Coming clean to the CRA: An introduction to the Federal Voluntary Disclosures Program

Presented by McMillan LLP ¹

The Voluntary Disclosures Program (the “VDP”) is a broad-based program administered by the Canada Revenue Agency (the “CRA”) that is aimed at permitting taxpayers to disclose historically inaccurate or incomplete tax reporting under a variety of circumstances in exchange for potential penalty (and, in limited circumstances, interest) relief. Subject to certain qualifying conditions, the VDP can be utilized by individuals, trusts, corporations and other juridical entities to disclose previously unreported domestic or foreign income or assets, including undisclosed offshore bank accounts. This article provides a brief introduction to the VDP.

Overview of the VDP

The VDP is rooted in authority granted under an express provision of the Income Tax Act (Canada) (the “Tax Act”)²; however, the relief available under the VDP is ultimately granted at the discretion of the CRA and is, therefore, uncertain. The CRA has published documents, including the Voluntary Disclosures Program Guidelines and Information Circular IC00-1R2 Voluntary Disclosures Program, that assist taxpayers in determining whether relief under the VDP may be granted under a particular set of circumstances.³ While the CRA’s publications may be of assistance in understanding the CRA’s views, and the likely application of the CRA’s discretion, they are not binding on the CRA and may not restrict the “spirit or intent” of the operative provision of the Tax Act.⁴

If a taxpayer’s disclosure satisfies both the applicable statutory requirements and the four conditions for validity set out below, the CRA may approve a voluntary disclosure and waive all applicable penalties. In accordance with its standing administrative practices, the CRA may also grant partial interest relief in respect of years preceding the three most recent years from the date of the relevant tax assessment. Generally, the CRA may use its discretion to reduce the applicable interest rate by four percent from the prescribed rate; however, in exceptional circumstances, an interest rate reduction of greater than four percent may be granted.⁵

In order to be eligible for relief under the VDP, the following statutory requirements must be satisfied:⁶

1. the applicant must be a taxpayer, which includes individuals, corporations, trusts and, for the purposes of the VDP, partnerships, regardless of whether the taxpayer is liable or not for tax; and
2. the application for relief must be made within 10 calendar years from the end of the year in respect of which the taxpayer is seeking relief (e.g., if an application for relief under the VDP was made on March 1, 2011, relief is only available in respect of the 2001 and subsequent taxation years).⁷

Furthermore, in order for the CRA to consider a voluntary disclosure made under the VDP to be valid, it must satisfy each of the following four conditions:

1. the disclosure is made voluntarily;
2. the disclosure is complete;
3. the disclosure involves the application or the potential application of a penalty; and
4. the disclosure includes information that is: (i) at least one year past due, or (ii) less than one year past due and is in respect of a previously filed return that contains information that is at least one year past due.

Circumstances excluded from the VDP

There are limited circumstances under which the CRA will not consider granting relief under the VDP, regardless of whether the disclosure meets the four conditions for validity outlined above. These circumstances include disclosures in respect of (i) income tax returns where no taxes are owing or a refund is expected, (ii) provisions under the Tax Act that permit taxpayers to elect specific tax treatment, (iii) advance pricing arrangements, (iv) rollover provisions, which allow a taxpayer to defer income that would otherwise arise on the transfer of property to a taxable Canadian corporation (e.g., section 85 of the Tax Act), (v) returns that must be filed in the year of bankruptcy, and (vi) post-assessment requests for penalty or interest relief.⁸

“Named” vs. “No-Names” Disclosures

A taxpayer, or a taxpayer’s authorized representative, may apply for relief under the VDP by submitting a written, executed application to the Assistant Director, Enforcement Division of the CRA Tax Services Office that serves the taxpayer.⁹ A taxpayer has the choice of making a “named” disclosure or a “no-names” disclosure.

In a “named” disclosure, the identity of the taxpayer is revealed to the CRA in the initial submission requesting relief under the VDP. The taxpayer has 90 days from the “effective date of disclosure” to provide a full and complete disclosure.¹⁰

In a “no-names” disclosure, the taxpayer has 90 days from the effective date of disclosure to disclose their identity and provide a full and complete disclosure. A no-names disclosure is advantageous because it allows a taxpayer to discuss its situation with a VDP officer and gain a better understanding of the CRA’s position on the potential availability of relief under the VDP and the implications of the taxpayer’s disclosure being rejected (e.g., potential penalties if the taxpayer’s non-compliance is discovered by the CRA outside the VDP) without the taxpayer having to reveal its identity.

Enforcement action commenced during the 90 day disclosure period in the context of a no-names disclosure will not disqualify a taxpayer from obtaining voluntary disclosure relief if all qualifying conditions are otherwise satisfied and the taxpayer completes the disclosure, on a named basis, in a timely manner.

Prior to a taxpayer revealing its identity, a VDP officer may confirm verbally or in writing that, based on the information provided in the no-names disclosure, (i) nothing the taxpayer has disclosed would invalidate the disclosure under the VDP, and (ii) the CRA will reassess the taxpayer’s relevant taxation years for a specific amount of income.

However, the CRA considers that discussions on a no-names basis with a VDP officer are non-binding and, accordingly, a taxpayer must identify itself in order to receive a final determination from the CRA as to whether the disclosure is a valid voluntary disclosure. Before making a no-names disclosure, taxpayers should be aware of the CRA’s policy that it will not consider subsequent “no-names” disclosures by a taxpayer in situations where the taxpayer previously made a no-names disclosure on the same facts and did not identify itself within the 90 day period.¹¹

Payment of amounts owing

The CRA expects that a taxpayer will pay any amount of tax and interest owing at the time a voluntary disclosure is finalized. Where the taxpayer does not pay such amounts at the time of the disclosure, interest will continue to accrue on the amount of tax owing and the voluntary disclosure officer may contact a collections officer to arrange with the taxpayer the payment of any outstanding amounts.¹²

Potential changes to the VDP

On November 30, 2010, at the CRA Roundtable at the Canadian Tax Foundation’s Annual Tax Conference, the CRA stated that “a revised VDP information circular will be forthcoming to clarify a number of issues which have been brought to our attention since the last revision of the IC in 2007.” The CRA has also expressed an ongoing desire to ensure that the integrity of the VDP is maintained.

The VDP is a program within the Enforcement and Disclosures Directorate (the “EDD”) of the CRA’s Compliance Programs Branch. In the CRA’s Final Report on its evaluation of the EDD,¹³ the CRA expressed the view that the mandate of the VDP (i.e., to facilitate voluntary compliance with legislation administered by the CRA by processing voluntary disclosures made by, or on behalf of, non-compliant taxpayers) does not appear to have a clear linkage to the mandate of the EDD, which is to “deter, detect and correct, tax evasion and criminal non-compliance.” 

Specifically, the CRA noted that the VDP performs review processes focused on a taxpayer group that would normally be addressed by regular audit areas. The CRA recommended in its Final Report that it consider the appropriateness of the location of the VDP within the EDD. CRA Management has agreed to consider the proper location of the VDP within the CRA in order to “maximize program delivery and to enhance the intelligence gathering capacity for Agency programs by September 30, 2011.”¹⁴

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

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¹Michael Friedman is a tax partner at McMillan LLP in Toronto  and Ashley Palmer is a tax associate at McMillan LLP in Toronto.

²R.S.C. 1985, c. 1 (5th Supp.), as amended, at subsection 220(3.1).

³CRA, Voluntary Disclosures Program Guidelines (June 2008) [Guidelines]; CRA, Information Circular IC 00-1R2 “Voluntary Disclosures Program” (22 October 2007) [IC] .

⁴See, for example, Peter Pond Holdings Ltd.v. Attorney General of Canada, 2010 FC 5;Maple Lodge Farms Ltd. v. Canada, [1982] 2 S.C.R. 2; and IC, ibid. at para. 7.

⁵Guidelines, supra note 3 at 4.2.1 and 4.2.3.

⁶For additional information on whether you are eligible to make a voluntary disclosure under the VDP, see Michael Friedman & Ashley Palmer, “Are You Eligible to Make a Voluntary Disclosure?” (2010) 21; 1 Ontario Bar Association Taxation Law Section Newsletter.

⁷See, for example, Telfer v. Canada (Revenue Agency), 2008 D.T.C. 6192 (reversed on other grounds, 2009 D.T.C. 5697); and Bozzer v. Minister of National Revenue, 2010 D.T.C. 6612 (currently under appeal).

⁸IC, supra note 3 at para. 19; Guidelines, supra note 3 at 2.1.4.

⁹For taxpayers served by a Tax Services Office located in the Atlantic Region of Canada, the VDP is centralized in, and all disclosures should be sent to, the Saint John Tax Services Office. For taxpayers served by a Tax Services Office located in the Province of Ontario or the Territory of Nunavut, the VDP is centralized in, and all disclosures should be sent to, the St. Catharines Tax Services Office. Otherwise, applications for relief should be sent to the Tax Services Office that has jurisdiction over the area where the taxpayer resides, which, for a business, is generally based on its operating address. See, Guidelines, supra note 3 at 1.7; IC, supra note 3 at para. 55.

¹⁰The CRA considers that the “effective date of disclosure” is the earlier of: (i) the date the CRA receives a completed and signed Form RC199, Taxpayer Agreement, or (ii) the date the CRA receives a letter signed by the taxpayer or the taxpayer’s authorized representative that contains information similar to the information in Form RC199.

The CRA requires that Form RC199 be attached to an application for relief under the VDP. The form provides information with respect to the identity of the taxpayer and, if applicable, the taxpayer’s authorized representative and generally requires the taxpayer or their authorized representative to declare that the contents of the form are true and that they are not aware of any enforcement action that has begun against the taxpayer, a related party/entity or a third party where the action against the third party is sufficiently related to the disclosure.

Where a taxpayer is making a “no-names” disclosure, the taxpayer need only provide the first three characters of their postal code on Form RC199 and certain generic, indentifying information (e.g., gender and age).

¹¹See IC, supra note 3 at paras. 26-30; Guidelines, supra note 5 at 2.2.

¹²Guidelines, supra note 3 at 2.4.

¹³CRA, “Enforcement and Disclosures Programs Evaluation – Final Report” (October 2010).

¹⁴CRA, “Enforcement and Disclosures Programs Evaluation – Management Action Plan”.