Canada’s Voluntary Disclosure Reforms Are Helpful, if Imperfect

The Canada Revenue Agency’s Voluntary Disclosure Program reforms, effective Oct. 1, promise positive changes for taxpayers while leaving several issues unresolved.

In the years after Canada introduced the goods and services tax in 1991, the CRA’s goal wasn’t so much chasing evasion as it was getting Canadian and US businesses to comply with a completely new taxing system. The hallmark of those efforts was the CRA robust tax amnesty programs.

Canada’s disclosure process historically has been similar in spirit to the IRS’s voluntary disclosure practice. But it’s not quite as effective, and it’s far behind the prior disclosure policy implemented by US Customs and Border Protection for import noncompliance.

Then and Now

Back in the 1990s, a tax practitioner could initiate the process by calling up a CRA contact and saying, “I’d like to commence a voluntary disclosure for my client, ACME Inc.” It was a straightforward and generally predictable process: Pay the tax, get a break on interest and penalties, and receive immunity from possible criminal prosecution.

The CRA was receptive to voluntary disclosures, especially on the goods and services tax side of things. The more taxpayers brought “under the tent,” the better for everyone—the fisc, the taxpayer, and Canadian tax administration as a whole. Businesses weren’t resisting the tax out of defiance; they simply didn’t know how to navigate the many new complex rules. Fixing past errors was key.

Fast forward to today, and Canada’s Voluntary Disclosure Program has become unrecognizable and, for many, unworkable. Too many conditions, too many “what-ifs,” not enough benefits in the relief being offered, and a total lack of predictability.

Things may have changed for the better, however, with the CRA’s Sept. 9 announcement of major structural reforms to voluntary disclosures. The changes might be a quantum leap forward, bringing Canada’s program closer to that in place for IRS purposes, and maybe further.

Under the new rules, voluntary disclosures can be accepted whether unprompted or prompted. More relief is afforded to unprompted disclosures. Previously, virtually any contact from the CRA put at issue a disclosure’s “voluntariness.” Now there are somewhat brighter lines on what will and won’t be allowed.

Relief is also more generous, with unprompted disclosures receiving 75% interest relief and 100% penalty relief. Prompted disclosures receive 25% off interest, and up to 100% off penalties (with conditions). Previously, the benefits were far less.

For wash transactions—applicable to certain goods and services tax transactions, where tax is recoverable by someone down the line—100% interest and penalty relief is given (under certain conditions).

Initial lookback periods also are shorter, with the CRA requiring documentary disclosure back four years for goods and services tax matters, and back six or 10 years for income tax matters, depending on whether assets or income are located inside or outside of Canada, respectively.

The new rules continue to grant full and guaranteed protection from prosecution and gross negligence penalties for all information disclosed.

Falling Short

Now the bad news: Canada hasn’t gone quite far enough, and serious impediments remain for Canadian and US taxpayers looking to clean things up in Canada.

The first major problem is that an audit or investigation will normally disqualify a voluntary disclosure. This is like the IRS situation, but too restrictive.

A better approach—that both the CRA and IRS could jump on—would be to follow the lead of the US Customs and Border Protection’s prior disclosure model. CBP grants full benefits to an importer making a prior disclosure even if initiated during an audit, provided the disclosed violations are outside the specific scope of the audit.

So, on a verification of tariff classification issues, CBP would still accept disclosures of valuation issues. CBP also accepts disclosures made without knowledge that an audit has already begun.

Better yet, why not allow the disclosure at any point? The governments put too much faith in auditors who can miss key issues, in our experience. Disqualification on audit risks incentivizing taxpayers to continue playing “hide the ball” on most audits.

The CRA should consider disqualifying only if intentional noncompliance is found during the audit but still allow persons with intentional noncompliance to make unprompted disclosures.

Lookback periods are another major problem. Under the old rules, taxpayers with multiple years of noncompliance often had incentives to take a do-nothing approach. The best that could come from a disclosure was dwarfed by the worst possible outcomes if the disclosure went in a wrong direction.

For example, one recent US multinational client had been offside since potentially the goods and services tax’s inception. The client couldn’t risk making a voluntary disclosure because the CRA theoretically could look back to 1991 for tax compliance—probably bankrupting the company. And the CRA wouldn’t guarantee how far back it would impose tax.

Even under the new rules, the lookback periods are only capped on paper. The CRA says it can still request records beyond the stated limits at its discretion. Moreover, it requires taxpayers to disclose “all known errors and omissions”—that is, all the way back. Liability for past decades still seems on the table, which really doesn’t make sense.

Looking Ahead

Clear bright lines would be a better approach. Capping liability at 10 years, for example, would provide the predictability required to motivate taxpayers to come forward voluntarily.

Ultimately, both Canada and the US should aim to get taxpayers under the tent and paying taxes to the government.

With the CRA’s latest reforms, Canada seems to have made a great first step. But the proof will be in the pudding. How much uptake there will be under this new program is anyone’s guess.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Robert G. Kreklewetz is founding partner of Millar Kreklewetz in Toronto and has more than 35 years of experience in international trade, customs, and indirect tax.

Peter Krol is an associate at Millar Kreklewetz.

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