Voluntary Disclosures Program under continued attack from Canada Revenue Agency

TORONTO – Drastic changes to the administration of the Voluntary Disclosures Program (VDP) confirm my fears that the Canada Revenue Agency (CRA) is attempting to eviscerate the program. In July and August, the CRA started to respond to the first batch of disclosure applications that our tax law firm had filed under the new disclosure rules, which took effect as of March 1, 2018. 

The CRA appears to be formulating policy on the fly. In informal conversations with our tax lawyers, it advised that it would reject VDP applications, if the relevant tax returns weren’t enclosed with the initial application. This new requirement affirms that the CRA does in fact intend to make the VDP unavailable or, at the very least, hard to access for many taxpayers. 

As a transitional measure, it will allow 30 days for the first group of disclosing taxpayers to submit their returns. However, this temporary measure will end once the CRA determines that taxpayers have been apprised of the new rules. 

The VDP is headed to the courts

It is disturbing that the CRA’s approach to subsequent disclosure applications seems contrary to the new VDP information circular — making the CRA’s policy headed for the courts. The CRA’s guidelines on the post-March 2018 Voluntary Disclosures Program are laid out in Information Circular IC00-1R6 (IC). 

While paragraph 43 of the IC indicates that “[a]ll CRA returns, forms and schedules needed to correct the non-compliance must be included with the application,” the IC clearly considers that a disclosing taxpayer may require additional time to submit the completed tax returns. If a taxpayer needs extra time to submit documents, paragraph 33 advises the disclosure applicant to make a written request “for an additional specified period of time” upon submitting the disclosure application. 

Similarly, paragraph 53 of the IC states that a taxpayer may, if necessary, submit “additional CRA-requested information and/or documentation to complete the application” up to 90 days from the day that the CRA received the VDP application. While not well drafted, the phrase “additional CRA-requested information and/or documentation to complete the application” on a normal reading includes the relevant tax returns for the taxpayer’s disclosure. 

Certainly these returns are required to complete the disclosure and are clearly requested by the CRA in the text of the IC itself. Furthermore, IC paragraph 54 allows the CRA to grant more than 90 days where (1) “the complexity of the application or other extraordinary circumstances” dictate and (2) taxpayer makes a written request. 

Failure to exercise powers will be challenged

The CRA’s newly developed position is unduly harsh and inconsistent. The wording in the IC patently permits a disclosure applicant the opportunity to submit tax returns after submitting the VDP application. 

Although the CRA has final discretion on whether it will or won’t allow a taxpayer’s request for additional time to file the tax returns, the categorical statements from voluntary disclosure personnel to the effect that the CRA will, as a matter of course, deny the disclosure when tax returns aren’t enclosed with the initial application indicate a failure to exercise a discretion amounting to an ousting of those specific discretionary powers. 

It is clear in case law that failure to properly exercise discretionary decision-making powers is subject to successful challenge under judicial review in the Federal Court of Canada. In my opinion, Canadian tax accountants and lawyers should consider ourselves forewarned. The CRA is clearly acting to limit the availability of the VDP.

David J. Rotfleisch, CPA, CA, JD, is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Visit Taxpage.com and email David at david@taxpage.com.