On December 15, 2017, the CRA released the final version of Information Circular IC 00-1R6 – Voluntary Disclosures Program (“VDP”) for income tax, after receiving and considering community input on the June 2017 draft version. This article summarizes the important differences between the draft and the final ICs and discusses implications and practical insights of the new VDP.
Timing for implementation: Despite indications at the Canadian Tax Foundation (“CTF”) National Conference in November, 2017, the implementation of the new VDP will not be delayed until Summer or Fall 2018: IC 00-1R6 will apply to disclosures filed on or after March 1, 2018. Disclosures filed before that date will be grandfathered and considered under the current IC, IC 00-1R5, if a taxpayer makes a named disclosure.
Limited program: The new “limited program” now applies “where there is an element of intentional conduct on the part of the taxpayer or a closely related party”, determined on a case by case basis using factors described elsewhere in the IC 00-1R6. Those factors were slightly altered in IC 00-1R6, but the changes are more stylistic than substantive. IC 00-1R6 affirms that the factors are treated together and no single one is determinative. The flexible use of a range of factors to deny general program relief would, of course, have to be reasonable in the circumstances.
Fewer express prohibitions: The CRA reconsidered prohibitions against relief that were set out in the draft IC. Under IC 00-1R6, applications by corporations with gross revenues greater than $250M in two of the last five years (including any related entities) will be considered under the limited program, after all. This is an improvement, since the draft IC indicated such applications would be denied. The prohibition against disclosures for proceeds of crime has also been removed. Interestingly, the CRA will entertain disclosures concerning transfer pricing issues (other than advance pricing arrangements or competent authority matters) with such applications to be sent to the Transfer Pricing Review Committee rather than the VDP.
Voluntariness criteria – data leaks: the voluntariness criterion is slightly modified in IC 00-1R6. A disclosure might not be voluntary if, among other well-established principles, the CRA had “received information regarding the specific taxpayer’s (or a related taxpayer’s) potential involvement in tax non-compliance (for example, a leak of offshore banking or other information that names the taxpayer).” This change to the voluntariness criterion was to be expected, in light of the recent numerous and significant data leaks.
Completeness at the time a disclosure is commenced: While the draft IC indicated taxpayers would have up to 90 days from commencing a disclosure to complete it, new language specifies that if a taxpayer cannot file a complete disclosure when it is initiated, the taxpayer must request in writing additional time to complete when making the initial disclosure. In practice, making a written request for additional time to complete a disclosure will likely become standard, as taxpayers rarely present themselves to their tax advisors with complete documents and schedules in hand, ready to have fresh or amended tax filings immediately prepared. In the real world, obtaining complete documents and conducting analysis is time consuming, but prudent advisors will want to get VDP protection for their clients as soon as possible. Thus, the most likely approach going forward will be initiating named disclosures including extension requests. The draft IC stated that applications under the limited program would be reviewed for completeness by a specialist area, but that guidance has changed: only applications involving complex issues or large dollar amounts will be referred.
Payment arrangements: Payment may have been required in previous versions of the VDP (see, for example, IC 85-1R2 at paragraph 3(d)), but later versions of the IC suggest that payment was an expectation not a requirement. Payment of tax or a payment arrangement was added as a validity criterion in the draft IC. The language in IC 00-1R6 is more moderate than the draft IC: extraordinary circumstances are not required when seeking a payment arrangement and adequate security is no longer a strict requirement. This seems like a practical and reasonable approach to ensuring payment pursuant to a disclosure. Virtually all taxpayers commencing disclosures actually pay the tax and interest owing, but that doesn’t mean that full payment is easily available at the time the disclosure is filed. It is reasonable to allow taxpayers some time to reorganize their affairs to make available sufficient funds to pay the tax and interest.
No more no-names: The draft IC eliminated the no-names option for commencing a disclosure. However, there will be an option for initial non-binding discussions with CRA officials on an anonymous basis without creating an effective date of disclosure. IC 00-1R6 references an option for complex technical issues or questions to be referred to a specialized audit area for anonymous discussions if required. It remains to be seen how efficient such referrals will be. A skeptic might be forgiven for thinking referrals will be protracted and risky, since the taxpayer would remain outside the VDP until sufficient advice is obtained to give the taxpayer enough comfort to come forward. The elimination of initial no-names disclosures may have occurred because of a perceived misuse of that feature. However, that said, the no-names option increased the likelihood that uncertain taxpayers would come forward. Eliminating the no-names feature may therefore have a chilling effect on the VDP.
RC199 form: The draft IC required a completed RC199 form to be filed, but IC 00-1R6 does not make that a strict requirement. The change is likely due to the application of s. 32 of the Interpretation Act, which states: “where a form is prescribed, deviations from that form, not affecting the substance or calculated to mislead, do not invalidate the form used.”
Practical Implications Going Forward
Practitioners already know that the “general program” under the new VDP is similar to that available under the current VDP: penalties are not assessed, there is no referral for prosecution for tax offenses and partial interest relief is granted. The interest reduction is slightly less attractive: whereas under the current VDP interest is reduced by 4% for historic years, under IC 00-1R6 the interest rate is halved.
Practitioners will obviously prefer that their clients’ disclosures be considered under the general rather than the limited program, since the limited program will not provide relief from strict liability penalties and will not offer interest relief. The financial implications of this reduced relief will vary depending on the circumstances, but the punitive effect could be severe. Careful advocacy, informed by significant experience in dealing with the VDP, will be required to ensure that factually accurate and complete disclosures achieve preferable outcomes under the right VDP stream.
Paragraph 12 of IC 00-1R6 states that if “the CRA finds there is any misrepresentation due to neglect, carelessness, wilful default, or fraud, a reassessment can be issued at any time for any tax year to which the misrepresentation relates, not just those years included in the VDP application.” That paragraph further states that: “any relief that may have been granted under the VDP will be cancelled as a result of the misrepresentation.” Consequently, under IC 00-1R6, the completeness criterion appears to be open for reconsideration indefinitely. Prudent and ethical practitioners do not need to be reminded about counseling their clients to file complete disclosures. That said, IC 00-1R6 amplifies the need to educate clients about completeness.
IC 00-1R6 maintains the position from the draft IC that where books and records no longer exist “the taxpayer should make all reasonable efforts to estimate income for those years.” This is a significant departure from the CRA’s previous position, which was that a taxpayer should make all reasonable efforts to obtain information and documents, including for years before the most recent ten years. IC 00-1R6 differs as it does not require reasonable efforts to obtain documents and information, but rather efforts to estimate income. The type of efforts that may be considered “reasonable” is unknown. Without documents, it is hard to know how capital contributions, withdrawals, or net income and gains could reasonably be estimated and, respectfully, the example in para. 32 of IC 00-1R6 is unhelpful. Further, tax practitioners will likely struggle with how to address such efforts, in terms of whether a disclosure submission should include an explanation of efforts that were made to estimate income. That said, at the CTF November 2017 conference, discussed further below, it was stated that senior CRA auditors would be made available to practitioners and taxpayers for initial advice on formulating disclosures, presumably including how to deal with the “reasonable efforts” requirement. Since disclosures involving complex issues and large dollar amounts will be diverted for review by specialist areas within the CRA, engaging in a pre-disclosure discussion with a senior CRA officer is probably advisable in complex and/or high value matters.
It has been suggested that the new criteria in IC 00-1R6 demonstrate an intention to fetter ministerial discretion. While that point is well taken, para. 11 of IC 00-1R6 confirms that decisions will be guided by the principles of procedural fairness and good faith, in a manner that promotes the objects of the Income Tax Act (Canada) (“ITA”). It also emphasizes the discretionary nature of the VDP, stating that relief does not have to be granted, that each application is decided on its own merits and that the CRA will provide an explanation where it denies relief. It is not unreasonable for the CRA to provide administrative guidance to assist in determining applications, considering the broad wording of ss. 220(3.1) of the ITA. However, any rigid application of IC 00-1R6 without due and careful consideration could and should be tested in Federal Court.
Further CRA Insights
At the CTF panel I co-chaired in November, 2017, senior CRA officials gave insights into the reasons why the VDP was reformulated. The panel confirmed that the CRA has increasingly more powerful tools at its disposal to identify tax at risk and single out certain taxpayers for audit. In other words, since the VDP is just one compliance tool among many, it has been reformulated to reflect the CRA’s greater access to information and its ability to effectively process that information to identify non-compliance. Further, it was stated that while the VDP will not be discontinued in the near future, within the next two to three years it would be reevaluated. That point was stated more aggressively in a recent news story, in which it was stated that the CRA might actually close or further restrict access to the VDP because the CRA is confident in its ability to detect non-compliance. However, it was also stated that the CRA intends to allow relief for self-reporting of honest mistakes or de minimis underreporting of income.
At the November, 2017 CTF panel discussion, it was also made clear that the CRA intends to resile from its current process-driven approach in favour of a fact specific approach under which each disclosure will be considered on its facts and accepted or rejected at the CRA’s discretion. That panel also discussed the exercise of discretion with reference to the requirement for the CRA to behave reasonably. In the CRA’s view, published guidance is required to establish a consistent approach, but rigid adherence to agency-made rules would be an impermissible fettering of discretion. Hence the perceived vagueness embedded in IC 00-1R6: it sets out a set of flexible parameters for VDP administration. This might result in a period during which the application of the VDP gets fine-tuned by cases ending up before the Federal Court for judicial review.
Given the substantial changes to the VDP that will be implemented as of March 1, 2018, the short to medium term uncertainty associated with disclosures and the long term prospects of the VDP, it goes without saying that practitioners will have their work cut out for them and non-specialists should seek the advice of specialists before wading into disclosures. Thoroughness and careful advocacy will be more important than ever once the new VDP guidance is implemented. It would also be advisable, wherever possible, to commence disclosures under the VDP before March 1, 2018, while its features remain more attractive and its application more well known.
 Toronto Centre Canada Revenue Agency and Professionals Group Breakfast Seminar, December 1, 2015.