Weigh In: Big Changes to CRA’s Voluntary Disclosures Program

Big changes are coming to CRA’s Voluntary Disclosures Program (VDP) this fall. The proposals on the table will see the program evolve from an opportunity for taxpayers to correct errors and omissions, to an opportunity for government to use the program to generate revenues at a modest cost.

You can weigh in with your opinion in the next 60 days via an online consultation process. And anyone with errors or omissions to correct should act now, while the current, more lenient rules are still in effect.

Under the program as it stands, taxpayers may come forward voluntarily to tell CRA about omissions or mistakes they may have made in reporting income tax, excise tax and duties, source deductions, GST/HST as well as charges under the Air Travellers Security Charge Act and the Softwood Lumber Products Export Charge Act. However, CRA is using some of its close to $1 billion in new funding to crack down on tax cheats and limit the breadth of the VDP.

Specifically, the following provisions are under the microscope:

• The CRA will narrow the criteria for who is eligible for penalty and interest relief.
• The pre-payment of the estimated taxes and interest owing will become a condition of qualifying for the program.
• How the interest relief available is calculated will be changed.
• Relief will be cancelled if it is later discovered the application is incomplete due to a willful misrepresentation.
• Severe cases of non-compliance will not qualify for full penalty and interest relief at all; neither will voluntary disclosure of the proceeds of crime.
• Transfer pricing applications will not qualify; nor will corporations with gross revenues in excess of $250 million.

The online consultations specifically ask you to weigh in on two questions about fixing mistakes on tax obligations:

1. Is VDP the right program for taxpayers to fix mistakes or should they be dealt with differently? Should it apply only to those who knowingly choose to not pay their taxes or also to those who make mistakes on their returns?
2. Are we striking the right balance? CRA considered the comments made by OCAC (the Offshore Compliance Advisory Committee ) to distinguish between helping those who were fully compliant and those who were seriously breaking the rules. With the proposed changes, have we achieved that balance?

But to answer these questions with authority, you’ll need to do some reading, starting with the high-level comments that the OCAC had for the government. Their report began with defining the role of CRA as follows: “The core mandate of the CRA is to collect revenue in accordance with the tax laws in order to fund government programs and to benefit all Canadians.”

It then embellishes on its view of what the role of the VDP should be: “The Committee believes that, in addition to assisting taxpayers in bringing their tax affairs into order, a well-designed VDP can play a role in this revenue-raising mandate and that it should do so at a moderate administrative cost.”

The committee takes some of its direction from a report from the OECD (Organization of Economic Cooperation and Development), which has since 2010 made substantial progress in the international exchange of information and transparency in tax matters, with more than 125 members cooperating in this effort. The OECD report recommends that a VDP be designed to make participating taxpayers pay more when they voluntarily disclose their errors and omissions than if they had been fully compliant in the first place. Secondly, it recommends that those who are compliant and law abiding are treated more fairly.

To that end, OCAC recommended a list of circumstances in which non-compliant taxpayers should be treated more severely than those who do comply, by denying them relief from civil penalties or increasing the period in which full interest must be paid:

• Cases of deliberate or wilful default or carelessness amounting to gross negligence
• Where there are active efforts to avoid detection through the use of offshore vehicles or other means
• Where large dollar amounts of tax are avoided, and where there have been multiple years of non-compliance
• Where there has been a repeated use of the VDP by a taxpayer who meets clarified requirements for repeated use
• Where the taxpayer is “sophisticated”
• Where the taxpayer’s disclosure is motivated by CRA statements regarding its intended focus on compliance or by broad-based CRA correspondence or campaigns
• Any other circumstance in which a high degree of taxpayer culpability contributes to the failure to comply

The committee has correctly identified that striking the right balance between raising revenues and fairness is a critical foundation for any tax system. In the long run, taxpayers will not be willing to participate and comply with a system that is perceived to be unfair.

To that end, the balance seems to be excellent in Canada. Our tax filing base is already very compliant with a complicated tax system: 92% of Canadians file and pay their taxes on time without intervention, according to the CRA’s Report on Plans and Priorities 2016¹.  The VDP has also been working well: over two years, close to 30,000 voluntary disclosures were processed, representing unreported income in excess of $2 billion.

So should we continue with a Voluntary Disclosure Program that supports a self-assessment system for the vast majority of taxfilers who voluntarily comply with a tax system that they support? Should we have more significant consequences for the minority who fail to comply?

My vote would be yes to both of those questions; however, striking the right balance means that the 92% do not perceive or experience an erosion in their current rights.

What do you think? If you can, do make time in the 60-day consultation period to provide your views.

Here’s the link: https://www.canada.ca/en/revenue-agency/campaigns/consulting-canadians-voluntary-disclosures-program.html

¹Note that the format of this comprehensive report has been dropped starting in 2017-2018 in favor a very abbreviated report that gives no comparable information about taxpayer activity.

Evelyn Jacks is President of Knowledge Bureau, author of 52 books on personal tax and wealth management and program director for the Distinguished Advisor Conference, which discusses issues of critical importance to the future of the tax and financial services industries. Call 1-866-953-4769 for early registration tuition reductions.

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