Upcoming Changes to the Voluntary Disclosures Program (VDP) – A Canadian Tax Lawyer Analysis

On December 15, 2017 the Canada Revenue Agency published Information Circular IC00-1R6 – Voluntary Disclosures Program, updating the rules surrounding the tax amnesty program. Changes and updates are due to take effect on March 1, 2018. What follows is our analysis of the settled upon changes and the effect they will have on the program. This is the first follow up from CRA since the proposals released June 9, 2017 and the deadline for comments that expired on August 8, 2017. There has been no CRA response at all to the comments submitted by various professional organizations such as the Canadian Institute of Chartered Accountants as well as interested parties such as our tax law firm.

Voluntary Disclosures Program (VDP) – Brief Explanation of the Current Program

The Voluntary Disclosures Program (“VDP” or Canadian Tax Amnesty) is a Canada Revenue Agency (“CRA”) program designed to allow taxpayers to come forward voluntarily to correct mistakes or omissions on their previously filed income tax or GST/HST returns without fear of harmful monetary penalties or criminal prosecution.

Under the current program, the acceptance of a voluntary disclosure is predicated on the satisfaction of four objective requirements:

1. The information being disclosed must be subject to a penalty;
2. There must be no active and ongoing enforcement action against the taxpayer at the time of the disclosure;
3. The information being disclosed must be at least one year past due; and
4. The disclosure must be complete, meaning that the taxpayer must ensure that all outstanding information is reported and tax is calculated.

Under the previous regime, when a disclosure is accepted under the VDP the taxpayer will avoid criminal tax evasion prosecution, CRA will waive the imposition of all civil tax penalties and partial interest relief is applied.

History of Proposed Changes and Modifications

On June 9, 2017, the federal Liberal government announced a series of changes to the program that was purportedly designed to narrow the factors for acceptance in order to prevent certain taxpayers from “abusing” the program which offers valuable relief if certain objective conditions are met. Our firm made extensive submissions to the Honourable Diane Lebouthillier, imploring her to abandon or modify several of these new modifications. Of perhaps greatest concern to our firm and Canadian taxpayers was the introduction of a level of subjectivity to the new conditions for acceptance.

The release of the new Information Circular IC00-1R6 indicates that the original proposals are being substantially implemented, with mostly minor changes to the language from the draft proposals dated June 9, 2017. However, a few changes of note include:

1. Paragraph 2 indicates that the new rules do not take effect until March 1, 2018. However, any taxpayers who have made a no-name disclosure prior to this date will need to reveal their identity by February 28, 2018 or their application will be discarded;
2. Paragraph 20 has been slightly modified to eliminate the need of the VDP to examine the taxpayer’s “culpability” – this is likely in response to concerns that the VDP was poised to become far too subjective for there to be any certainty for taxpayers;
3. New paragraph 21 states that applications by corporations with gross revenues in excess of $250 million will be automatically considered under the “Limited Program” (discussed below);
4. New paragraph 22 adds new language stating that the existence of a single applicable factor will not necessarily result in assigning a request to the limited program;
5. New paragraph 23 removes the draft language which would have automatically disqualified any disclosure request the subject matter of which was income that is the proceeds of a crime;
6. New paragraph 24 allows those taxpayers considering a disclosure request related strictly to transfer pricing to submit the application directly to the CRA’s Transfer Pricing Review Committee; and
7. New paragraph 29 adds a new condition to the “voluntary” requirement. If the CRA receives information on a taxpayer’s potential involvement in tax non-compliance from a third party (for example a leak from an offshore bank), the disclosure will not be considered voluntary despite the taxpayer having no knowledge of the information leak.

Paragraph 29 appears to be a condition added likely as a result of the recent Panama and Paradise Papers leaks which have been the subject of much journalistic scrutiny of late and is probably part of the impetus and rationale for the changes in the first place.

Outline of Final Changes to Program

To begin, under the new program, the conditions of a valid disclosure request are predicated on the satisfaction of five requirements:

1. The application must be voluntary;
2. The application must be complete;
3. The application must involve a penalty;
4. The information being disclosed must be at least one year past due; and
5. The taxpayer must include a payment of the estimated taxes owing when making the application. (new condition).

Thus far, the CRA has not made it clear if the conditions “voluntary” and “complete” have been modified in some way, so taxpayers and counsel will need to proceed under the assumption that the old rules and case law still apply.

The Introduction of “Tracks”

Beyond the addition of a fifth condition of a valid disclosure is the introduction of two separate “tracks” for the processing of disclosure applications. Henceforth, all disclosure applications will be assigned to one of the two tracks:

1. The General Program will offer taxpayers much the same relief as the current and historical program; criminal prosecution will be waived, all penalties will be deleted and partial interest relief will be granted;
2. The Limited Program severely modifies the relief offered; taxpayers will not be referred for criminal prosecution and will not be charged the civil Gross-Negligence Penalties. However, normal late-filing penalties and full interest will be applied.

Based on the CRA’s current published material with respect to these “Tracks” it would appear that the choice of track remains solely in the CRA’s discretion.

Choice of Track

The CRA has released some preliminary guidance with respect to how it will choose to allocate each individual disclosure to the General or Limited programs. The CRA intends to consider a few factors which include but are not limited to:

1. The overall quantum or dollar amounts involved;
2. The number of years of non-compliance being disclosed; and
3. The taxpayers level of “sophistication”.

Whereas in the past, all taxpayers could be assured that if they met the objective factors they were capable of achieving full relief, the new “track” method introduces a level of subjectivity that eliminates certainty of outcome and severely reduces the incentive for taxpayers to come forward voluntarily.

Elimination of the No-Names Program

Until the announcement of the new changes, the CRA also offered protection for those taxpayers who came forward through their Canadian tax lawyers on a no-names basis. The purpose of this process was to allow the taxpayer’s counsel to release the facts related to the taxpayer’s non-compliance and determine if they would qualify for relief and make submissions in support of a given taxpayer’s qualification for the program. The key benefit of this method was that so long as the taxpayer eventually revealed their identity, the disclosure was deemed made on the date the tax law firm made contact with the VDP.

The CRA will be eliminating the “no-names” program to be replaced with what it is calling a “pre-disclosure discussion service”. Under the new service, tax lawyers can approach the CRA to discuss the facts and information of the disclosure in much the same way, however the CRA will not consider the disclosure application to have been filed for the purposes of the program until the taxpayer’s identity is known, thus eliminating the benefit in its entirety.

Administration of New Program Still Largely Unknown

Despite the fact that the CRA has published this new Information Circular to put taxpayers and representatives on notice for the new program, there is still a large amount of uncertainty. For example, the CRA has not clarified any number of points with respect to the choice between the limited and general program. Additionally, it has not clarified if the disclosure application process will allow for protection if a taxpayer comes forward but requires additional time to finalize and submit amended tax returns. Taxpayers with unreported income are essentially wading into the unknown and placing their affairs at the mercy of the program as the CRA envisions it.

Of course, having effective Canadian tax lawyers is key in this scenario as it is likely that many applications will be improperly denied, forcing the taxpayers to seek judicial review in the Federal Court of Canada. We also envision Federal Court Applications with respect to applications which are accepted into the limited program by taxpayers who feel they should have been accepted to the general program.

The current program draws upon more than 20 years of case law which has served to add certainty, thus it is not unreasonable to assume that the new program will not be defined with any level of certainty for at least the next decade once judicial review applications are heard. This acts as a strong disincentive to taxpayers and will likely encourage ongoing non-compliance.

Moving Forward with the Voluntary Disclosures Program

There can now be no further doubt that the CRA intends to heavily limit the benefits and availability of the voluntary disclosures program. Taxpayers will now more than ever need to consult and work with experienced an experienced tax law firm to ensure the appropriate outcome if they wish to come forward to correct their affairs. The changes are coming into effect as of March 31, 2018, so taxpayers who wish to take advantage of the old rules should contact our top tax law firm immediately to ensure fair treatment. Of particular concern is the need to pay estimated taxes as part of a voluntary disclosure submission. The amount of tax owing is rarely known at the time that the voluntary disclosure is submitted, so it remains to be seen how CRA will implement this requirement. Those who come forward after the changes will want to also utilize the services of our Canadian tax lawyers as we can set a file up for any required challenges through the Federal Court’s judicial review system if the CRA attempts to deny or limit the relief unfairly.