Crackdown: CRA proposes radical change to Voluntary Disclosures Program

OTTAWA – The Canada Revenue Agency has proposed changes to its Voluntary Disclosures Program (VDP) that would narrow eligibility and impose additional conditions on taxpayers applying to use it. 

“The VDP will no longer be a ‘one size fits all’ program. Major cases of non-compliance that are disclosed will not receive the same level of relief as they would through the current program,” the Agency announced. 

The CRA’s proposals follow a December 2016 report by the Offshore Compliance Advisory Committee (OCAC), an independent committee of tax experts. The OCAC assessed the VDP and made several recommendations on how to improve the program to become more effective and fair. The proposed comprehensive changes, which are being discussed over a 60-day consultation period that will end in early August 2017, contain the following measures: 

• excluding from VDP relief applications from corporations with gross revenue in excess of $250 million in at least two of its last five taxation years;
• excluding applications that involve transfer pricing adjustments;
• requiring payment of the estimated taxes owing as a condition of qualifying for the program;
• excluding applications that disclose income from the proceeds of crime from VDP relief;
• changing the way the amount of interest relief available is calculated; and
• cancelling VDP relief if it is subsequently discovered that a taxpayer’s VDP application was incomplete due to a misrepresentation attributable to wilful default. 

“This is a classic case of trying to fix something that is not broken,” charges Canadian Accountant blogger David Rotfleisch, the owner and senior lawyer with Rotfleisch & Samulovitch Professional Corporation in Toronto.

“The proposals look like they were drafted by somebody who is purely academic and has no experience in the field. Based on my experience, this is going to have the effect of greatly curtailing, if not destroying, the voluntary disclosures program, both for income tax [and] even more so for GST,” he adds.

Rotfleisch, who notes that he completes several voluntary disclosures a week on behalf of clients, believes that the VDP, as it presently operates, is a very effective program. He says that many people who come into his office with unfiled tax returns for previous years decide to file because they feel comfortable that, under this program, they will obtain penalty relief and, in some cases, also an interest break. 

But the proposed new rules would either restrict or eliminate that possibility, he believes. 

“For example, if you’re part of the underground economy and you haven’t been collecting and remitting GST, you’re not eligible. So where is the incentive for somebody who is in the underground economy — which is a major focus of CRA, to try to deal with the underground economy — who hasn’t been collecting or remitting GST, particularly in cash, to come into the system? None whatsoever,” he claims. 

KPMG scheme the catalyst?

Dennis Howlett, the Ottawa-based executive director of Canadians for Tax Fairness, an organization “that advocates for fair and progressive tax policies aimed at building a strong and sustainable economy, reducing inequalities, and funding quality public services,” says he views the proposed changes in a positive light. 

“On the whole the recommendations are good. In general terms, I think there were some serious problems with the program before,” he says, citing as an example the high-profile KPMG Canada deal, which broke in 2015 and spurred a House of Commons finance committee hearing in 2016.

Howlett, who appeared before the committee, says the CRA offered a very generous special deal to clients of an offshore tax structure established by KPMG in the Isle of Man — a self-governing British Crown dependency in the Irish Sea and a popular tax haven with no wealth, capital gains or inheritance taxes — if they would voluntarily disclose their participation in what the CRA called a tax ‘sham.’

The CRA offered a partial amnesty consisting of a break with penalties waived for tax years up to and including 2014, as well as some interest relief between 2004 and 2010 if those clients paid the taxes they should have paid, he adds. 

Howlett says the key overall principle with the CRA’s proposed changes to the VDP program is there should be no advantage provided to taxpayers applying for relief, compared to those who filed properly on time. 

“Probably there should be some relief in terms of penalties and interest. But at a minimum they should still pay whatever it is they should have paid in the first place, plus some penalty and interest. Otherwise, by not applying under the VDP, you take your chances that you don’t eventually get caught,” he says.

Jeff Buckstein, CPA, CGA, is an Ottawa-based business journalist. 

Tomorrow, part two of "Crackdown: Canada Revenue Agency proposes change to Voluntary Disclosures Program."