Proposed Changes to Federal Voluntary Disclosure Program
(Originally published at this link)
Voluntary Disclosures
On June 9, 2017, the Canada Revenue Agency (“CRA”) proposed significant changes to the federal voluntary disclosure program (“VDP”). The effect of the changes would be to reduce both the type of taxpayer eligible for the VDP and the extent of the relief offered. These proposed changes follow the publication in late 2016 of a report commissioned by the CRA on the VDP by the Offshore Compliance Advisory Committee in which the committee recommended that the VDP offer less generous relief in certain circumstances.
The proposed changes to the VDP also come in the wake of the CRA’s decision to refuse VDP treatment to all taxpayers whose names or whose entities appear in the Panama Papers or the Bahamas Leak provided that those taxpayers filed their applications to the VDP after the publication of the information in the International Consortium of Investigative Journalists’ database (offshoreleaks.icij.org). Whereas taxpayers were previously eligible to apply for VDP treatment in respect of their tax errors and omissions up until the point in which the CRA had begun or was set to begin an enforcement action in respect of the taxpayer, the CRA’s new approach expands the meaning of “set to begin an enforcement action” substantially.
As we move toward the automatic exchange of foreign banking information with the CRA in 2018, one can expect, based on the CRA’s new approach to the VDP, that taxpayers identified by way of the exchange will not be eligible to apply for VDP treatment.
TWO PROGRAMS:
The changes proposed by CRA include dividing voluntary disclosure files into two streams:
| I. | The General Program – these files would largely benefit from the protections from penalties and prosecution and partial interest relief that all valid voluntary disclosures currently enjoy; and |
| II. | The Limited Program – files that disclose major non-compliance would benefit from relief from prosecution and the imposition of gross negligence penalties but would be exposed to other penalties and would not receive any interest relief. |
Files will be reviewed on a case by case basis to determine their eligibility for each program. However, the CRA lists the following criteria as evidence of major non-compliance, which may lead to a file’s inclusion in the Limited Program:
| • | Where active efforts have been taken to avoid detection through the use of offshore vehicles or other means; |
| • | Where large dollar amounts are involved; |
| • | Where the file evidences multiple years of non-compliance; |
| • | Where the applicant is a sophisticated taxpayer; |
| • | Where the disclosure is made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns; and |
| • | Any other circumstance in which a high degree of taxpayer culpability contributed to the failure to comply. |
NO ANONYMOUS FILES:
Another major change includes removing the option to open a voluntary disclosure file on a no-names basis. Taxpayers and their representatives can have “pre-disclosure discussions” with the CRA in respect of a specific file but none of the protections afforded under the voluntary disclosure program will be available until the taxpayer is named and has signed the application to open the file.
CONDITIONS OF DISCLOSURE:
The CRA confirms the four conditions of a valid voluntary disclosure and adds a fifth; that payment of the estimated tax owing be made at the time of the voluntary disclosure application.
ESTIMATES OF UNREPORTED INCOME:
The proposed Information Circular also clarifies that, for a complete disclosure, taxpayers are expected to report undeclared income and to estimate investment income earned in all years, including those periods for which no books or records are available.
LIMITATIONS OF RELIEF:
The Income Tax Act (Canada) only authorizes the Minister to offer relief for a ten year period. The proposed Information Circular confirms that despite the CRA’s requirement for disclosure of unreported amounts in all years, it can only offer interest and penalty relief for the ten years preceding the voluntary disclosure application. This means that any tax debts arising in respect of years prior that ten year period will necessarily be subject to full interest rates and penalties. As a point of reference, the federal prescribed rate of interest on income tax debts in 1986 was 16%, in 2000 it was 10%. Under the Income Tax Act (Canada), both income tax debts and penalties accrue interest.
AN EXPECTATION THAT TAXPAYERS WILL NAME NAMES:
The Information Circular also provides that applicants to the VDP are expected to name the professional who provided assistance to the taxpayer in respect of the subject matter of the VDP application with a view to giving the CRA sufficient information to verify the facts provided in the application.
A 60 day consultation period on the proposed changes to the VDP ends August 8, 2017. It is proposed that the changes will take effect January 1, 2018.
Automatic Exchange of Foreign Financial Information
July 1st, 2017 was the deadline for Canadian banks, insurance companies, custodians, brokers, fund managers, and other financial institutions to be ready to provide the information required by the Common Reporting Standard to the Canada Revenue Agency in preparation of the OECD’s automatic exchange of financial information.
As of May, 2017, there were over 1800 activated bilateral exchange relationships under the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information. Canada has activated 42 such relationships to date. Many countries have committed to begin exchanging information by September, 2017, including members of the European Union. Canada, Switzerland, Israel, and other jurisdictions will only begin exchanging information in 2018.
Multilateral Convention to Prevent BEPS
On June 7, 2017, Canada and 67 other jurisdictions signed on to the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”). The MLI will serve to modify Canada’s and other signatories’ existing income tax treaties to incorporate measures designed to prevent base erosion and profit shifting. Such measures are designed to ensure that the tax burden of a multinational business is borne in the jurisdiction of the active business. It is expected that the MLI will come into force sometime in 2019.
The material contained herein is necessarily of a general nature and cannot be regarded as legal advice. The members of our firm would be pleased to provide additional information. You may reach us at (514) 849-1188 or by e-mail as follows:
| Sydney Sweibel | ssweibel@sweibelnovek.com | |
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| Denis A. Lapierre | dlapierre@sweibelnovek.com | |
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