As we reported in March, 2017, the Government of Canada is taking steps in response to the Finance Committee Report “The Canada Revenue Agency, Tax Avoidance and Tax Evasion: Recommended Actions." Earlier this month, the Minister of National Revenue (“Minister”) provided a progress update, including matters impacting tax dispute resolution.
Voluntary Disclosures Program (“VDP”) and Settlement Guidelines
The government’s review of the VDP and settlement guidelines was completed by the mandated March 31, 2017 deadline. The Minister and the CRA indicated they would leverage the recommendations of the Offshore Compliance Advisory Committee (“OCAC”). The OCAC recognized the VDP as an integral part of the CRA’s administration and enforcement programs, but recommended tightening the criteria for VDP acceptance. The CRA will “soon” make its proposed revised VDP policy available for comments from the community. After that external consultation, a revised policy will be finalized and implemented in Fall 2017.
The CRA will also update its guidance on audit settlements and the waiver of objection rights, by October 31, 2017, to “improve the governance of the audit settlement process”. The main proposed change will be a new settlement approval process, requiring mandatory referrals to an Audit File Resolution Committee (“AFRC”) in some cases, including cases involving large dollar amounts and/or “international transactions”. The stated goal of the AFRC will be to “formalize oversight and due diligence over the settlements, to support the reasonable application of the tax laws to ensure protection of the tax base, and to provide consistency, predictability and fairness to the settlements in the context of the income tax system.”
It is reasonable for the Government of Canada to periodically review its policies on the administration and enforcement of income tax and GST/HST, since policy should not remain static in a changing environment and opportunities to fine-tune become clearer over time. However, a cautious approach should be used.
The Finance Committee Report and the Minister’s responses were clearly prompted by negative press coverage of the CRA’s settlement with taxpayers engaged in a particular offshore structure and, respectfully, the Government of Canada appears to be on a public relations campaign to seek to demonstrate “toughness”. There will be challenges for the Minister and the CRA to create revised policies that are effective while balanced. On one hand, the tendency for taxpayers to be voluntarily compliant is partially based on a perception that the system is fairly administered. Press coverage suggesting that non-compliant taxpayers are unfairly advantaged and dealt with lightly will likely undermine voluntary compliance/accurate self-assessment across the board. The Minister’s public relations campaign about “cracking down” is undoubtedly intended to mitigate that risk, by reinforcing that the Canadian tax system is fair and that “cheaters” get punished.
While it is understandable that the Minister needs to project that the system is fair for the vast majority of taxpaying Canadians and that non-compliant taxpayers do not get unfair advantages, there must still be a place for pragmatism. The VDP is a compliance program that allows non-compliant taxpayers who have not been detected to voluntarily come forward to resolve their issues with the incentives of not being prosecuted or assessed civil penalties and paying reduced interest. The VDP clearly attracts substantial unpaid taxes back into the system without the any of the substantial costs associated with detecting, auditing and assessing a taxpayer and possibly litigating civil or criminal matters before the Courts. The VDP is practical and effective. While it is reasonable for the Minister to continually review the VDP, excessively tightened it up in an effort to demonstrate toughness may risk defeating its overall purpose.
Respectfully, the AFRC initiative may be ill conceived, although likely neither harmful nor helpful to resolving tax disputes. CRA officers and Department of Justice (“DOJ”) lawyers are intimately familiar with the principled basis for resolving tax disputes in accordance with the facts and law. Notwithstanding recent strident press coverage, in my view the CRA and DOJ are not predisposed to cutting corners and simply do not capitulate with a nod and a wink: quite the opposite – from time to time one wonders why CRA appeals officers and DOJ litigators maintain the CRA’s assessing position when it was clearly wrong. In any case, it is difficult to imagine a situation where the AFRC would actually need to intercede to override a proposed resolution to a tax dispute. The AFRC may be a political solution in search of a problem, rather than a tool to resolve an actual issue.
The Finance Committee asked the Minister to report on the status of Panama Papers audits before June 1, 2017. The CRA stated that it has been working closely with domestic and international players to share information regarding the Panama Papers, including a large exchange of information through the OECD’s Joint International Task Force on Shared Intelligence and Collaboration.
As of April 1, 2017, 122 audits were in progress along with several criminal investigations, with a further 64 files identified for later review. Taxpayers implicated in the Panama Papers are not the only parties at risk: the CRA is also relying on its “Promoter Compliance Centre” to identify promoters associated with offshore structures organized through Panama. The CRA has stated elsewhere that it intends to identify and take action against promoters of aggressive schemes involving offshore structuring, including civil penalties and potentially prosecution.
The CRA also reiterated that it would not accept VDP applications from taxpayers identified in the Panama Papers, absent extraordinary circumstances.
The outcome of CRA audits and referrals for prosecution will be a fact-driven exercise and while there is insufficient information to meaningfully comment on the CRA’s approach, taxpayers who are under audit or who may be facing criminal charges obviously need tax and criminal defense counsel. Similarly, taxpayers who believe their affairs may be connected with the Panama Papers investigation should seek legal advice as soon as possible and consider whether coming forward voluntarily may be advisable.