On March 1, 2018, the Canada Revenue Agency (CRA) released a new Voluntary Disclosures Program (VDP) for all applications received after Feb. 28, 2018, aimed at sending a stronger message to Canadians about tax evasion.

In particular, the CRA will no longer allow Canadians the same incentives when disclosing unreported income under the new VDP program, as penalty and interest relief will depend on eligibility for the General Program. Taxpayers who do not qualify under the General Program may be assessed under the Limited Program, which not only provides no relief of interest and penalties (other than gross negligence penalties), but offers limited protection against criminal prosecution (only to the extent of the specific disclosure).

Overall, the amendments to the VDP illustrate an attempt by the CRA to respond to the perceived shortcomings of the Program. Particularly, the fairness of the regime and relative ease with which taxpayers were accepted.

It appears the CRA is applying this approach even to disclosures made before the amendments to the Program, as evidenced by the recent Grewal decision,¹ in which the applicant was accepted into the VDP in 2015, but subsequently assessed unreported income and gross negligence penalties through an audit. The taxpayer lost the appeal in Federal Court and Federal Court of Appeals.

Overview of the VDP and Grewal disclosure

When Mr. Grewal was accepted in 2015, the VDP was under the guidelines of CRA Circular IC00-1R5,² which set out four conditions of a valid Voluntary Disclosure:

1. Voluntary
2. Complete
3. Existence of a penalty
4. One-year past due

The second stipulation that must be met for a disclosure to be valid is the completeness of the application. An applicant (or taxpayer) must provide all facts for all years with unreported information for an application to be considered complete.³ If all four stipulations are met, the CRA has the ability, under subsection 220 (3.1), to waive and cancel interest and penalties within the last 10 calendar years from when the request was made.

In the Grewal case, the disclosure included unreported business income for the years 2004 through 2013. Also included was a list of loans to Panamanian companies, but no benefit associated to these loans was disclosed or calculated.  The CRA accepted his application and granted relief from interest and penalties for the years in question.⁴

In 2017, subsequent to a CRA audit, Mr. Grewal was assessed gross negligence penalties for his 2007 through 2013 taxation years, based on unreported taxable benefits arising from the Panamanian loans. These taxable benefits amounted to more than $14 million and were received from companies in which Mr. Grewal had direct and indirect interests.⁵

Despite disclosing the loans themselves under the VDP, and receiving an acceptance to his disclosure, Mr. Grewal was still audited and assessed gross negligence penalties. The Court ruled it is clear when one is accepted into the VDP, the CRA retains the right to audit, as it stipulates this in the CRA’s acceptance letters. Indeed, a letter excerpt states: “…the VDP has not verified the accuracy of the information you have provided in this disclosure and the CRA reserves the right to open these years for audit or verification in the future.”⁶

Mr. Grewal’s plea to waive gross negligence penalties based on his acceptance into the VDP was dismissed, as the VDP does not protect one from future audit nor incomplete disclosures.  

Similarly, other recent decisions do not bode well for taxpayers. In Gauthier,⁷ the Federal Court found the CRA was not forbidden from using information it received via disclosure to reassess earlier tax years beyond the CRA’s legislative ability to waive interest and penalties. Taxpayers should review their VDP submission carefully to ensure the years in question align with the 10-year statutory period for waiver of interest and penalties. Otherwise, the VDP may not provide the protection sought by the taxpayer.

In another decision, it was deemed the CRA did not possess the power to extend a Notice of Objection period by using subsection 220(2.1), since this section does not apply to Objections. Thus, it is reasonable to conclude this provision would also not apply to the VDP.⁸

These amendments and decisions should be of great concern to anyone seeking to use the VDP as a blanket immunity program. One thing is clear: the VDP has become more restrictive, signaling the CRA’s intention to combat tax evasion seriously. Furthermore, the CRA believes fairness is a fundamental principle of the tax system and any perception of injustice promotes non-compliance.

Consequently, it is reasonable to expect more decisions similar to Grewal, as the courts determine that taxpayers who benefited from the VDP are in a better position than those who did not use the Program.⁹ Individuals wishing to use the VDP in the future should tread carefully and ensure they make a complete disclosure.

Meet the Author

Riccardo Zerbino
Montréal, Québec
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