Canada: Sweeping changes proposed to voluntary disclosure programme
On June 9, the Canada Revenue Agency (CRA) released for discussion purposes significant administrative changes (the proposed changes) to its existing voluntary disclosure programme (VDP) that if implemented, would apply as of January 1 2018.
The proposed changes include the introduction of a new two-track system for income tax disclosures that groups applicants into one of two streams – the general programme or the limited programme – depending on the status of the applicant and the type of non-compliance being disclosed.
Under the general programme, eligible applicants would be granted penalty relief as well a partial interest relief, and would not be referred for criminal prosecution for tax offences.
Under the limited programme, which is intended to apply in cases of "major non-compliance", eligible applicants would only be granted relief from gross-negligence penalties and criminal prosecution. The limited programme could apply in a variety of circumstances, including disclosures involving large dollar amounts, multiple years of non-compliance, sophisticated taxpayers and active efforts to avoid detection through the use of offshore vehicles or other means.
Other proposed changes include limiting the type of taxpayers and subject matter that can be eligible for relief under the programme, whether under the general programme or the limited programme. Notably, a corporation with gross revenue in excess of $250 million in at least two of its last five taxation years would no longer be eligible for relief under the VDP. This proposed change in particular has been criticised for targeting one category of taxpayer for no reason other than the taxpayer's revenues.
Furthermore, the proposed changes list a number of applications that would no longer be accepted under the new programme, for example, applications relating to transfer pricing adjustments and penalties, and applications that depend on an agreement being made at the discretion of the Canadian competent authority under a provision of a tax treaty.
Other notable proposed changes include the requirement that the estimated taxes owing be paid at the time of the application, and the expectation that the name of any adviser who assisted in respect of the subject matter of the VDP application should be divulged in the application.
The purpose of the VDP is to encourage taxpayers to voluntarily correct any previous non-compliance with their tax obligations by providing relief from penalties and interest. By restricting access to the VDP, the proposed changes will likely frustrate this objective, leading to a reduction of revenue from the programme. In their current form, the proposed changes will render the VDP virtually unusable by many taxpayers who use the programme in good faith to rectify inadvertent non-compliance. A large number of taxpayers will likely end up thinking twice about voluntarily disclosing errors to the government, thereby causing the CRA to allocate additional audit resources to identify non-compliance.
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