Taxation National

VDP was applied inconsistently to tax evaders, says Auditor General

Accountants and tax lawyers should take note of CRA acquiescence

Author: Canadian Accountant

TORONTO, November 23, 2018 – In his report on inconsistent compliance activities at the Canada Revenue Agency, Auditor General Michael Ferguson, FCPA, FCA, has pointed his finger at the Voluntary Disclosures Program (VDP), a “second chance” program for Canadians to correct inaccurate or incomplete information, or disclose information not reported previously. 

As previously reported by Canadian Accountant, the Auditor General’s report has focused on a double standard applied to Canadian taxpayers, in which CRA audit outcomes depend on the locations and financial resources of the taxpayer. The report uses the VDP as an example of the inconsistent waiving of penalties and interest at the CRA. 

Much to the dismay of Canadian accountants and tax lawyers, VDP rules were changed earlier this year, which caused a sudden rush of voluntary disclosures. The Auditor General’s report, which focuses on a five year period from 2013-18, notes the changes as does the CRA in its agreement to comply with the report’s recommendations. 

The Auditor General analyzed over 86,000 records of applications to the VDP during a five-year period. It found 140 cases in which taxpayers were under audit when submitting their applications, yet the applications were still accepted. This represents no more than .16 per cent of the overall cases, though these cases, according to the report, represented about $17 million in interest and penalties waived. 

“According to the Agency’s policy, relief from penalties and interest under the program was legitimate in some cases, despite an ongoing audit,” says the report. “In our opinion, the Agency should have delayed processing the application for relief until it completed the audit.” 

The CRA noted in its response, however, that until March 2018, VDP s policy allowed the CRA to accept a voluntary disclosure even when an audit was already under way. In December 2017, the Agency announced it would amend the program’s policy to address this possibility.  The Auditor General did not examine the impact of the changes to the VDP but noted additional conditions made it “more difficult for those who intentionally avoided their tax obligations to benefit from relief of interest and penalties.” 

The report also notes that VDP audits were not timely or complete. During a five-year period, five per cent of files were not reassessed by March 31, 2018. “In these cases, the taxes owing were not reassessed, so the Agency did not collect any amounts that might have been due.” 

The CRA did not follow through with taxpayers who had used the VDP to ensure that they continued to comply. There appeared to be no thought at the CRA that those who used the VDP were at risk to re-offend. 

“For example, if a taxpayer had an offshore investment and used the program to avoid paying interest on undeclared past income, the Agency did not follow up on whether the taxpayer still owned the investment and declared that income on later tax filings.” 

Canadian accountants and tax lawyers will note the willingness with which the CRA has agreed to the recommendations of the Auditor General. In terms of timeliness and penalties, the CRA has pledged to harmonize its processes across taxpayer categories, implement an audit tracking system, and ensure that eligibility criteria are fully met before approving applications for all relief programs.

By Canadian Accountant staff.

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