Voluntary Disclosure Program Cut Back

The CRA's voluntary disclosure program (VDP) provides relief from penalties (and in some cases interest) for taxpayers who voluntarily come forward to correct previous errors or omissions in their tax affairs. In June 2017, the government released a draft information circular (IC 00-1R6) setting out proposed changes to the program. (The comment period ends August 8, 2017; the proposed changes are to take effect on January 1, 2018.) The changes are drastic, and practitioners should consider advising clients that fall into any of the affected categories that the window for disclosure will close at the end of 2017. Also, for 2017 VDP applications, submitting payment of the estimated tax at the time of making full disclosure (that is, advance implementation of one of the new rules) should be considered as a gesture of good faith.

The proposed changes include the following:
  • elimination of the "no-names" disclosure process;

  • elimination of relief for corporations with gross revenue exceeding $250 million in at least two of their last five taxation years;

  • elimination of relief for applications relating to transfer-pricing adjustments and transfer-pricing penalties;

  • mandatory payment of the estimated tax at the time of making the VDP application; and

  • mandatory disclosure of the identity of the adviser who assisted the taxpayer in respect of tax matters that form the subject matter of the voluntary disclosure.

The last point seems to suggest that the CRA might wish to subject the adviser's clients to additional audit scrutiny or assess a past adviser for third-party penalties. The taxpayer's VDP application, of course, protects only the taxpayer from penalties; it does not protect the adviser.

One of the requirements for a VDP (in both the current and proposed programs) is that the disclosure must be truly voluntary. This requirement often results in a race against time to disclose before the CRA picks up on the issue. The proposed elimination of the no-names disclosure option may pose a practical problem for taxpayers and their advisers, because taxpayers will no longer be able to apply for relief until they have all of the information in place to complete the disclosure. Under the current no-names disclosure system, the taxpayer has had the comfort of knowing that the CRA would not take action until after the 90-day period to provide full disclosure had passed. This safety net will no longer be available under the proposed program.

Given that the proposed program is still in draft form, presumably the current VDP (as set out in IC 00-1R5, January 2017) is still applicable until the end of 2017. However, the CRA could potentially delay consideration of applications until the new program is in place, although there is no indication whether this will occur.

Although the proposed changes to the VDP are dramatic, they are not a total surprise. A 2016 report by the CRA's Offshore Compliance Advisory Committee proposed all of the changes listed above and more. For example, the committee proposed (1) that eligibility for full relief be restricted, and (2) that the factors that would reduce the amount of relief provided ­include the dollar amount of tax avoided, evidence of deliberate or wilful default or carelessness, active efforts to avoid detection through the use of offshore vehicles, and the sophistication of the taxpayer.

The committee also recommended changes to the internal processing of VDP applications within the CRA, and it suggested that higher-level signoff requirements be implemented for cases involving substantial amounts of evaded taxes, complex arrangements, or new issues of law. It is not clear whether the lack of mention of these internal-change proposals implies that they will not be going forward.

Amanda S.A. Doucette
Stevenson Hood Thornton Beaubier LLP, Saskatoon

Canadian Tax Focus
Volume 7, Number 3, August 2017
©2017, Canadian Tax Foundation