The Canada Revenue Agency’s (CRA) proposed changes to its voluntary disclosure program (VDP) may reduce the program’s effectiveness, according to tax specialists such as David Rotfleisch, founding lawyer with Rotfleisch & Samulovitch Professional Corp. in Toronto.
“These proposals are sounding the death knell to the program as we know it,” says Rotfleisch, who also is a chartered professional accountant.
The VDP extends an olive branch to Canadians who have been breaking tax rules for which a penalty should be imposed, but have come forward voluntarily before the CRA catches them. These taxpayers may have their interest and penalties reduced and avoid prosecution, although they still have to pay the taxes owed.
The VDP is an approach that works, says Salvatore Mirandola, partner and lawyer with Borden Ladner Gervais LLP in Toronto, who specializes in tax dispute resolution. Says Mirandola: “The [VDP] has been successful in encouraging non-compliant taxpayers, many of whom would not otherwise have been detected by the CRA, to regularize their tax affairs.”
According to the CRA, 19,000 voluntary disclosures totalling $1.3 billion in declared income were made by VDP participants in 2014-15, with $780 million coming from offshore accounts.
Those numbers may drop significantly if the proposals are implemented. The CRA intends to create two streams: a “general program” and a “limited program.” Under the general program, penalties would be taken off the table along with the threat of criminal prosecution. Interest relief would be 50% (with some qualifiers).
The limited program is less generous, eliminating only gross negligence penalties and offering freedom from criminal prosecution. Interest would be owed in full.
The category a taxpayer falls under would depend on the extent of his or her bad behaviour. Individuals and companies with a history of attempts to avoid paying taxes and cases involving large amounts of money would fall within the limited program.
The CRA also plans to add a condition to valid voluntary disclosures: immediate payment of the taxes outstanding. If taxpayers cannot pay the estimated taxes when they disclose, they may be out of luck.
“It is proposed that the VDP will no longer be a one size fits all program,” says Zoltan Csepregi, the CRA’s senior media relations advisor. “Major cases of non-compliance that are disclosed will not receive the same level of relief as they would through the current program.”
If the changes are implemented as proposed this past summer, taxpayers may opt to roll the dice rather than own up to their non-compliance. “It’s not an unreasonable decision to not come forward,” Rotfleisch says.
Not only are the incentives to disclose less compelling under the proposed program, there’s also greater ambiguity.
“Many of the changes, as currently proposed, are vague and imprecise,” Mirandola says, “leaving taxpayers with too much uncertainty about whether their disclosures will be accepted and, if accepted, the extent of relief that will be granted.”
The impetus for the proposed changes comes from two fronts: the Offshore Compliance Advisory Committee (OCAC) and the Standing Committee on Finance (SCF). The OCAC was established last year to provide advice to the Minister of National Revenue and the CRA on strategies to deal with offshore compliance. The OCAC’s first report recommended that the criteria for acceptance into the program be tightened. “The committee also proposed that the VDP be made more effective and fair,” Csepregi says.
A report from the SCF called on the CRA to undertake a comprehensive review of the VDP. Says Mirandola: “The government and the CRA do not want the [VDP] to be seen to reward non-compliant taxpayers. The proposed changes work toward achieving this goal.”
Response to the CRA’s draft proposal has been fast and furious. A joint submission from the Canadian Bar Association and the Chartered Professional Accountants of Canada pointed out that the proposals are more than a shift in process and procedure; they represent a shift in policy “by introducing a multi-tier system where eligibility for relief depends partly on the identity or characteristics of the taxpayer.”
The caution may fall on deaf ears. The CRA and the government have made clear they are taking on tax evaders, an approach that has resonated well with taxpayers and voters. “The government is strongly committed to cracking down on offshore tax evasion and aggressive tax avoidance to ensure that the tax system is responsive and fair for all Canadians,” Csepregi says.
The shape and form of that commitment – at least, as far as the VDP is concerned – will be revealed later this autumn, when the new program is unveiled officially. In the meantime, advisors should be proactive. “The old rules are still in place,” Rotfleisch says. “If you have [clients with] unreported money, now is the time to report.”
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