There has been much discussion in recent months of tax avoidance and evasion. The March 2013 Federal Budget proposes to introduce the Stop International Tax Evasion Program, which would reward individuals (up to 15% of federal tax collected) who provide tips on significant international tax non-compliance leading to collection of outstanding federal taxes in excess of $100,000. On May 1, 2013, the Standing Committee on Finance presented its report on Tax Evasion and the Use of Tax Havens, which examined tax avoidance and tax evasion in Canada, as well as the methods used domestically and internationally to detect and prosecute – and thereby reduce – aggressive tax planning so that taxpayers pay their fair share of tax.
Canada has a self-assessment tax regime that requires taxpayers to assess their tax liability by filing a return with the Canada Revenue Agency (CRA) by the required filing deadline. A taxpayer who determines he or she has unreported income, has claimed ineligible expenses in prior tax returns, or has failed to file required information returns (the T1135 – Foreign Income Verification Statement, for example), can take comfort in the fact that the CRA administers the Voluntary Disclosure Program (VDP). The VDP allows taxpayers to come forward to correct previous errors and omissions in their dealings with the CRA.
The report on Tax Evasion and the Use of Tax Havens notes that the CRA received 3,298 voluntary disclosures and recovered $138 million in tax revenue in the 2009-2010 fiscal year. In the 2011-2012 fiscal year, there were more than 15,000 voluntary disclosures that resulted in $310 million in tax revenue.
A taxpayer who submits a valid disclosure will avoid penalties and prosecution. Partial relief of interest may be granted for years or reporting periods preceding the three most recent years of returns required to be filed. A voluntary disclosure must meet these four conditions:
- it must be voluntary;
- it must be complete;
- it must involve the application or potential application of a penalty; and
- it must involve information that is at least one year past due.
The CRA will deny a voluntary disclosure if it determines that any of the four validity conditions have not been met.
The CRA’s administrative guidelines regarding the VDP are outlined in the March 21, 2013, revised information circular, IC00-1R3. (The revision is a result of the CRA changing locations to which written submissions may be faxed or mailed.)
A written submission on Form RC199 may be made on a “named” basis, where the identity of the taxpayer is disclosed on the initial submission. Alternatively, the submission may be made on a “no-name” basis, allowing the taxpayer to have informal, non-binding discussions with the CRA to better understand the implications of making a disclosure and whether to proceed. A taxpayer has ninety days from the date the CRA receives the no-name submission to provide a complete named disclosure. A subsequent no-name disclosure for the same information and taxpayer will not be considered by the CRA.
Once a voluntary disclosure is started, the taxpayer has limited time to provide additional relevant information or documentation to ensure the disclosure is complete. A voluntary disclosure may lead to an investigation into other accounts the taxpayer has with the CRA, so taxpayers should ensure all errors and omissions are properly disclosed to avoid penalties and prosecution.
A taxpayer has no right of objection to dispute a discretionary decision that denies relief or partial relief. However, the taxpayer can request a second administrative review, which will be carried out by a VDP officer not involved in the first review and decision. If a taxpayer feels that the Minister of National Revenue did not exercise discretion in a fair and reasonable manner, he or she has thirty days from the date the decision was communicated to apply to the Federal Court for a judicial review of the Minister’s decision.
Due to the complexity of the Canadian tax system and self-reporting regime, it is not uncommon for a taxpayer to inadvertently miss reporting income or filing a required information return. The penalties for non-compliance can be costly and can be avoided by filing a valid voluntary disclosure. If you wish to make a disclosure under the VDP, contact your Collins Barrow advisor to guide you through the process.
Kathy Byvelds, CPA, CA, is a Tax Partner in the Winchester office of Collins Barrow.
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