Changes to the Voluntary Disclosures Program
Do you have unfiled tax returns, or have you incorrectly reported income? If so, you may be eligible for the Voluntary Disclosures Program. The Voluntary Disclosures Program incentivizes taxpayers to correct previous non-compliance by offering relief from penalties, a reduction of interest, and a promise that the taxpayer will not be referred for criminal prosecution. However, the Canada Revenue Agency is proposing changes that threaten the viability of the Voluntary Disclosures Program altogether.
Changes to the Voluntary Disclosures Program
The Federal government has announced that broad changes will be implemented to the Voluntary Disclosures Program. The first will be restrictions on who is eligible to qualify for the program. The second change to the Voluntary Disclosures Program is that the Canada Revenue Agency will have the power to revoke the acceptance of the disclosure, and the power to audit information coming through the Voluntary Disclosures Program. The third change is that the amount of relief for certain situations will be limited. Finally, the Canada Revenue Agency will want up front payment of the taxes owed.
Please see below for a more detailed discussion of the changes to the Voluntary Disclosures Program.
Restrictions on Eligibility
Under the new Voluntary Disclosures Program, applications reporting proceeds from a crime will no longer qualify. The new program would also exclude applications that involve transfer pricing and applications from corporations with gross revenue in excess of $250 million. To restrict eligibility from proceeds from crime will mean that illegal income, and those who earn illegal income have no real chance to become compliant with our tax laws. This change to the Voluntary Disclosures Program will force taxpayers to continue to hide from the Canada Revenue Agency as they have no incentive in coming forward. The penalty will be the same whether they disclose under the Voluntary Disclosures Program, or get caught.
Power to Revoke, and Power to Audit
The Canada Revenue Agency reserves the right to audit any information provided in the Voluntary Disclosures Program application, and to reassess any tax year – not just the years involved in the disclosure. If implemented, the new Voluntary Disclosures Program would also give the CRA power to cancel Voluntary Disclosures Program Relief if they discover misrepresentations attributed to wilful default even if the misrepresentation has nothing to do with the disclosure.
Limited Relief for Severe Non-Compliance
The CRA has also proposed a “Limited Program,” that limits the scope of Voluntary Disclosures Program relief in cases of “severe non-compliance.” In its draft Information Circular, the CRA provides a non-exhaustive list of ‘severe’ cases:
- Those who actively attempted to avoid being caught, including through offshore corporations, trusts, or other entities;
- High dollar amounts;
- A large number of years of non-compliance;
- Anyone who the CRA considers to be a sophisticated taxpayer;
- A Voluntary Disclosure being made by a taxpayer where the taxpayer is employed in an area currently being targeted by the CRA for enforcement; and
- Any other circumstances where the taxpayer actively attempted to evade taxes.
Frequently, failing to file in one year causes a spiral effect whereby taxpayers become too anxious to file in subsequent years. These are often taxpayers with modest incomes who have little knowledge of Canadian tax laws. For these taxpayers, penalties can account for a large portion of their tax liability.
Another peculiar proposal is to make “large amounts” eligible under only the Limited Program. This will arguably have the effect of decreasing revenue from the Voluntary Disclosures Program, in that only taxpayers with small tax debts will come forward.
Up Front Payments
Under the current Voluntary Disclosures Program, disclosures must meet four criteria in order to be valid: the disclosure must be voluntary, complete, be more than one year past due, and involve the imposition of a penalty. The CRA is proposing a fifth criterion that taxpayers make payment of the estimated taxes owing at the time of filing the application.
The new Voluntary Disclosures Program provides the opportunity for a payment arrangement with the CRA where taxpayers are unable to pay the entire amount at once. However, taxpayers must present “adequate security” in order to qualify, making it harder for low-income taxpayers with few assets to qualify for Relief from the Voluntary Disclosures Program.
If either of these changes are implemented, the Voluntary Disclosures Program will no longer be a viable program for those looking to become compliant with the Canada Revenue Agency. These changes will force taxpayers to continue hiding and will have the effect of destroying the entire Voluntary Disclosures Program.
If implemented, the proposed changes will take effect on January 1, 2018. If you are considering filing under the Voluntary Disclosures Program, do so before the proposed changes take effect by contacting a tax lawyer at Rosen Kirshen Tax Law today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.