TaxMatters@EY - May 2013
Bob Neale, Toronto
The Canada Revenue Agency’s (CRA’s) Voluntary Disclosures Program (VDP) is intended to promote voluntary tax compliance. Under the VDP, individuals may correct inaccurate or incomplete information previously provided to the CRA or disclose information they have not previously provided. Because the CRA does not want individuals to use the VDP as a means of retroactive tax planning, it does not accept late-filed elections through the VDP.
Usually, an individual makes a voluntary disclosure as protection against significant penalties — or, in extreme cases, prosecution — that may result if the errors or omissions are detected by the tax authorities first. The VDP program allows individuals to rectify prior omissions in a manageable way. Indeed, the VDP program is an integral part of any successful self-assessment tax system, allowing citizens to come forward and self-correct information without being exposed to penalties or prosecution.
Where an individual makes a valid disclosure, he or she is liable to the taxes owing and related interest, but is not subject to penalties or prosecution. The CRA has legislative authority to waive or cancel penalties or interest. Based on current legislation, the ability to grant relief is limited to the 10 taxation years before the calendar year in which the submission is filed. For example, an income tax submission made on 1 May 2013 would only be available for the 2003 and subsequent taxation years.
For the disclosure to be valid, the disclosure must:
- Be voluntary
- Be substantially complete
- Involve at least one penalty provision
- Include information that is at least one year overdue or, if the information is less than one year overdue, the disclosure must not be made solely to avoid late-filing or instalment penalties
As implied in the first of these conditions, the submission must be initiated by the individual before the tax authorities have begun any inquiry. If an audit or investigation has already begun, or if the individual is party to a transaction that is under review by the CRA or any other authority or administration, a disclosure is not considered voluntary. With respect to the second condition, it should be noted that documentation may be required in order to verify the information disclosed.
An individual who wishes to make a voluntary disclosure must do so in writing by mail or fax to the VDP at the designated Tax Centre that has jurisdiction over the area in which the individual resides. Form RC199, Taxpayer Agreement, should be used to make this initial submission.
Although many disclosures are made on a “named” basis (i.e., the individual’s identity is provided to the CRA when making the disclosure), it is also possible to make a “no-name” disclosure to initiate discussion with the CRA. A no-name disclosure allows the individual’s advisor to explore the implications of disclosure with the CRA on a hypothetical basis.
However, negotiations conducted before the individual is identified and the CRA has complete information are quite limited. The identity of the individual must be provided within 90 days from the effective date of disclosure. If all other disclosure conditions have been met, the individual is protected from penalties and prosecution, beginning on the effective date. A final and complete submission of the disclosure is also expected to be provided within these 90 days.
Once the CRA has a complete file, a VDP officer can make a decision and will provide the individual with written notice of the decision along with an explanation. If the disclosure is accepted, the CRA issues an assessment. If the disclosure is denied, the file is referred to audit or investigations.
An individual may request the director of the Tax Centre where the original decision was made to review and reconsider the decision. It is also possible to seek a Federal Court judicial review of the VDP officer’s initial decision or the decision of the director.
Individuals may appeal an assessment or reassessment made as a result of a disclosure, but not with respect to the waiver of penalty or interest.
To learn more about the Voluntary Disclosures Program, speak to your EY advisor.
CRA to crack down on international tax evasion
In an 9 April 2013 news release, Minister of National Revenue Gail Shea highlighted initiatives introduced in the March federal budget to strengthen the capacity of the Canada Revenue Agency (CRA) to crack down on international tax avoidance and evasion.
In the news release, the minister again called upon the International Consortium of Investigative Journalists to provide the CRA with the information they currently hold on individuals with income or property held offshore, including 450 Canadians. In addition, the minister noted the CRA is working with its international partners, including the United States, in exploring other avenues of addressing international tax evasion.
In closing, the minister stated “These new measures will provide the CRA with additional tools to combat tax cheats. Our Government is serious about cracking down on those who attempt to cheat the system.”
For additional information, see our Tax Alert 2013 Issue No.10, Federal Budget 2013-14.
US Justice Department highlights tax division’s enforcement results
In a news release also released on 9 April, the US Justice Department announced highlights of its work during the past year to defend and enforce the nation’s tax laws. The Internal Revenue Service and the Justice Department’s Tax Division have collaborated to carry out their combined tax enforcement missions in several critical areas, including prosecuting tax fraud and evasion, halting the spread of abusive tax shelters, tracking down tax cheats who use offshore accounts, and combating stolen identity refund fraud.