Canadian Tax Haiku of the Week: (Voluntary Disclosures Program)
Have not filed, or
Maybe forgot some income?
The reality is that we are moving towards an increasingly transparent tax world. The bad old days of people hiding income or money while thinking “who is going to find out?” are over. We are in a new world where the only issue is “who is going to sell you out?”.
However, that does not mean that everyone who has undeclared funds or income is a bad person or a “black hat” as I call them. The reality is we have seen numerous cases where Canadians end up offside simply because they did not receive proper advice. For example, if a resident of Canada has relatives overseas, and the country they live in is not a paragon of governmental virtue like Canada (I know we love to complain, but really our government is not actually run by kleptomaniacs and thieves….), where if you tell anyone how much you earn on a tax return, someone will get that information and then kidnap your children for ransom or just show up at your house with a gun and take everything. Believe me, that actually happens in lots of places. So in order to protect the family, the safe & secure Canadian is the one who opens the offshore account to hold the family’s money. Even though the Canadian is just holding the money for relatives, as far as the Canada Revenue Agency (“CRA”) is concerned, those assets are taxable in Canada. And we have seen many variations on that theme – funds received as inheritances etc. In many of these cases, had the family received any Canadian tax advice before doing what they did to protect themselves, there would never have been a Canadian tax issue and no tax would have ever been due. But simply because they did not get proper tax advice, they are offside. So not everyone with a tax problem is really a black hat. There are plenty of those too, but not all.
The Canadian Voluntary Disclosures Program is aimed at providing Canadian taxpayers with a second chance to correct their tax affairs. Administered by CRA, the Voluntary Disclosures Program encourages taxpayers to come forward to correct inaccurate or incomplete tax information, or to disclose information regarding income not previously reported. Taxpayers who make a valid disclosure only have to pay the taxes due on the unreported income, plus interest, without penalty or prosecution. Moreover, limited interest relief is available, depending on the circumstances.
Authority for the Voluntary Disclosures Program is granted by an express provision of the Income Tax Act (the “Act”), relief is ultimately granted at the discretion of the CRA. The CRA has published documents, including an Information Circular, that provides information that may assist taxpayers in determining whether relief under the Voluntary Disclosures Program may be granted in their particular set of circumstances.
Overview of the Voluntary Disclosures Program
A disclosure must satisfy both the statutory requirements and the four conditions for validity for the CRA to approve a voluntary disclosure and waive all applicable penalties.
In order to be eligible for relief under the Voluntary Disclosures Program, the following statutory requirements must be satisfied:
- the applicant must be a “taxpayer”, which includes individuals, corporations, trusts and, for the purposes of the Voluntary Disclosures Program, partnerships, regardless of whether the taxpayer is liable or not for tax; and
- the application for relief must be made within 10 calendar years from the end of the year in respect of which the taxpayer is seeking relief (e.g., if an application for relief under the Voluntary Disclosures Program was made on March 1, 2011, relief is only available in respect of the 2001 and subsequent taxation years).
Furthermore, in order for the CRA to consider a voluntary disclosure made under the Voluntary Disclosures Program to be valid, it must satisfy each of the following four conditions:
- the disclosure is made voluntarily;
- the disclosure is complete;
- the disclosure involves the application or the potential application of a penalty; and
- the disclosure includes information that is: (i) at least one year past due, or (ii) less than one year past due and is in respect of a previously filed return that contains information that is at least one year past due.
Circumstances excluded from the Voluntary Disclosures Program
There are limited circumstances under which the CRA will not consider granting relief under the Voluntary Disclosures Program, regardless of whether the disclosure meets the four conditions for validity outlined above. These circumstances include disclosures in respect of:
- income tax returns where no taxes are owing or a refund is expected
- provisions under the Tax Act that permit taxpayers to elect specific tax treatment
- advance pricing arrangements
- rollover provisions, which allow a taxpayer to defer income that would otherwise arise on the transfer of property to a taxable Canadian corporation (e.g., section 85 of the Tax Act)
- returns that must be filed in the year of bankruptcy, and (vi) post-assessment requests for penalty or interest relief.
“Named” vs. “No-Names” Disclosures
A taxpayer has the choice of making a “named” disclosure or a “no-names” disclosure.
In a “named” disclosure, the identity of the taxpayer is revealed to the CRA in the initial submission requesting relief under the Voluntary Disclosures Program. The taxpayer has 90 days from the “effective date of disclosure” to provide a full and complete disclosure.
In a “no-names” disclosure, the taxpayer has 90 days from the effective date of disclosure to disclose their identity and provide a full and complete disclosure. A no-names disclosure is advantageous because it allows a taxpayer to discuss its situation with a Voluntary Disclosures Program officer and gain a better understanding of the CRA’s position on the potential availability of relief under the Voluntary Disclosures Program and the implications of the taxpayer’s disclosure being rejected without the taxpayer having to reveal its identity.
However, the CRA considers that discussions on a no-names basis with a Voluntary Disclosures Program officer are non-binding. Therefore, a taxpayer must identify itself in order to receive a final determination from the CRA as to whether the disclosure is a valid voluntary disclosure.
Stages of a “No-Name” Disclosure
The first stage is to prepare an initial disclosure letter to the CRA setting out the facts and circumstances in a generic manner. No identifying information is provided to the CRA. Taxpayers are only required to provide a general explanation, as well as the first three digits of their postal code so that the CRA can assign the file to the appropriate regional office. The CRA states on its website that it will respond within 30 days to indicate if the submission is generally acceptable pending full disclosure. At that time discussions may be had with the Voluntary Disclosures Program officer on the file to determine if there is likely to be an issue going forward.
If there is no issue, the taxpayer will generally have 90 days from the initial disclosure, and at least 60 days from the CRA’s response, to make the full disclosure. Up until the time of the full disclosure, the CRA is not aware of any of the taxpayers contact information and will not be able to identify the taxpayer or determine the location of any funds at issue.
It is important to note that the above process described above the CRA’s stated policy. However, the CRA is currently overwhelmed and is unable to respond in a timely manner to Voluntary Disclosures Program requests. The reality is that it may take several months until the tax payer receives even an acknowledgement that the CRA has received the disclosure.
This initial, “Thanks, we received it” letter informs the taxpayer’s counsel that when an officer has been assigned to the case, the CRA will send a second so-called “90-day letter” and only at that point will the 90-day clock to complete the disclosure will start. Although the wait times for both letters are becoming shorter (3-4 months), the CRA voluntary disclosures office seems to have virtually shut down from the end of April until mid-September for the past two years.
Payment of amounts owing
The CRA expects that a taxpayer will pay any amount of tax and interest owing at the time a voluntary disclosure is finalized. We have found that is it better to send a cheque with the complete disclosure in order to show the CRA officer on the file that the taxpayer has a bona fides wish to resolve the matter.
If you or someone you know has income or assets that they have not declared, then you should seriously consider a voluntary disclosure. The process is actually not as painful or expensive as many people imagine, particularly if we are dealing with offshore undisclosed accounts. The reality is that very often the tax is not much because the income, after the fees charged, is not very much at all. This is partly because the Canadian dollar had risen so rapidly over the past 10 years and so the income in Canadian dollar terms (which is all we care about from a Canadian tax perspective) was reduced, and also because of the 2008-2009 financial crisis often resulted in significant capital losses, compounded by exchange rate losses. As a result, in one recent case, our client actually received a net refund from the CRA because of the huge losses suffered in the offshore account during the relevant period!
By Jonathan N. Garbutt, Barrister & Solicitor and Raminder Pandher, student-at-law.
The above is provided on an FYI basis and does not constitute tax law advice.
 Information Circular IC00-1R4, Voluntary Disclosures Program at paragraph 12[IC].
 R.S.C. 1985, c. 1 (5th Supp.), as amended, at subsection 220(3.1).
 IC, supra note 1.
 Ibid at paragraph 2.
 Ibid at paragraph 13; see also Bozzer v Canada (2011 FCA 186).
 IC, supra note 1 at paragraphs 31-42.
 Ibid at paragraph 19.
 Ibid at paragraph 25.
 Ibid at paragraph 26.