Voluntary Disclosure Program – It’s worth considering under the right circumstances

The Voluntary Disclosure Program (VDP) is an initiative from the Canada Revenue Agency (CRA)  designed to encourage  taxpayers to be more compliant with their income tax filings and to correct omissions or errors which may be considered “negligent” from previous income tax returns.  
The VDP offers taxpayers an opportunity to correct inaccurate or incomplete information or to correct previous erroneous information without penalties or prosecution.
One of the major incentives of proceeding by way of a voluntary disclosure is the assurance of knowing that IF his/her disclosure is accepted by the CRA, the taxpayer is assured of not facing tax evasion charges.

Criteria for a VD to be Valid

For a voluntary disclosure to be valid, it must meet certain specific criteria.  If the taxpayer fails to meet any of these criteria, the voluntary disclosure will be considered potentially invalid resulting in penalties and prosecution.
The CRA is unequivocal that a valid voluntary disclosure must be

(1) voluntary,
(2) complete,
(3) involve a monetary penalty, and
(4) involve information that is one year or more overdue.

Timing

Timing is crucial when filing a voluntary disclosure.  The CRA and the jurisprudence are clear: a disclosure may not qualify as a voluntary disclosure if it is found to have been made with the knowledge of an audit, investigation or other enforcement action that has been initiated by the CRA or other authorities or an administration with which the CRA has information exchange agreements.
It is crucial that the taxpayer be unaware of any audit, investigation or enforcement procedure when filing a voluntary disclosure. This means that if there is any direct contact by the CRA (such as a telephone call from a CRA agent or receiving a letter or a requirement to file from the Agency), the voluntary disclosure will be denied on the basis that it is not voluntary.
Furthermore, if a third party closely associated with the taxpayer receives a communication from the Agency or if any enforcement action against that third party is initiated and such action is sufficiently related to the taxpayer in the eyes of the CRA, the taxpayer’s voluntary disclosure may be denied on the basis it is not voluntary.

Completeness

The CRA is unequivocal that the taxpayer must provide full and accurate facts and documentation for all taxation years where there was previously inaccurate, incomplete or unreported information.  In most instances, the agent reviewing the voluntary disclosure will most likely request additional specific documents or information corroborating the initial application.
Should the taxpayer fail to provide the information requested, or should the facts in the initial application not withstand the scrutiny of the CRA, the voluntary disclosure will likely be denied.
As is always the case in tax matters, the onus of proof lies with the taxpayer. It is the responsibility of the taxpayer to prove that the information submitted provides a complete and accurate account of the facts involved.
However, it is worth noting that minor errors or omissions shall not disqualify the disclosure. Further, the CRA clearly states that each submission will be reviewed on its own merits.

Monetary Penalty

Another criterion is the obligation that the voluntary disclosure must involve the application, or potential application, of a monetary penalty.  There are different reasons as to why a penalty would be levied (such as a late filing penalty, a failure to remit penalty, an installment penalty or a discretionary penalty) but in order for a voluntary disclosure to be valid, it must involve a monetary penalty applying to one reporting period.

One Year Past Due

The last criterion for a valid disclosure is that it must include information that is (1) at least one year past due, or (2) the disclosure is to correct a previously filed return.

10 Year Limitation

CRA will only grant penalty relief for a period of 10 years.  (§220(3.1) of the Income Tax Act was amended in 2004 to only provide relief for a period of 10 years prior to the application for relief of interest and penalties).
This is quite unfortunate as a taxpayer that would like to rectify past filings must take into consideration this 10 year limit.  Indeed, should a taxpayer opt to file a disclosure concerning taxation years dating back more than 10 years from the application, they run the risk of being liable for penalties.
CRA does not advertise such a limitation period and this further emphasises the importance of seeking professional assistance prior to proceeding with a voluntary disclosure.

Conclusion

The VDP is worthy of consideration by any taxpayer that wishes to rectify a previous filing and avoid any penalties or prosecution.
However, the criteria of a valid voluntary disclosure are precise and one should always seek professional assistance given the significant risks that an invalid application may invoke.
Should you be interested in proceeding by way of a voluntary disclosure, Tierney Stauffer LLP would be glad to assist and advise you.  If you have any questions, please do not hesitate to contact us.

Sébastien Desmarais
LL.B., LL.L., J.D.
Lawyer, Tierney Stauffer LLP
This article is provided  as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter  referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship.