Aug 16th, 2023
Jun 29th, 2017
By David H. Sohmer
A VDP application must be complete in order to qualify for relief. The Draft Information Circular provides:
“A taxpayer’s VDP application for a particular issue must be made for all relevant taxation years where there was previously inaccurate, incomplete or unreported information regarding their tax affairs…..In cases where books and records no longer exist, the taxpayer should make all reasonable efforts to estimate the income for these years…
… If the CRA is satisfied that the taxpayer has provided all available information and legitimately cannot locate or obtain certain documents (e.g. relating to a deceased relative) or has made reasonable efforts to estimate income amounts related to years for which documentation is unavailable, the application may be considered to be complete”
The CRA Voluntary Disclosure Program (VDP) Operations Manual, 2015-07, states at s1.92 that “In all cases, the final decision on completeness rests with the VDP officer”. A determination by a VDP officer that efforts to estimate income were not reasonable may therefore expose a taxpayer to criminal sanctions and gross negligence penalties, including the additional penalties for failure to file or fraudulent filing of Form T1135. Put bluntly, this is a risk which no informed taxpayer will accept.
Another interesting but perverse effect of the requirements may be to encourage taxpayers to delay disclosures until they are non compis mentis or are dead, so that the lower bar for “reasonableness” will apply.
The revision to the Draft Information Circular was made in response to a recommendation by the Offshore Compliance Advisory Committee. The Committee appears not to have been aware of the fact that offshore banks will resist attempts to obtain information for years exceeding the retention period provided by the laws to which they are subject. The CRA is well aware of the fact that compelling offshore banks to provide information which they are not obliged to retain may be time-consuming and probably futile. The VDP Operations Manual and CRA practice implicitly recognize this by instructing the VDP officer to check “the record retention policy for banking records located in Appendix XIX Foreign Bank Record Retention” in determining completeness for disclosures. (S1.9.5). The Draft Information Circular implicitly recognizes this as well by limiting the time to submit information to 90 days from the effective date of disclosure. The VDP would not have been as successful as it has been if information for years beyond the offshore bank retention period was required. (This is supported in an article by David Sohmer entitled “Canada’s Voluntary Disclosure Program: If It Ain’t Broke Don’t Fox It” in vol xxxix No.3 of The Canadian Taxpayer, February 10, 2017))
At the CTF 2010 CRA Round Table, the CRA stated: “The CRA can confirm that each disclosure must meet the four conditions necessary for it to be considered a valid disclosure by the CRA, regardless whether the disclosure is for the failure to file a return or for the underreporting of income. How far back the CRA may go in terms of the number of years reviewed and assessed is determined by the facts presented in each case. A decision to open stature-barred years must be based on the provisions of subparagraph 152(4)(a)(i). For unfiled tax returns, the CRA is obliged to assess as far back as there are returns to be filed.” [Response 18-6].
In order to re-assess tax for a particular statute-barred year for which tax returns have been filed the Minister must prove facts which support a conclusion that the taxpayer has made a misrepresentation that is attributable to neglect, carelessness or willful default or has committed fraud in filing the return for the particular year. The revisions to the Draft Information Circular require the taxpayer to make reasonable efforts “to estimate income amounts related to years for which documentation is unavailable.” An estimate is not a fact which can be proved and will not discharge the Minister’s burden, even if the estimates are provided by the taxpayer. The burden on the Minister under subparagraph 152(4)(a)(i) in the context of offshore accounts is analyzed in an article written by the Honorable Gerald Rip, David Sohmer, Stephanie Pepin and Jean-Francois Reed (Gerald J. RIP et autres, « Regard critique sur l’application de la méthode de l’avoir net rétrospectif au-delà de la période normale de cotisation », (2017), vol. 36, no 4 Revue de planification fiscale et financière 511-528.).
The House of Commons Standing Committee on Finance recommended that the CRA “calculate Canada’s federal tax gap on an ongoing basis”. Minister Lebouthillier issued a news release on June 6, 2017, which stated that in 2018 the CRA will be releasing a study in its tax gap series which focuses on international tax evasion. Estimates of income are unreliable and of limited use in estimating Canada’s tax gap,
The CRA should have the ability to extract the ages of disclosing taxpayers from disclosures which have been processed. Based on personal experience involving hundreds of disclosures, the vast majority of disclosing taxpayers are golden-agers. Since golden-age taxpayers are unlikely to continue evading tax from offshore sources and since Imminent automatic reporting of information will also dramatically reduce the use of offshore banks to evade tax, estimates of past unreported income will not be useful in estimating future tax gaps.
Relief Provided Under the VDP
Section 14 of the Draft Information Circular provides that under the Limited Program, the taxpayer “will not be charged a gross negligence penalty”. It is suggested that the waiver refer to “penalties” rather than to “penalty”. This will confirm that the additional penalties for failure to file and for fraudulent filing of Form T1135 will be waived as well as the general gross negligence penalty provided for in s 163(2).
The vast majority of taxpayers who have failed to disclose income from offshore accounts will only qualify for the Limited Program. This holds true for heirs and executors of deceased taxpayers who have done so, since death does not provide absolution for the tax sins of a deceased.
If the intention is to permit less egregious cases involving undisclosed offshore income to qualify under the General Program, the Draft Information Circular should provide some "bright line" tests. This will allow these cases to be processed efficiently.
Since many taxpayers are more concerned with removing a source of anxiety than with the cost of disclosing, the Draft Information Circular should permit taxpayers to elect to have the disclosure governed by the Limited Program. This will reduce the time involved in processing the disclosure.
The CRA should recommend that the ten year limit for relief in s 220(3.1) be removed. There is no basis in tax policy to retain it. A taxpayer who meticulously retains records for 20 years should not be treated more severely than a tax payer who meticulously shreds all records not required to be retained by S230(4).