Voluntary Disclosures

by | Jan 6, 2020 | Taxation Articles by Joe Truscott

The Voluntary Disclosures Program

The “Canada Revenue Agency Guidelines for the cancellation and waiver of interest and penalties” outline that penalties and interest may be waived or cancelled in whole or in part in order to facilitate collection where:

  1. They result in circumstances beyond a taxpayer’s control;
  2. The interest or penalty arose primarily because of actions of the Canada Revenue Agency;
  3. There is an inability to pay amount owing.

The Canada Revenue Agency has wide discretion to give equitable relief to taxpayers by cancelling or waiving penalties and interest that would otherwise be payable under the Act.

This discretion is exercised partly through the Voluntary Disclosures Program.  On October 22, 2007, the Canada Revenue Agency issued Information Circular IC 00-1R2, which updated and expanded the Canada Revenue Agency’s Voluntary Disclosures Program policies.  The purpose of the program is to promote compliance and encourage individuals to correct inaccurate or incomplete information, or to disclose information not previously reported to the Canada Revenue Agency.

If a voluntary disclosure is found to satisfy all the requisite conditions, relief will be provided from penalties and prosecution that may otherwise have been imposed.  However, the taxpayer will still be liable for remitting outstanding taxes and duties.  In addition, the taxpayer may also be liable for interest on the outstanding taxes and duties; however, the taxpayer is still entitled to bring an application to the Taxpayer Relief Committee requesting relief from the payment of interest on the outstanding taxes and duties.

The Ontario Ministry of Finance has a similar voluntary disclosure program for certain provincial taxation statutes.

Circumstances Under Which Voluntary Disclosures Program Will Be Considered

The Canada Revenue Agency has outlined specific circumstances under which Voluntary Disclosures Program relief may be granted, which include circumstances where a taxpayer:

  1. Failed to fulfill their obligations under the applicable act;
  2. Failed to report any taxable income they received;
  3. Claimed ineligible expenses on a tax return;
  4. Failed to remit source deductions for their employees;
  5. Failed to report an amount of GST;
  6. Failed to file information returns;
  7. Failed to report foreign income that is taxable in Canada.

The Canada Revenue Agency has also listed the following examples of circumstances that will not be eligible for the Voluntary Disclosures Program:

  1. Tax returns with no tax owing;
  2. Provisions in the Act under which a taxpayer can elect specific treatment of certain transactions;
  3. Advance pricing arrangements for certain transactions between a taxpayer and a non-resident entity;
  4. The rollover provisions;
  5. Bankruptcy returns;
  6. Post-assessment requests for penalty or interest relief.

Where the Voluntary Disclosures Program is not applicable to a taxpayer’s particular tax situation, relief may be requested under the Taxpayer Relief Provisions as described in 1C 07-1.

Should you have any questions about your particular situation please call me at 905-528-0234 Extension 224 or email me at [email protected].

Many other situations arise where the advantages and benefits of the Voluntary Disclosure Program can be sued to save you a considerable sum of money.

Conditions for Valid Voluntary Disclosure

Once a disclosure is made, the taxpayer is expected to pay all amounts owing as a result of the disclosure; however, non-payment will not disqualify a valid voluntary disclosure.  The taxpayers authorized representative can make the voluntary disclosure on behalf of the taxpayer by submitting a signed copy of the appropriate prescribed authorization form.  In order for a voluntary disclosure to be considered valid by the Canada Revenue Agency, evidence of all four conditions outlined below must be present:

1. Disclosure Must be Voluntary

The Canada Revenue Agency must determine that the disclosure is voluntary.  The taxpayer is required to initiate the voluntary disclosure.  A disclosure may not qualify as voluntary if it is found to have been made with the knowledge that an audit, investigation or other enforcement action that is set to be conducted by the Canada Revenue Agency or has been initiated by the Canada Revenue Agency or other authorities with which the Canada Revenue Agency has information exchange agreements, such as a provincial authority, a police force, or a securities commission.  The confirmation of the voluntary status of disclosure will only take place after all the information, including the identity of the taxpayer, is provided to the Canada Revenue Agency.

A taxpayer may be disqualified from obtaining the benefits of the Voluntary Disclosures Program where the taxpayer has knowledge of a prior audit relating the a third party who is associated with or is related to the taxpayer, if it is reasonable to believe that the purpose and impact of the audit of the third party is sufficiently related to the subject matter of the voluntary disclosure.

The existence of computer-generated notices from the Canada Revenue Agency is considered to be an enforcement action by the Canada Revenue Agency under the Voluntary Disclosures Program Guidelines.  Therefore their existence may disqualify the disclosure from being a voluntary one, unless it can be demonstrated that the taxpayer did not receive the computer-generated notice or that enough time has passed to suggest that the enforcement action has in effect been abandoned by the Canada Revenue Agency.

2. Disclosure Must be Complete

The Canada Revenue Agency must determine that the disclosure is complete.  The disclosing taxpayer is expected to provide full and accurate reporting of all previously inaccurate, incomplete or unreported information.  The Canada Revenue Agency may request documentation to verify amounts disclosed.

The disclosing taxpayer will not be disqualified simply because the disclosure contains a minor error or omission.  However, if the disclosure is found to contain material errors or omissions, the disclosure will not qualify for the Voluntary Disclosures Program.

The taxpayer will be held to the reasonable person standard and the disclosure must be substantially complete.  Where a disclosure is found not to qualify for the Voluntary Disclosures Program on this basis, the taxpayer’s disclosed information will be processed in the normal course by the Canada Revenue Agency, and the taxpayer will be exposed to interest and penalties on the entire outstanding amount.

3. Disclosure Must Involve an Income Tax Penalty

A disclosure must involve the potential application of at least one income tax penalty.  The penalty may be a late-filing penalty, a failure to remit penalty, an installment penalty, or a discretionary penalty, such as an omission penalty or a gross negligence penalty.  Where there is no monetary penalty involved, there is no need for a taxpayer to disclose information through the Voluntary Disclosures Program.  If that is the case, it is sufficient for a taxpayer to submit the information to the Canada Revenue Agency in the normal manner.

4. No-Name Voluntary Disclosures

Generally, the disclosure should involve information that is at least one year or more overdue.  Where a voluntary disclosure relates to the current taxation year, it will qualify for the program only where it is submitted as part of a disclosure for a series of years, where it corrects a previously filed return, or where the disclosure contains information that is itself at least one year past due.

No-Name Voluntary Disclosures

The primary benefit of initiating a no-name voluntary disclosure is that it starts the clock running in terms of protecting the taxpayer from penalties, prosecution and Canada Revenue Agency audits.

Formerly, this type of disclosure procedure allowed an unidentified taxpayer to obtain an understanding from a Voluntary Disclosures Program officer as to whether or not their disclosure would qualify for the Voluntary Disclosures Program by disclosing sufficient information to the officer on a no-name basis.  Under the former guidelines, the Canada Revenue Agency retained the right to verify the information, but if it proved to be in conformity with what was represented earlier, the Canada Revenue Agency would honour any previous commitment and grant a taxpayer access to the Voluntary Disclosures Program once their identity was revealed.

As of September 2006, the Canada Revenue Agency implemented a fundamental policy change to the no-name Voluntary Disclosures Program.  This policy change was a response to the decision made by the Federal Court of Canada in Karia v. Canada (MNR), which is discussed in the Recent Case Law section of this memorandum.  As a result, while the taxpayer remains unidentified, the Canada Revenue Agency will not confirm that the taxpayer qualifies for the Voluntary Disclosures Program.  The Canada Revenue Agency will only make a decision in respect of the taxpayer’s voluntary disclosure after the identity of the taxpayer is revealed to the Canada Revenue Agency.  The no-name discussions with a Voluntary Disclosures Program officer are intended to be “informal, non-binding, and general in nature,” as noted in IC 00-1R2, and any advice based on the facts as submitted on a no-name basis is “without prejudice.”

Once a taxpayer initiates a non-name voluntary disclosure, the identity of the taxpayer must be revealed within 90 days from the effective date of disclosure (the date the no-name voluntary disclosure is received by the Canada Revenue Agency) for the taxpayer to qualify for the Voluntary Disclosures Program.  If the identity of the taxpayer is not received by the Canada Revenue Agency within 90 days, the Canada Revenue Agency will close the no-name Voluntary Disclosures Program file and protection from penalties and prosecution will be terminated.  A final and complete submission of the voluntary disclosure is expected within this 90 day period.  The taxpayers authorized representative can make the voluntary no-name disclosure on behalf of the taxpayer.  In this case, the taxpayer’s representative should submit a signed copy of the appropriate prescribed authorization form at the same time the identification of the taxpayer is provided.

Second Disclosure by the Same Taxpayer

The Canada Revenue Agency expects taxpayers to remain compliant after using the Voluntary Disclosures Program.  Under normal circumstances, a taxpayer is entitled to utilize the benefits of the Voluntary Disclosures Program only one time.

A second disclosure for the same taxpayer may be considered by the Canada Revenue Agency if the circumstances surrounding the second disclosure are beyond the taxpayer’s control.  At the time of making a second disclosure, a taxpayer must provide their name and specify that they had previously made a disclosure.

If it is discovered during the course of the disclosure review that the taxpayer had previously made a disclosure and the taxpayer has not disclosed this fact, the Canada Revenue Agency may deem the disclosure to be invalid for Voluntary Disclosures Program purposes.  If the second disclosure is for the same issue that was previously denied as incomplete due to information not being received by the stipulated date, then the second disclosure will be denied.

GST Non-Compliance

Effective April 1, 2007, changes were implemented to subsection 280(1) of the Excise Tax Act regarding GST penalties and interest for non-payment or late payment of taxes.  Pursuant to the GST, a “wash transaction” occurs when a supply that is taxable is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant, who would have been entitled to claim a full input tax credit if the tax had been correctly applied.  The former 4% flat penalty for a “wash transaction” was replaced with a flat 4% interest charge, and, for overdue balances, the 6% penalty previously imposed was removed and offset with a new 4% higher rate of interest.

Since one of the pre-conditions of the Voluntary Disclosures Program is that the disclosed amount be subject to a penalty, it appears that a disclosure related to one of the above-mentioned situations may no longer qualify for the Voluntary Disclosures Program.  To date, the Canada Revenue Agency has not indicated that it will make any changes to the Voluntary Disclosures Program in light of these legislative changes.

A taxpayer that qualifies for the Voluntary Disclosures Program is no longer able to avoid the extra interest on overdue balances, which previously would have been waived as a penalty.  The Canada Revenue Agency does nave discretion to grant a taxpayer relief application and waive interest in appropriate situations.  However, case law has confirmed that in exercising this discretion, the Canada Revenue Agency must consider all relevant factors; and the Courts should not fetter or otherwise limit the decision-making authority of the Canada Revenue Agency.

Provincial Voluntary Disclosure

The Ontario Ministry of Finance has outlined similar conditions to those of the federal Voluntary Disclosures Program for corporations and individuals who wish to voluntarily disclose a violation of a provincial tax statute.

The Ministry of Finance requires that five conditions be satisfied for the voluntary disclosure to qualify as valid:

  1. The disclosure must be voluntary;
  2. The disclosure must be full and accurate,
  3. All books of account, records and documents must be made available and questions from Ministry staff answered so that the information disclosed can be verified;
  4. The disclosure must not relate to information for the current tax return;
  5. The disclosure must involve an offence with a civil penalty.

Corporate Disclosure

In the case of corporations, a separate voluntary disclosure may be necessary under the provincial taxing statutes and federal taxing statutes.  A joint Ontario-Federal disclosure interview may be arranged by the Ministry upon request.

Conclusion

The rules and regulations for the Voluntary Disclosure Program are very extensive, generous and lenient.  A considerable sum of money can be saved by the reduction of interest and penalties and in some situations in income taxes, GST, etc owing.

Over the past 5 years Joe Truscott has been actively assisting a wide variety of Canadian and US clients who have saved a considerable sum of money.

Please call me at 905-528-0234 Extension 224 with any questions you may have or email Joe at [email protected].