The Canada Revenue Agency says that it’s working on bringing greater consistency and clarity to how it administers its voluntary disclosure program, addressing concerns from tax advisors that the program does not always offer taxpayers equal or fair treatment.

However, the CRA says, it remains committed to the VDP, and will continue to raise public awareness of the program to encourage non-compliant taxpayers to come forward.

“We want to make sure that the VDP is part of all of our compliance activities and strategies in addressing the underground economy, offshore transactions, etc.,” said Kevin Pratt, director of the CRA’s policy, planning and disclosures division in Ottawa. He spoke in June at the national conference of the Canadian chapter of the Society of Trust and Estate Practitioners in Toronto.

Tax authorities around the world are becoming increasingly vigilant regarding targeting non-compliance and, therefore, are sharing more information with each other. That’s prompting taxpayers to come forward to make voluntary disclosures. In the 2009-10 tax year, the CRA received 12,128 applications under the VDP, an increase of 14% over the previous tax year, which continues a longer-term upward trend in applications.

The VDP allows taxpayers to come clean with the CRA regarding any unreported, incomplete or inaccurate tax information without being subject to penalty or criminal prosecution. The CRA will grant a VDP only if the taxpayer makes a full disclosure of his or her complete tax information and only if the taxpayer is not already under audit. Under the VDP, the taxpayer remains liable for any taxes owed, plus applicable interest.

However, the decision to make a voluntary disclosure can be a tricky and potentially dangerous one, say tax advisors. For one thing, the CRA may choose not to grant a taxpayer’s application for a voluntary disclosure but can still use the information the taxpayer provided in the VDP application to conduct an audit. The VDP application won’t be granted if the taxpayer is making it only to pre-empt an audit he or she has reason to believe is imminent, and failure to provide full information in a timely fashion can result in the revoking of a VDP exemption from penalties and a subsequent audit.

“Taxpayers shouldn’t apply for a VDP without getting good advice and thinking it through,” says Robin MacKnight, a tax partner with Markham, Ont.-based Wilson Vukelich LLP. “Don’t treat the process lightly.”

Some tax advisors say that they’ve been frustrated by a lack of consistency in how the VDP is applied.
@page_break@“We actually have to tell clients as we go into some voluntary disclosures that we have absolutely no idea what the outcome will be,” says Lorna Sinclair, a tax partner with Deloitte & Touche LLP in Toronto. “We’ve gone in with identical situations and yet found that the voluntary disclosure officer’s requirements — what they require in terms of documentation, what they [decide to] waive — will be different on each one.”

At the STEP Canada conference, Pratt acknowledged that the way VDP applications are handled can differ from case to case, and regional office to regional office — a state of affairs the CRA plans to address, he says: “Our objective is to have a process that will be consistent across the country, so whether you make a disclosure in Saint John, New Brunswick, or Vancouver, you get equal and fair treatment.”

Another complaint from tax advisors is a lack of clarity over certain issues, such as how the CRA determines when a disclosure is voluntary and how the agency defines what constitutes complete disclosure. For instance, individuals making a VDP application can’t be sure how far back the CRA will go when asking for tax records.

Tax advisors say there are horror stories of taxpayers making what they describe as “good faith” efforts to clear up tax issues, only to find themselves with unexpected tax bills. “The VDP is much more far-reaching than people think,” Sinclair says. “They think they can go in for a little issue, but really they’re opening up their whole tax life.”

Tax advisors argue that if the VDP process is too punitive, it will only serve to dissuade taxpayers from coming forward — particularly if a taxpayer has reason to believe he or she is off the CRA’s radar. Says MacKnight: “You may decide not to kick the sleeping dog.”

Pratt says that the CRA will look at defining voluntary disclosure better and what it means by “complete” disclosure. The CRA will issue clarification of VDP procedures and policies in the coming weeks.

However, despite the intended changes to the VDP, the CRA is making few apologies. “When you come forward, we give you the benefits — no penalty, no prosecution,” says Pratt. “But we expect a full and complete disclosure. If you come in with half the picture, then it won’t work.”

IE