepared to proceed with the disclosure application barring unforeseen circumstances. Nonetheless, the removal of the "no-name" disclosure method could create further uncertainty and discourage taxpayers from making voluntary disclosures.
The Circular does refer to the option of having preliminary discussions with the CRA prior to making a disclosure application. However, it is uncertain, at this early stage of the Program, how this will be different from the general assistance that the CRA currently provides, such as by way of an informal request to the CRA rulings directorate.
General Program vs Limited Program
A major change in the new Program is that income tax disclosures will now fall into one of two different tracks: (i) a General Program which provides penalty relief and partial interest relief, and (ii) a Limited Program with reduced penalty relief and no interest relief.
Under the General Program, in addition to not charging penalties, the Minister will typically grant partial relief in the application of arrears interest. Under the (new) General Program, this partial interest relief is 50% of the applicable interest in respect of assessments for years preceding the three most recent years of returns required to be filed. Under the old Program, the partial interest relief was typically a reduction of the arrears interest rate by 4%. As before, full interest will be charged for the three most recent years of returns required to be filed under the General Program.
Under the Limited Program, the taxpayer will not be charged gross negligence penalties nor referred for criminal prosecution. However, the taxpayer will be responsible for paying tax, full interest and other applicable penalties (such as late filing penalties).
The ITA limits the Minister's ability to grant penalty and interest relief only to taxation years that ended within the previous ten (10) years before the calendar year in which the application is filed. However, the Minister can grant relief on the interest that accrued during the previous ten (10) calendar years regardless of the taxation year (or fiscal period) in which the tax debt arose.
The CRA will notify the taxpayer, on acceptance into the Program, whether the disclosure has been accepted into the General Program or the Limited Program. The Circular states that VDP applications that disclose non-compliance involving an element of intentional conduct on the part of the taxpayer, or a closely related party, will fall into the Limited Program.
The Circular lists the following factors that the CRA may consider in accepting a disclosure into the Limited Program:
- efforts were made to avoid detection through the use of offshore vehicles or other means;
- the dollar amounts involved;
- the number of years of non-compliance;
- the sophistication of the taxpayer; and
- the disclosure is made after an official CRA statement or broad-based CRA correspondence regarding a specific compliance focus area of the CRA.
Furthermore, the Circular states that applications by corporations with gross revenue in excess of $250 million in at least two of the last five taxation years, and any related entities, will generally only be considered under the Limited Program.
Alternatives to the Voluntary Disclosures Program
Some tax issues are not considered under the VDP, but may still be resolved through other procedures. Income tax returns with no taxes owing, with refunds expected or that are less than one year past due are typically handled under the normal tax return processing procedures.
Elections that are late, amended or revoked are also handled through a different procedure depending on the type of election and whether statutory or administrative relief is available. For example, an issue that may arise for non-residents of Canada is late-filing section 216 elections. The section 216 election is used by non-residents to elect to report rental income from real or immovable property on a net rather than a gross basis (e.g. due to Part XIII withholding tax on rental payments). In these cases, taxpayers would instead rely on the CRA's one-time section 216 late-filing policy (if applicable) and make a request to the CRA International Tax Services Office.
The Circular specifically excludes from VDP consideration applications that depend on an agreement being made at the discretion of the Canadian competent authority under a provision of a tax treaty.
The Circular notes that given the complexity of transfer pricing issues such applications will be referred to the Transfer Pricing Review Committee for consideration under the ITA relief provisions. Taxpayers are invited to send applications directly to the Committee at the CRA International Tax Division.
Disputing the Results of the Voluntary Disclosures Program Application
As the Program is an exercise of the discretionary authority of the Minister, a taxpayer who disagrees with the Minister's decision in respect of the relief provided would, in the first instance, request a second level administrative review on the basis that the Minister's discretion was not exercised in a fair and reasonable manner. The taxpayer can also make an application to the Federal Court for a judicial review of the decision although, in most cases, a second level administrative review should be requested first.
Under the old Program, the taxpayer still had the right to file a notice of objection to an assessment or reassessment resulting from the VDP application with which the taxpayer disagrees. However, under the new Program, taxpayers that are accepted under the Limited Program will be required to waive their rights to object and appeal in relation to the specific matter disclosed and the specific assessment of taxes (other than with respect to a calculation error or a characterization issue).
Practical Concerns with the New Program
In making a voluntary disclosure application, it is important to not only identify that one or more errors or omissions have been made, but to ensure that all the errors and omissions have been identified. Accordingly, it is important to work with tax advisors with broad experience that can identify all the relevant issues, properly characterize the transaction, provide a plan to remedy the errors or omissions, and file an application that is "voluntary" and "complete". As noted above, some tax issues are not resolved through the VDP and so consideration will need to be made as to the alternate remedies that may be available.
Once an application has been made, there is limited time to provide complete information. Gathering information and documents, especially if the location of the records is overseas, can be time-consuming. Accordingly, sufficient time should be allowed to not only gather the information, but also to prepare the new returns and amended returns that may have to be filed. Additional issues can arise which will require further consideration and, in such cases, the involvement of advisors with broad experience can be crucial.
The possibility of being accepted into the Limited Program and, for many taxpayers, not knowing if the application will be accepted into the Limited Program until after most of the disclosure has been made, is a disincentive for taxpayers to participate in the VDP. Not only does the Limited Program provide reduced relief, it also requires the taxpayer to waive certain rights to file a notice of objection.
This uncertainty can be mitigated by weighing the likelihood that a particular taxpayer that is disclosing a particular issue will be accepted into the General Program rather than the Limited Program. Given the factors listed in the Circular, this will require a close analysis of what the CRA may consider a "sophisticated taxpayer", a material dollar amount of tax owing, or the issues that the CRA has made a focus area of compliance.