Are you looking into the Voluntary Disclosure Program in Canada?

Taxpayers in Canada are supposed to file their tax returns accurately and timely, otherwise, there may be interest and penalties or even criminal prosecutions depending on the situation. If a taxpayer fails to do so, he is not entirely out of luck.

The Voluntary Disclosure Program (known as “VDP”) is designed to be a second chance granted by the Canada Revenue Agency (CRA) for a taxpayer to correct their previous errors or disclose information not previously reported.

If a VDP application is accepted, a taxpayer will be eligible for relief from prosecution and in some cases from penalties that they would otherwise be subject to under the legislation.

However, the CRA is not required to grant relief to all VDP applications and is guided by principles of procedural fairness when exercising its own discretion.

Therefore, it is highly recommended for a taxpayer consult with an experienced Canadian tax lawyer to maximize his or her chance of acceptance.

Legal Cases That Made The News

The Voluntary Disclosure Program (VDP) is a program that allows taxpayers to voluntarily disclose information about their past tax liabilities to the Canada Revenue Agency (CRA) without fear of prosecution or penalties. The program aims to encourage compliance and help taxpayers avoid the consequences of non-compliance. However, over the years, several high-profile cases have made headlines in Canada, where individuals or companies have been caught using the VDP to their advantage.

One such case involves KPMG, a global auditing firm, accused of promoting a tax avoidance scheme to wealthy clients. KPMG marketed a program called the “Offshore Compliance Initiative,” which encouraged clients to move money offshore and then use a series of complex financial transactions to avoid paying taxes in Canada. As a result, KPMG agreed to pay the CRA $40 million in penalties and back taxes, raising questions about the integrity of the VDP and whether it was being used by large corporations to avoid paying their fair share of taxes.

Wealthy Canadians avoid paying taxes

Another case that grabbed media attention was the Liechtenstein Global Trust. The trust was set up to help wealthy Canadians avoid paying taxes by transferring money to a bank account in Liechtenstein. The CRA discovered the scheme, resulting in over 100 individuals being charged with tax evasion. This case highlighted the need for greater transparency in the use of offshore accounts and led to increased scrutiny of the VDP.

In yet another case, Arthur Porter, a Canadian businessman, was accused of using the VDP to avoid paying taxes on millions of dollars in income. Porter was the former head of the McGill University Health Centre and was accused of using offshore bank accounts to hide his income from the CRA. Porter was ultimately extradited from Panama to Canada to face charges of fraud and money laundering, raising concerns about the effectiveness of the VDP in preventing tax evasion.

Money laundering

In 2017, the CRA announced that it was investigating 21 individuals and corporations for possible abuse of the VDP. The investigation focused on cases where the program was used to hide income from illegal activities, such as money laundering, drug trafficking, and other forms of organized crime.

The investigation led to several arrests and the seizure of assets worth millions of dollars, demonstrating the importance of the VDP in uncovering criminal activity and the need for the CRA to remain vigilant in its enforcement of the program.

These high-profile cases demonstrate the potential for abuse of the VDP and highlight the need for greater transparency and accountability in its use. The CRA must ensure that those who use the program for illegal purposes are held accountable while also making sure that the program is accessible to all taxpayers and does not unfairly penalize those who make honest mistakes or misunderstand the complex tax system.

The CRA has reported that, in the 2020-2021 fiscal year, it received over 12,000 voluntary disclosures under the VDP, resulting in the collection of over $1 billion in taxes owed. While the VDP can be a valuable tool for taxpayers to come forward and rectify past tax issues, its misuse has significant consequences, underscoring the need for its proper use and enforcement.

When to File a Voluntary Disclosure Application

The VDP is designed to allow taxpayers to correct their previous errors or unfiled returns.

The followings are some typical situations where a taxpayer may want to take advantage of the VDP:

– A late-filed or unfiled tax return;

– Unreported income on a previously filed tax return;

– Wrong expenses were claimed on a previous return;

– Unsubmitted employee source deductions on a previous return;

– Unreported foreign assets such as T1135 form;

– Ineligible GST/HST input tax credits that were previously claimed.

Conditions of a Valid Voluntary Disclosure Application

For a VDP application to be accepted, it must meet the following conditions:

1. The application must be voluntary. That means a taxpayer must initiate the process before the CRA contacts him for potential tax problems.

2. The information provided by the application must be complete. Therefore, a taxpayer must disclose all tax information related to all relevant tax years and it cannot be a partial disclosure.

3. It must involve the application or potential application of a penalty.

4. It must include information that is at least one year past due. If your tax return is less than a year due, you can simply file it although you may need to pay a late-filing fee.

5. It must include payment of the estimated tax owed.

Two programs regarding VDP

The CRA used to allow no-name VDP applications, however, this is no longer the case.

In March 2018, the CRA made significant changes to the VDP to differentiate those who want to correct unintentional errors from those who attempt to intentionally avoid their tax obligations.

Generally, this interest relief will be 50% of the applicable interest for those periods. However, full interest charges will be assessed for the three most recent years of returns required to be filed.

The Limited Program In Canada

The Limited Program. These are applications where there is an element of intentional conduct on the part of the taxpayer or a closely related party or for corporations with gross revenue exceeding $250 million.

Penalty relief: taxpayers will not be referred for criminal prosecution with respect to the disclosure and will not be charged gross negligence penalties where the facts establish that the taxpayer is liable for such penalties.

However, taxpayers will be charged other penalties as applicable.

Interest relief: no interest relief will be provided under this program.

In comparison, the General Program is more favourable for a taxpayer.

Moreover, taxpayers under the Limited Program will have to waive their rights to file the Notice of Objection to the CRA’s Appeals division as well as their rights to appeal to the Tax Court of Canada except for calculation errors or issues other than those disclosed under the VDP.

The General Program, on the other hand, still allows taxpayers to file a Notice of Objection or appeal to the Tax Court of Canada.

Limitation period regarding CRA’s discretion for relief of interest and penalties

The CRA’s ability to grant penalty relief is limited to any penalty that could apply to any taxation year that ended within the previous 10 years before the calendar year in which the application is filed.

Regarding interest relief, the CRA’s ability is limited to the interest that accrued during the 10 previous calendar years before the calendar year in which the application is filed.

What to do if your Voluntary Disclosure Program application is denied

There is no right of objection under the Income Tax Act for a taxpayer to dispute the CRA’s discretionary decision regarding the VDP.

However, a taxpayer may request in writing for the CRA to reconsider the original decision if he or she believes the CRA has not exercised discretion in a fair and reasonable manner. Another avenue for a taxpayer is to make an

application to the Federal Court for a judicial review within 30 days from the date the notification of the VDP decision was communicated to the taxpayer.

Tax tips

According to the CRA, whether an application will fall under the General Program or the 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.

At Barrett tax law, we have extensive experience in helping clients draft VDP applications and we will go through each criterion to ensure your application will fall under the General Program.

If you are considering the Voluntary Disclosure Program, call our office at (416)907-8429 to book a consultation with an experienced Canadian tax lawyer and let us maximize your chance of success.

Jack Wang

Tax lawyer at Barrett Tax Law