Introduction
Tax avoidance or evasion involving offshore bank accounts has been in the news a lot lately. In 2007, a relatively low-level employee at a bank in Lichtenstein sold information on certain accounts at the bank to German authorities for millions of dollars and a place in a witness protection program. That disclosure led to more than 50 audits in Canada, according to The Globe and Mail. More recently, the U.S. authorities have investigated the activities of UBS, a Swiss bank, with the result that the Canada Revenue Agency (the CRA) is likely on the trail of more Canadian taxpayers with offshore accounts that they failed to disclose. It’s no surprise, then, that some Canadian taxpayers have started paying more attention to the CRA’s voluntary disclosure program (the VDP).
The VDP
The VDP permits “taxpayers [to] make disclosures to correct inaccurate or incomplete information, or to disclose information not previously reported. For example, taxpayers may not have met their tax obligations if they claimed ineligible expenses, failed to remit source deductions or the GST/HST, or did not file an information return” (from Information Circular IC00-1R2 (“Voluntary Disclosures Program”)). The VDP is intended to provide taxpayers with a way to “come clean” about their tax affairs if they haven’t filed returns or reported income that should have been reported. The program is available to fix any kind of tax-related mistake or omission.
Background
In our experience, accountants and lawyers, especially those who do not specialize in tax matters, are only too happy to turn over voluntary disclosures to those with more experience with the process. The voluntary disclosure process as such is not complicated. That is, the CRA’s requirements for making a disclosure are not particularly complex. The trick is making sure the client discloses all of his or her mistakes and omissions so that the client isn’t left exposed at the end of the process. The CRA is clear that it will not extend the benefit of the VDP to a client if the client holds anything back (see, for example, Peintres Filmar inc. c. Canada (Revenu), 2007 CF 560 and Palonek v. Canada (National Revenue), 2007 FCA 281). Indeed, the CRA will sometimes refuse to extend the benefits of the VDP to a client even where the client intended to disclose information, but perhaps didn’t do so clearly enough (see Mazzariol (Mazcom Print) v. The Queen, 2009 TCC 169).
A voluntary disclosure can protect a taxpayer from penalties and prosecution, but it does not protect a taxpayer from having to pay taxes for years for which a correction is necessary even if that year is many years before the disclosure. The fact that a taxpayer makes a voluntary disclosure for certain years will not prevent the CRA from going back to older years, years that might otherwise be statute-barred, if the Minister believes that the limitation period provided in the Income Tax Act does not protect the taxpayer. See College Park Motor Products Ltd. v. The Queen, 2009 TCC 409. As a result, for omissions where it is clear that the limitation period would not be available, the taxpayer making a disclosure must be prepared to discuss and disclose years long past.
Interest relief may be available. In IC00-1R2, the CRA states that “In addition to penalty relief, if a disclosure is accepted as valid by the CRA, the Minister may grant partial relief in the application of interest against a taxpayer in respect of assessments for years or reporting periods preceding the three most recent years of returns required to be filed.”
The relief available for interest and late-filing penalties under the VDP is available only for years that ended within the previous 10 years before the calendar year in which the submission is filed. The Income Tax Act was amended several years ago to limit the ability of the CRA to grant relief for periods ending before the 10-year limitation period. The result is that the CRA cannot waive interest and late-filing penalties for such periods, although it appears the CRA will still give assurances about relief from the threat of gross negligence penalties and prosecution.
The CRA takes the position that it is not required to grant relief under the VDP. The CRA states that each case is “decided on its own merit.”
Just because a taxpayer is making a voluntary disclosure does not mean that the taxpayer would be subject to penalties or prosecution without the disclosure. Some of our clients come to us about omissions for which they are concerned they will be prosecuted. Sometimes we have the happy task of telling them that, in our view, they would not be subject to gross negligence penalties (never mind prosecution) even if the CRA discovered the omission before a voluntary disclosure could be made.
Of course, the taxes, ordinary penalties (for late-filing for example) and interest can be enough of a potential burden by themselves. The client will usually want to make the disclosure as quickly as possible simply to deal with that problem even if gross negligence penalties would not otherwise be a factor.
Making a Disclosure
IC00-1R2 sets out the two methods available for making a disclosure to the CRA: a taxpayer can make a no-name disclosure or a named disclosure. The CRA describes the difference as follows:
25. A “named” disclosure is a disclosure in which the identification of the taxpayer is stated on the initial disclosure submission.
26. Taxpayers who are unsure they want to proceed with a disclosure are given an opportunity to participate in preliminary discussions about their situation on a “no-name” basis. These discussions with a VDP officer are informal, non-binding, and general in nature and are done before the identity of the taxpayer is revealed. They are for the benefit of the taxpayer and are intended to provide insight into the VDP process, a better understanding of the risks involved in remaining non-compliant, and the relief available under the VDP.
The date of the disclosure in either case is the date on which the disclosure submission is received by the CRA. This means that, if a valid no-name disclosure is received before the date on which the CRA begins an investigation, the taxpayer will be able to argue that the benefits of the VDP should be available to the taxpayer (even if, when the investigation begins, the taxpayer’s identity has not been provided to the CRA).
Why choose a no-name disclosure over a named one? We generally recommend the no-name disclosure process in all but the simplest cases just because the process itself usually brings to light issues not previously contemplated by the taxpayer. The no-name process gives the taxpayer the opportunity to think twice about making a disclosure, if necessary.
Conditions to Making a Disclosure
The CRA, in IC00-1R2, states that the following conditions must be met before a disclosure will be considered voluntary:
1. The taxpayer cannot be aware of, or have knowledge, of an audit, investigation or other enforcement action set to be conducted by the CRA or any other authority or administration, with respect to the information being disclosed to the CRA. The CRA will not consider a disclosure to be voluntary if it is prompted by a provincial audit.
2. The taxpayer, when providing his or her identity, will provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer was or is associated.
3. The taxpayer is at risk for penalties and gross negligence penalties for the errors and omissions being disclosed.
4. The disclosure relates to returns previously filed by the
taxpayer or information that is overdue by at least one year (no using
the VDP in 2010 simply to late-file your 2009 tax return).
Making a Disclosure with SimpsonWigle LAW LLP
For more information on making a voluntary disclosure through SimpsonWigle LAW LLP, please contact John Loukidelis at (905) 777-2399.
We regret that we cannot provide free consultations on voluntary disclosures. Our practice is to charge for the time we spend with a client to provide the advice he or she needs. We don’t provide free consultations, which might give us an incentive to convince you to follow a disclosure process that you do not need. If our advice is that you do not need to proceed with a disclosure, and you decide not to proceed, then you will owe us for the consultation and nothing more. Our aim is provide impartial advice on your circumstances.