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Concealing or Confessing: Canada’s Voluntary Disclosures Programme
Canada's Voluntary Disclosure Programme is designed to give taxpayers who are not under audit the chance to come forward and correct inaccurate or incomplete information or to disclose previously unreported information, without penalty or prosecution. Once the Canada Revenue Agency (CRA) accepts a disclosure as voluntary, no tax evasion charges will be laid or penalties imposed and only the outstanding tax and interest must be paid. The CRA may also waive some of the accrued interest for years preceding the most recent three or four years. Taxand Canada discusses a recent case involving the Voluntary Disclosure Programme and the conditions companies should adhere to.
This ancient proverb helps explain the Voluntary Disclosures Programme:
'He who conceals his sins does not prosper, but whoever confesses and renounces them finds mercy.'
Timing is especially crucial for taxpayers with undeclared Canadian income, in light of disclosures of secret offshore banking records to the CRA and the CRA's clear intent to pursue non-compliant taxpayers. Consequently, there is no time like the present to declare unreported foreign income under Canada's Voluntary Disclosure Programme.
For a voluntary disclosure to be valid, it must be voluntary, complete, involve a monetary penalty and involve information that is at least one year overdue.
In Livaditis1, the CRA denied Mr. Livaditis and his family relief because their disclosures were not voluntary.
Mr. Livaditis was the president of LaCaille Fifth Avenue Inc. ("LaCaille"), a condominium developer. In 2003, Mr. Livaditis and four family members acquired units before construction and resold them in 2006 without reporting the gain.
The first paragraph of the court judgment summarises the key facts:
The Applicant received a telephone call from a CRA official concerning records related to the first purchasers of the units in a condominium. Shortly after he disclosed to the CRA that he had failed to report capital gains on the sale of his condo unit in 2006.
The disclosures were rejected by the CRA because they were not made voluntarily, leading to litigation before the Federal Court.
The Court stated that in determining whether an enforcement action has occurred, the CRA must consider whether:
- there was any direct contact with the taxpayer by a CRA employee or other authority or administration for any reason related to non-compliance, or the taxpayer was likely to have been aware of the enforcement action
- any enforcement action had been initiated against a person associated with or related to the taxpayer, or a third party where that enforcement action is sufficiently related to the disclosure in issue and is likely to have uncovered the information being disclosed
The Court stated once enforcement action was commenced against his company Mr. Livaditis was disentitled to voluntary disclosure protection.
Unfortunately, by holding that a taxpayer's disclosure is involuntary where enforcement has begun against a related party, whether or not the taxpayer is aware of it, the Court established the CRA's policy as a guiding legal principle. However, a taxpayer may make a truly voluntary disclosure, while being unaware that enforcement has been or will be initiated against a related party. By applying the CRA's interpretation, the Court has allowed for anomalous outcomes in the future where a taxpayer's voluntary disclosure may be ruled involuntary because of unknown pending enforcement action against someone else.
In McCracken2 the Federal Court refused to overturn the CRA's decision to reject a voluntary disclosure that was incomplete.
Mr. McCracken was an eBay "Powerseller". While he had copies of his banking records, he requested further records from eBay to help prepare his tax filings. When eBay did not provide the records, Mr. McCracken's counsel sought an extension of time, which was granted but a second extension request was denied and Mr. McCracken was refused voluntary disclosure relief.
Mr. McCracken requested a review of the CRA's decision, however almost six months after requesting the further review the voluntary disclosure had still not been completed. The CRA's patience ran out and the earlier decision to reject Mr. McCracken's voluntary disclosure was maintained.
Mr. McCracken brought an application before the Federal Court to challenge the CRA's decision. The Court held that Mr. McCracken was given "ample opportunity" to provide information and make submissions and that the CRA's decision to reject the voluntary disclosure was made fairly on the basis of the evidence and arguments provided. The Court further held that the CRA's decisions on voluntary disclosures should be given "broad latitude".
The McCracken case illustrates that although the CRA's Voluntary Disclosure Programme is intended to provide taxpayer relief, the onus remains on taxpayers to provide complete and timely information.
The CRA provides taxpayers with an opportunity to "come clean" and report deficiencies in their Canadian tax filings. However, the criteria for a valid voluntary disclosure are enforced by the CRA and failure to meet these criteria could result in the voluntary disclosure being rejected and the assessment of full penalties and interest against the taxpayer. Taxpayers contemplating a voluntary disclosure should come forward as soon as possible, since it is too late to come forward if any enforcement action has been commenced against the taxpayer or a related party. Further, a voluntary disclosure must not only be substantially complete, it must be completed on a timely basis.
Your Taxand contacts for further queries are:
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1 2010 FC 950 ("Livaditis").
2 2009 FC 1189 ("McCracken")
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