The federal government announced on Friday that it will be tightening eligiblity for the Canada Revenue Agency's (CRA) Voluntary Disclosure Program, which allows taxpayers to proactively disclose to the CRA information about their tax non-compliance in exchange for leniency from the taxman.
The feds will be reducing some of the potential protections and benefits that had been offered through the existing VDP, a program which the government placed under review earlier this year, to make it "more difficult for those who intentionally avoid their tax obligation to benefit from the VDP", the government states. The new rules are set to come into effect March 1, not Jan. 1 as the government had previously signalled.
Taxpayers who believe that they are offside the rules would do well to consider whether it makes sense to make use of the program before the new rules come into effect, says Jamie Golombek, managing director of tax and estate planning with the financial planning and advice group at Canadian Imperial Bank of Commerce.
"If someone has offshore accounts, or has been intentionally non-compliant, he or she might want to voluntarily disclose before the new program begins," Golombek says.
The tougher rules governing the VDP are part of the government's effort to crack down on tax evasion and aggressive tax avoidance overall, particularly offshore tax evasion. For example, the government reiterated that the CRA would continue to restrict eligibility to the VDP overall if the agency has already received information of a taxpayer's potential non-compliance – information such as the leak of offshore financial information in the Paradise Papers it received from earlier this year.
Currently, the VDP allows taxpayers to come clean to the CRA regarding any unreported, incomplete or inaccurate tax information, generally without being subject to penalties or criminal prosecution. The CRA will grant a VDP only if the taxpayer makes a full disclosure of his or her complete tax information, and only if the taxpayer is not already under audit. Under the VDP, the taxpayer remains liable for any taxes owed, plus applicable interest.
Under the new VDP coming into effect in March, applications would now fall into one of two tracks: a limited program and a general program.
The limited program would provide limited relief for those taxpayers who disclose non-compliance "where the facts suggest that there is an element of intentional conduct on the part of the taxpayer or a closely related party." Under this program, taxpayers would not face criminal prosecution or be charged gross negligence penalties, but would be charged other penalties and interest, as applicable.
All applications that don't fall under the limited program would be referred to the general program. Under this program, taxpayers would not be charged penalties and would not face criminal prosecution related to the information being disclosed. The CRA would provide partial interest relief for years preceding the three most recent years of returns required to be filed.
To determine whether intentional avoidance has occurred, and thus into which stream the application would fall, the CRA would consider factors such as whether 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, as well as the sophistication of the taxpayer. Corporations with gross revenue in excess of $250 million that would apply to the VDP will be considered under the limited program.
The government also announced a number of significant changes to the VDP overall, irrespective of which stream an application might fall into.
Chief among these changes is that applicants would have to pay the estimated tax owing upfront as a requirement of qualification for the VDP. This was not a requirement under the old VDP. If a taxpayer didn't have the ability to pay at the time of filing, they could request a payment arrangement.
Another key change is the elimination of the "no names" disclosure method, to be replaced with a pre-disclosure discussion service. Under the "no names" method, a taxpayer or his or her representative could contact the CRA anonymously regarding his or her situation, and that contact would constitute acceptance into the VDP. A pre-disclosure discussion would not constitute acceptance into the new VDP, the government indicates.
Finally, any relief offered under the program would be cancelled if the CRA subsequently discovers that the taxpayer's application was not complete due to a misrepresentation.
According to Golombek, the more restrictive and less-forgiving VDP may have an effect in terms of the number of people who decide to come forward and use the program: "Going forward we may see less disclosure."
Another tax practitioner says he generally believes the changes to the program are reasonable: "I think they've done a pretty good job at balancing this," says Peter Weissman, a partner with Cadesky Tax in Toronto. "People should be paying their tax, and the government has got the right to collect the right amount of tax."
In making the announcement today, the government also said that the CRA's information-gathering tools for audits and investigations to combat aggressive tax non-compliance continues to improve, and that the agency has been given greater resources to pursue these efforts. The government said it will continue to review the operation of the VDP program, which is expected to remain in place for at least two years, after which additional tightening may be proposed, based on results under the revised program.
"[This is] similar to what the U.S. did with non-filers," Weissman says. "[The US government], started off with a relatively simple approach and as time went on, for people who didn't take advantage of that, they tightened it up more, and added more penalties. So this looks like the [CRA's] first shot across the bow at tightening up."
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