Written by Martin A.U. Sorensen and Nicholas Arrigo
Earlier this month, we reported that a senior representative of the Canada Revenue Agency (CRA) had announced that it was "highly likely" that the incoming changes to the Voluntary Disclosures Program (VDP) would be delayed until at least June 2018. It seems, however, that the improbable has come to pass, as Minister of National Revenue, Diane Lebouthillier, announced on December 15 that the new rules will actually take effect on March 1, 2018.
The New Rules Have Been Finalized
Minister Lebouthillier’s announcement was accompanied by a finalized version of the VDP information circular (IC00-1R6) (the "December 15 Amendments"), which differs from the originally proposed draft in several respects. The key elements of new VDP are as follows:
Additional Eligibility Requirement
There are four requirements to qualify under the current VDP. Applications must (1) be voluntary, (2) be complete, (3) involve the application or potential application of a penalty, and (4) involve information that is at least one year past due. The new rules will introduce a fifth requirement, namely that taxpayers must include payment of the estimated tax owing with their VDP application. Taxpayers unable to make such a payment may request to be considered for a payment arrangement, subject to the approval of the CRA’s collections division.
Limited Relief for "Major Non-Compliance" and for Large Corporations
Income tax disclosures will be administered under two separate tracks: the "General Program" and the "Limited Program". The General Program will offer relief similar to that available under the current rules: protection from prosecution, relief from penalties and a partial interest reduction. Disclosures dealt with under the Limited Program will receive reduced relief. While taxpayers will still receive protection from criminal prosecution and will not be subject to gross negligence penalties, they will be potentially liable for all other penalties as applicable, and will not be eligible for interest relief.
As originally proposed, the new rules set out a list of factors that the CRA may consider in order to determine whether the disclosure evidenced "major non-compliance", in which case the application would fall under the Limited Program. It was not clear whether the CRA would consider the factors only in circumstances of intentional misconduct, or whether the Limited Program could only apply even if there was no element of taxpayer culpability. The December 15 Amendments bring some added clarity to the application of these factors, stating that there must be "an element of intentional conduct on the part of the taxpayer or a closely related party."
Following the December 15 Amendments, in determining whether there has been major non-compliance in a situation where there has been intentional misconduct, CRA may consider the following factors:
- whether efforts were made to avoid detection through the use of offshore vehicles or other means;
- the dollar amounts involved;
- the number of years of non-compliance;
- the "sophistication" of the taxpayer; and
- whether the disclosure is made after an official CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to taxpayers working in a particular sector about a compliance issue).
Some uncertainty still surrounds the treatment of disclosures made by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years. Under the new rules as originally proposed, these corporations were excluded from the VDP outright. Now, in light of the December 15 Amendments, corporations exceeding the stated dollar threshold will generally be eligible for the Limited Program. Although not entirely clear from the language of the revised rules, it appears that these corporations will fall under the Limited Program regardless of whether they have committed any intentional misconduct.
Special Treatment of Transfer Pricing Adjustments
Under the new rules as originally proposed, VDP applications in respect of transfer pricing adjustments and related penalties were to be denied outright. Applications relating to transfer pricing matters are now eligible for VDP relief under the revised new rules, but will be referred to the Transfer Pricing Review Committee. However, this statement falls under the heading "circumstances where relief will typically not be considered." It is therefore an open question whether transfer pricing disclosures will commonly lead to relief. Caution is likely warranted here.
Narrower Objection Rights
Currently, taxpayers are free to object to assessments or reassessments that arise as a result of their voluntary disclosures. Under the new rules, however, taxpayers whose applications are accepted under the Limited Program will be required to waive their objection and appeal rights in relation to the specific matter disclosed in the VDP and any related assessments. This waiver will not prevent a taxpayer from objecting in circumstances where the assessment includes a calculation error, relates to a characterization issue (e.g., income vs. capital gains treatment) or relates to an issue other than the matter voluntarily disclosed.
Changes to the 90-Day Grace Period
The current rules, as well as the original draft of the new rules, permit the CRA to grant the taxpayer up to 90 days to gather all necessary information and documents after submitting a VDP application. The December 15 Amendments may still allow for this grace period, but will require taxpayers to submit a written request for an additional specified period at the time the application is submitted. It is therefore likely to become common practice for taxpayers and their advisors to request additional time to prepare the application.
No Protection for "No-Name" Disclosures
Under the current VDP rules, taxpayers who wish to remain anonymous may apply on a "no-name" basis, requesting that a CRA officer offer an initial assessment as to whether the disclosure will qualify for the VDP. If the response is in the affirmative, the taxpayer is given 90 days to provide identifying information and all supporting documentation required. Under the incoming rules, it is proposed that taxpayers may enter into informal, non-binding "pre-disclosure discussions" with a CRA official on an anonymous basis. However, taxpayers will no longer enjoy a guaranteed 90-day protection period. Instead, the proposed guidelines provide that pre-disclosure discussions will "have no impact on CRA’s ability to audit, penalize, or refer a case for criminal prosecution." The December 15 Amendments add that, "for complex technical reporting issues or questions, taxpayers will be referred to a CRA official in a specialized audit area to discuss their situation on an anonymous basis."
Now that the new rules have been finalized, the clock is ticking for taxpayers to apply under the current VDP, which generally offers more favourable relief. Taxpayers who wish to disclose any non-compliance should consider initiating a named VDP application on or before February 28, 2018, in order to preserve their entitlement to relief under the current rules.
We encourage you to reach out to a member of the Bennett Jones Tax team to discuss how the incoming VDP rules may affect you or your business.