Voluntary Disclosure Program. (Tax Amnesty) “Hereafter referred to as “VD”
This “White Paper” on the Voluntary Disclosure (Tax Amnesty) Program is written for the purpose of informing Canadians of the inherent risks by participating in by doing a Voluntary Disclosure and to let Canadians know exactly what they are signing up for, so that taxpayers can make the most informed decision. To do the VD or not to do the VD. That is the question.
A voluntary disclosure, also known as tax amnesty or tax pardon, is a method to allow you to deal with unfilled Canadian income tax or GST returns, or unreported income, with the possibility, not a certainty of avoiding penalties or income tax evasion charges. While Tax Evasion is a criminal offense, actual criminal prosecution is not likely.
Doing a Voluntary Disclosure is a mission critical action, and if is to be done at all, needs to be done properly. How you morph from a tax cheater to an audit ready business person is going to be up to you. But I suggest that in many cases a VD is not the right answer.
The Voluntary Disclosure Program is designed to collect tax that it may not otherwise get. This program allows CRA to collect tax on money that the odds say they won’t get otherwise.
According to CRA; the purpose of the Canada Customs and Revenue Agency's (CCRA) Voluntary Disclosures Program (VDP) is to promote voluntary compliance with the accounting and payment of duty and tax provisions under the Customs Act, Customs Tariff, Income Tax Act, and Excise Tax Act. The VDP encourages clients to come forward and correct deficiencies to comply with their legal obligations. It is a fairness program that is aimed at providing clients with an opportunity to correct past omissions, thus rendering themselves compliant.
One must understand that the Canada Revenue Agency is there to collect money. That is just a fact. The purpose of the amnesty program is exactly that “For CRA to collect money.” No more and no less. If the program did not collect more tax than not having the program, there would be no Tax Amnesty program at all.
The program gets tax payers to come forward to declare their tax owing. The benefit of this for the tax payer is so that they can reduce their stress by coming clean. The program allows for this, but it is not the only way to come clean and there may be better and safer ways to come clean.
The VD program appears to be ad hoc and maybe it seems that way because it looks like who you are determines how you are treated. In 2008, former Prime Minister Brian Mulroney disclosed that he declared receipt of C$225,000 in cash payments from a German arms dealer six years after the fact and paid taxes on only 50% of the amount. There were no penalties nor was any interest charged to Mulroney.
Doing a disclosure can have serious financial side affects. Always remember that before going to the wolves’ den, make sure you are completely audit ready. If you are not, then you are making a very foolish tactical blunder.
I can not stress enough how important it is that the VD be done completely, correctly and has disclosed any possible information that could invalidate your disclosure. CRA will look very closely for a reason to disqualify you from any protection offered by the VD.
While there is the possibility that doing the program will avoid penalties, which may or may not be true, depending on your particular circumstances. Even if your application is accepted by CRA, you may still ending up paying penalties, and there are other risks involved by you submitting all your financial information to CRA via a voluntary disclosure. Anything that can be used against you, will be used against you. You could find yourself in a 6 year audit.
You need to consider carefully the source of information that you are using to make important decisions. Always remember to consider vested interests when you are taking advice. Be conscious that if the entity or person giving you the advice stands to benefit by you following their advice, then you need to satisfy yourself that the advice is complete and adequate for you to make the appropriate financial decision. For instance; lawyers provide a useful services for those that need a lawyer, and will tell you that you do need one. Just remember that they too have a vested interest in telling you that you need a lawyer to do a voluntary disclosure, so that they can get your business. It clearly is in the interest of Lawyers to tell you to use their client privilege to protect you. This may or may not be needed, it depends on the circumstances. I do strongly recommend getting professional advice. I do not recommend going to CRA for the advice as it is biased.
This is true in terms of my own interest in giving you my advice. So I will be open here about my vested interest in giving you this advice. I too am hoping to get your business. It is my optimistic expectation that by sharing this information, it will cause you to consider our services to handle your tax and accounting issues. What we offer may be more in alignment with your individual needs.
While we can assist you with a Voluntary Disclosure, it is quite possible that we would advise you against doing it, in terms of risk management or that perhaps in your case the Voluntary Disclosure is not the best and safest way to disclose information to CRA.
CRA advises taxpayers to make a voluntary disclosure about unreported income based on that they advertise that they will not penalize you. You can not count on avoiding penalization. You must approach CRA before any investigation is commenced. You also must be sure that you present the information properly. If you err in how you do this, you could find yourself in a worse predicament than if you did not do the VD at all. In this case VD would stand for voluntary disaster. CRA is not your friend and you must never forget that. You are dealing with a government agency whose mandate is to collect as much tax as possible.
VD generates extra tax income for CRA because it causes people to come out of the woodwork who may never get caught and pay their taxes. I agree that this idea is good and proper, but I don’t like the idea of conveying that this is risk free way to come clean.
Lets look at what constitutes the requirement to have a successful VD.
A VD must fill four conditions:
1. The disclosure must be voluntary.
2. It must be complete.
3. It must involve a potential penalty.
4. It must include information that is as least one year past due. In some cases less than one year could be accepted, unless the sole reason is to avoid late filing penalties.
It does not matter how many years are involved, when you file a VD.
Tax returns have to be filed for every year you had a net income regardless of how many years are involved.
There is a new CRA administrative policy with respect to the voluntary disclosure program, relating to ‘‘No Name’’ disclosures. A No Name disclosure is not a valid disclosure until such time as the taxpayer is named. If a No Name disclosure is made and an enforcement action is taken before the taxpayer’s name is disclosed to the CRA, the disclosure will not be treated as a voluntary disclosure, even if the person’s name is disclosed within 90 days of the filing of the No Name disclosure.
It is important to realize what exactly is forgiven in a VD. The tax owing and the interest on that tax owing will still be payable. There may not be penalties charged, if everything checks out, but you will still pay a tax price. The best case scenario you can reasonably expect is to only owe tax and interest on the extra net income.
The worst that can happen to you is that because you were under some kind of investigation, or crime, by ANY other authority… eg… civil litigation etc. Anywhere where CRA has information exchange agreements. (The Workers Safety Insurance Board is one such entity. If you are subject to some enforcement procedure by WSIB then you will be denied the protection of a VD. Then not only will you have you made yourself vulnerable to the full CRA blast, but you will have opened up yourself to a complete audit for the entire and duration of the tax years in question.
In some cases if you submit the fact that you are in another enforcement process, and CRA accepts that, then you may be ok with the VD. This will be so if you provided that you first submit your VD first on a “No Names” basis and once the application is accepted only then can you do a VD on a “Names” basis. In this process in this circumstance, you would need a lawyer.
In the case of Karia v. Minister of National Revenue, CRA accepted the no names VD and then changed their mind. In this case the Federal Court ruled CRA wrong. The bad thing here is that most people will not go to court over tax matters.
A big lesson learned here, is as in all dealings with CRA, only what is in writing will save your assets in the end.
The real lesson here is to keep remembering, that CRA is not your friend and they will look to ways to collect more money than you volunteer to disclose. They will look for reasons to deny things they previously agreed to. This is especially true when it comes to verbal information. CRA’s standard response to what they say is; that if it is not in writing than it has no merit.
You can be sure that CRA will be looking for reasons to deny your VD, before and after the submission of your VD. To that statement I will stake my life.
CRA has the authority to reject part or all of your VD protection, in part or in full and at any time.
CRA also has the authority under the new rules to forgive interest on the penalties, although, I would not hold my breath that it will happen to you. I think it is just fly bait.
All it takes for CRA to revoke the protection of your VD is one tiny little reason and you could have a major financial concern on your hands. Even if there are no skeletons in your closets, you could still be subject to an audit. And if you are found in someway to be grossly negligent, or missed any other income, or claimed any bogus expenses, your VD will be voided.
The VD program has been rife with inequities and ad hoc policy throughout its 38-year history. For starters, the 50 per cent discount was available only in Quebec—a vagary the CRA’s spokespeople could not explain when contacted. After the Mulroney VD, the agency abruptly ended this and Sauvé told reporters at the Mulroney inquiry, in the interest of creating “consistency across Canada,” this 50% discount would be discontinued.
It is interesting to note that the World Bank has voiced doubts about the benefits of tax amnesty programs in general, warning they encourage evasion by sending the message that enforcement measures are weak. “Unless an excellent and inarguable reason can be found for an amnesty,” the bank advises governments on its website, “don’t declare one.”
You can take what you want from that statement.
A VD application can be submitted to CRA by an individual even if the individual is a shareholder or director of a corporation and the corporation is the subject of a request to file returns or an audit.
The Voluntary Disclosure program moved from Appeals to Audit, effective back on April 1, 2006. The VD program was moved from Appeals to Audit and new personnel took over. This move is pretty indicative of what the VD program is all about. It certainly streamlines the collection of money by CRA. Just look at the message it sends in terms of the mandate of the VD program. The audit departments mandate is to get as much tax as you can, and the VD is to forgive as much as possible. That is a conflict of interest or no interest in fairness as the case may be.
A VD allows CRA to have access a statute barred year which would normally prevent them from looking into. CRA being able to open numerous statute barred years is outrageous and a reason to second guess anyone coming clean if the results are going to be unmanageable and could lead to bankruptcy. CRA officials involved in a file can audit a normally stature barred year even without any basis for the audit other than the fact of someone signing the voluntary disclosure. Any mistake you may have made can make opening a stature barred year possible. CRA considers the disclosure to be an admission of misrepresentation due to the enumerated grounds, so you better be aware.
CRA has used the fact of the disclosure to open, audit and assess statute barred years on Canadians doing VDs, under the authority of subparagraph 152(4)(a)(i), which states that the Minister may assess tax, interest or penalties, after the taxpayer's normal reassessment period in respect of the year only if the taxpayer :
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act.
When you do a VD… this is a serious risk. If CRA audits you as a result of your VD, and they find that you made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act. THEN THE SHIT HITS THE FAN AND IT IS YOU WHO IS LEFT SPINNING.
In my opinion the CRA Audit section certainly has no business using the disclosure as a basis to assess statute barred years. And, if the VDP is designed to induce taxpayers to come forward and to become compliant, one is hard-pressed to understand how such an outrageous action is going to enhance the success of the VD program.
Some other pertinent details regarding VD if you are considering coming in from the cold.
The taxpayer is now expected to make a full disclosure without any idea of how many years might be required to be filed. And, of course, once the disclosure is made, the taxpayer runs the risk of having it invalidated, by not filing for additional years that were not originally contemplated in the VD.
In the case of blatant and serious tax evasion, for large amounts of money, and the penalties are going to bankrupt you then you are going to need to get the ball rolling with a good accountant and probably a good tax lawyer. Some times on rare occasions CRA might want to make an example of an errant taxpayer, but generally they just want their money.
You will need to disclose ALL your world wide assets. If you have more than $100,000 (at cost) in foreign assets you are required to declare the assets on your income tax return and file a form T1135. Foreign assets are assets in any country other than Canada. Not declaring this on your VD will void the protection, but not the resultant audit.
If you have unreported income such as income from eBay sales, unclaimed barter income, unreported cash payments, phony expense claims, it could invalidate your VD.
Coming out of the darkness of unreported income is not as simple as suddenly switching to an accurate tax return. A sudden change in a financial figure on your returns is a red flag that could cause an audit.
A VD does not mean that you won’t be audited; it just means that you may not have to pay penalties and interest on the penalties. On the other hand, you could still end up paying the full shot.
So if you do a VD, for sure you will need to cough up money. If you don’t do a VD, there is a good chance you will never get caught. We are not suggesting you don’t come clean, just be sure to come clean in the best way.
Once thing I could suggest that you could consider would be to simply file a T1A Tax adjustment to your tax years in question. Then deal with the matter the normal way instead of doing the VD and exposing yourself backwards and losing the 3 year statute barred protection against audits.
If you do decide to simply file an adjustment, let’s look at the normal sequence of events in normal circumstances. This is what we see as a sequence of events in regards to CRA and the cases that go through our hands.
1. The client gets audited.
2. Expenses are disputed.
3. Income is adjusted.
4. Penalties and interest amounting to three times the tax savings created in the incorrectly filed tax return.
5. A 30 day letter goes out to the client and their representative, outlining what the auditor proposes to assess.
6. Unless there is a big reason for the auditor to change directions, the assessment goes out.
7. From there on what happens depends on the circumstances. That is why you need professional help. Do not be lulled into thinking that your matter is simply a matter of being open and honest with CRA. How things go will depend on individual circumstances.
From a logistics point of view when you look at this situation, an audit from simply adjusting your previously filed tax returns could be seen as a good thing for you, as it allows you to come clean and know you can pretty much count on the results. This is a possibilities evaluation that needs to be considered before you proceed.
My personal take on this matter is; CRA is getting better and better at catching tax cheaters, so give that up being a tax evader in today’s technology world “is A Good Idea” because tax evasion is not a good idea, it is a dangerous idea.
Going forward, there is no choice in this matter. CRA is getting on the ball and 1984 Orwellian is not just around the corner. Major changes are now actually in the works and planning for the next wave of CRA tax payer abuse will be coming soon.
If you want to learn more about audits and audit ready bookkeeping visit www.tax-audit-solutions.com