The Canada Revenue Agency (CRA) has always offered taxpayers a second chance to make sure their taxes are error-free in the form of the Voluntary Disclosures Program (VDP), under which tax errors could be construed as either careless mistakes or intentional abuses. However, in response to much negative publicity around tax fraud and tax evasion—and pressure from the public—CRA has amended the VDP, making it much less generous. And likely making taxpayers’ heads spin.

Two VDP tracks—the Limited Program and the General Program—were introduced on March 1, 2018. All disclosures deemed to have an element of intentional abuse are now being diverted to the Limited Program, under which taxpayers are exempt from criminal prosecution and gross negligence penalties but will still be subject to interest and other non-compliance penalties. The General Program offers taxpayers partial interest relief and exemption even from gross negligence penalties.

Taxpayers must now determine if they can qualify for the more generous General Program. However, it’s not quite possible for the ordinary taxpayer to understand the concept of “an element of intentional abuse” as interpreted by CRA or by the court. To mitigate this unfairness, CRA has indicated the factors that it would use to determine the existence of an element of intentional abuse. These factors include, but are not limited to, the size of the transaction, any history of non-compliance, and the taxpayer’s (or representative’s) level of knowledge.

In attempting to make the VDP fairer, CRA has now created so much uncertainty that only tax professionals are capable of understanding the program. This uncertainty itself is now creating a new element of unfairness.

Restrictions

Unfairness aside, further changes have been made that are making the VDP even more restrictive than before. The Limited Program, for example, requires taxpayers to formally and legally forfeit their rights to object and appeal. As a result, taxpayers are more reluctant to participate in the program because they lose a great amount of legal flexibility when they do.

In addition, large companies (those with gross revenue of more than $250 million in at least two of their last five tax years) and any related companies are restricted to the Limited Program only.

Both the Limited Program and the General Program also have several restrictions:

• Both require taxpayers to pay the estimated amount of taxes owing or to have a payment plan in place.
• Both will no longer accept anonymous disclosures; however, both programs will offer some level of anonymity. Taxpayers, then, will be able to have an anonymous, but non-binding, pre-disclosure discussion with a CRA official.
• Both will now require disclosure of the name of the advisor associated with the noncompliance transaction. This change could potentially reduce the willingness of an advisor to recommend the VDP to his or her client.

More Accessible

There is some positive news, however, as some of the recent changes will make the VDP more efficient and accessible. Disclosures involving transfer-pricing transactions, for instance, will now be referred to a specialized committee that’s equipped to handle the complexity. The knowledge and ability of this specialized committee will increase efficiency for taxpayers. A transfer-pricing transaction is a transaction of two related parties located in at least two different jurisdictions with differential tax rates; this transaction can potentially shift taxable income from a high tax jurisdiction to a low tax jurisdiction.

Any disclosures involving complex issues or large dollar amounts will also be referred to specialists to review to ensure the disclosures are documented properly.

Wash Transactions

The VDP will reduce penalties and interest in HST/GST wash transactions (transactions that would not have generated net tax revenue for CRA). When a supplier has failed to charge HST/GST, but the purchaser did not claim an Input Tax Credit, the supplier qualifies for a reduction both in penalty and in interest when disclosing such a transaction. The rationale behind this special measure is likely that this type of non-compliance is revenue-neutral to the government, as the HST/GST that should have been charged and remitted should have been reclaimed as Input Tax Credit, resulting in zero net revenue for the government.

CRA has encouraged taxpayers to disclose tax matters. However, CRA’s new VDP tracks may give taxpayers a few more headaches, and discourage them to take advantage of the program.