Recent changes to the voluntary disclosure program (VDP) have resulted in a sharp decline in the number of taxpayers coming forward to the Canada Revenue Agency (CRA) under the program.
“The program is new, and the uncertainty is there,” says Marc Vanasse, partner, tax services group, with Toronto-based PricewaterhouseCoopers LLP. “This uncertainty could reduce taxpayers’ willingness to come forward and be compliant in the tax system.”
The VDP allows a taxpayer to make a voluntary disclosure to the CRA in cases in which the taxpayer has unreported, incomplete or inaccurate tax information, so long as the taxpayer makes a full disclosure and isn’t already under audit.
The CRA introduced changes to the VDP, effective March 1, 2018, that split the program into two tiers: “general” and “limited.”
Under the general tier, a taxpayer won’t be charged penalties and wouldn’t face criminal prosecution. The CRA will allow partial interest relief for years preceding the three most recent years of tax returns.
Taxpayers who fall under the limited tier won’t face criminal prosecution or gross negligence penalties, but will be charged other penalties and interest.
The introduction of the VDP’s two tiers, along with other requirements, has led to a significant decrease in the number of voluntary disclosure applications being made to the CRA. Between March 1 and June 30, the CRA received 3,550 VDP disclosures, a drop of about 60% vs the same period last year.
“By making the relief offered through the VDP less generous in certain circumstances,” the CRA states in an email sent to Investment Executive, “the CRA anticipated that use of the VDP would decline, as those who intentionally avoid their tax obligations have lost access to the relief provisions of the program.”
For many tax professionals, knowing which VDP tier applies to whom is problematic. A CRA information circular lays out guidelines for which applications may fall under the limited tier. For example, cases in which facts suggest that the taxpayer intentionally failed to report income, such as through the use of offshore investment vehicles, an application would fall into the limited tier. How criteria such as the dollar amounts, the number of years of non-compliance and the taxpayer’s level of financial sophistication will be considered isn’t clear.
“Before the change came into effect, there was not a lot of guidance,” says Jim Witty, vice president, tax, retirement and estate planning with Toronto-based CI Investments Inc. “There still is not a lot of guidance in what the CRA is going to look at in terms of a sophisticated taxpayer.”
The CRA’s information circular also notes that the agency will consider several criteria before making a decision regarding which VDP tier will apply.
Another change taxpayers must be prepared for is a requirement that they pay the estimated taxes owing up front when making an application to the VDP. If the taxpayer is unable to make such a payment, he or she may request to be considered for a payment arrangement.
Victoria Rodrigues, associate in the tax law practice of Miller Thompson LLP in Toronto, recommends ensuring that your clients have all appropriate documentation ready to present at the time of an application for a payment arrangement.
Taxpayers may have difficulty in determining whether a VDP application will be accepted and which tier will apply. Under the previous VDP, a “no names” disclosure method allowed taxpayers to enter the program anonymously. Now, taxpayers or their representatives can contact the CRA for a non-binding, pre-disclosure conversation – but that process does not constitute acceptance into the VDP.
“Hopefully, that [conversation] will be an avenue through which we can get some more guidance, such as what would fall under the general vs the limited [tier],” Rodrigues says. “But [that conversation] isn’t binding and the CRA isn’t going to be held to whatever [its employees] say in those discussions. So, [that process] doesn’t provide the same level of protection or comfort for taxpayers as the old no-name policy did.”
For your part, making sure your clients are aware of the new rules and what must be reported, such as a pension from a non-Canadian source, is important. You also can remind clients that they may have nothing to fear by making a disclosure, and that by not making the disclosure, they may be missing out on government benefits such as RRSP contribution room, the Canada Child Benefit or even a tax refund.
“You have nothing to lose [by filing an application to the VDP],” says Carol Bezaire, vice president, tax, estate and strategic philanthropy with Toronto-based Mackenzie Investments. “A lot of people don’t realize that if you do [apply], you’re going to sleep better at night knowing this is off your deck. And you may also get a refund out of it.”