Backgrounder - Voluntary Disclosures Program

The Government of Canada is committed to cracking down on tax evasion and aggressive tax avoidance to ensure a system that is responsive and fair for all Canadians. On March 1, 2018, a revised Voluntary Disclosures Program (VDP) will come into effect to narrow the eligibility criteria to access the Program and to impose additional conditions on applicants, making it more difficult for those who intentionally avoid their tax obligations to benefit from the VDP.

Conditions of a valid application

To qualify for relief, the application must:

• be voluntary;
• be complete;
• involve the application or potential application of a penalty and, for GST/HST applications, the application or potential application of a penalty or interest;
• include information that is at least one year past due for income tax applications and, for GST/HST applications, at least one reporting period past due; and
• include payment of the estimated tax owing.

Income Tax Disclosures

With the changes to the program, two tracks will be created for income tax disclosures:

Limited Program

The Limited Program provides limited relief for applications that disclose non-compliance where the facts suggest that there is an element of intentional conduct on the part of the taxpayer or a closely related party.

Under the Limited Program, taxpayers will not be referred for criminal prosecution with respect to the disclosure and will not be charged gross negligence penalties. However, they will be charged other penalties and interest as applicable.

In other cases, the General Program would generally apply.

General Program

Under the General Program, taxpayers will not be charged penalties and will not be referred for criminal prosecution related to the information being disclosed. The CRA will provide partial interest relief for years preceding the three most recent years of returns required to be filed.

GST/HST, excise tax, excise duty, softwood lumber products export charge and air travellers security charge disclosures

For GST/HST, excise tax, excise duty, softwood lumber products export charge and air travellers security charge disclosures, three categories will be created:

Wash Transactions

Wash transactions are generally transactions where a supplier has failed to charge and collect GST/HST from a registrant entitled to a full input tax credit. This category provides relief only for applications involving GST/HST “wash transactions” that are eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16.3.1, Reduction of Penalty and Interest in Wash Transaction Situations.  Registrants will not be charged penalties nor interest and will not be referred for criminal prosecution related to the information being disclosed. A registrant must now disclose information on any non-compliance during the four years before the application is filed. 

Limited Program

This category provides limited relief for applications that disclose non-compliance where the facts suggest that there is an element of intentional conduct on the part of the registrant or a closely related party.

Under the Limited Program, registrants will not be referred for criminal prosecution with respect to the disclosure and will not be charged a gross negligence penalty. However, they will be charged other penalties and interest as applicable.

In other cases, the General Program would generally apply.

General Program

Registrants will not be charged penalties and will not be referred for criminal prosecution related to the information being disclosed. The CRA will provide partial interest relief. A registrant must now disclose information on any non-compliance during the four years before the application is filed.

Determining if a disclosure will be processed under the General or Limited Program

For both income tax and GST/HST disclosures, the determination of whether an application should be processed under the General or Limited Program will be made on a case-by-case basis. The CRA may consider a number of factors, including but not limited to:

• the dollar amounts involved;
• the number of years of non-compliance; and
• the sophistication of the taxpayer/registrant.

Other significant changes to the Voluntary Disclosures Program

Payment of estimated taxes owing: Payment of the estimated taxes owing will be required as a condition to qualify for the program.When a taxpayer does not have the ability to make payment at the time of filing the VDP application, they may request to be considered for a payment arrangement.

Replacement of “no-names” disclosure method by a new pre-disclosure discussion service: The process for taxpayers and authorized representatives to make disclosures on a no-names basis has been eliminated. Under the new “pre-disclosure discussion” service, taxpayers or their authorized representatives can have a conversation with a CRA official on an anonymous basis, but that discussion does not constitute acceptance into the VDP.

Large corporations: Generally, applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.

Transfer-pricing applications referred to specialized committee: Due to the complexity of transfer pricing issues, these applications will be referred to an existing specialized Transfer Pricing Review Committee, which will review the applications instead of the VDP. For efficiency, taxpayers may send their applications directly to this committee.

Review by specialists: Applications involving complex issues or large dollar amounts will be reviewed for completeness by the relevant specialist from the program area prior to being accepted.

Disclosure of advisors: The name of the advisor who assisted with the non-compliance should generally be included in the application.

Cancellation of previous relief: Relief will be cancelled if it is subsequently discovered that a taxpayer’s application was not complete due to a misrepresentation.

Mandatory waiver of rights of objection and appeal: Under the Limited Program, participants will have to sign a waiver of their right to object and appeal in relation to the specific issue disclosed.