The Canada Revenue Agency is revamping a program that lawyers say has long lacked appeal for taxpayers
Upcoming changes to the Canada Revenue Agency’s voluntary disclosures program will expand eligibility and offer more relief for taxpayers who voluntarily admit errors related to GST and other filings, but tax experts are divided on whether the shift will lead to a substantial uptick in the number of taxpayers using the program.
The lack of bright lines in some of the new rules, which apply to voluntary disclosure applications that the CRA receives on or after Oct. 1, could leave potential program participants reluctant to take a risk with voluntary disclosure, says Robert Kreklewetz of boutique tax firm Millar Kreklewetz LLP.
“Voluntary disclosures only work if there are bright lines – that’s predictable requirements and predictable relief,” says Kreklewetz, who has practised tax law for over three decades. “No taxpayer wants to pull the trigger on disclosing past noncompliance to the CRA if the expected results are uncertain.
“I call that the voluntary disclosure dilemma,” he adds. “A taxpayer proceeds in the hopes of a better result than if they were to be caught on audit, but doesn’t want to proceed if they’re going to end up with a worse result.”
On the other hand, the upcoming rule changes are a welcome departure from the rigidity of the current program, argues Luc Pariseau, a partner at Lavery who has nearly 40 years of tax law experience.
Pariseau says he is more likely to recommend voluntary disclosure to clients under the new program than the current one. “The possibilities of going forward are more open… but also the benefits are higher than they used to be,” he says.
Unveiled by the CRA in September, the new program introduces significant eligibility and relief changes to the tax agency’s voluntary disclosures program. This program grants relief to taxpayers on a case-by-case basis when they voluntarily admit omissions or errors in their past tax filings.
The changes include allowing taxpayers to participate in the program regardless of whether the CRA has prompted them with verbal or written notices about an error or omission. Under the current rules, which have been in place since 2018, the CRA does not consider disclosures voluntary if the applicant was previously aware that the agency was pursuing an enforcement action against them or a third party associated with them.
Starting in October, voluntary disclosures will be classified as unprompted or prompted. Taxpayers who file unprompted disclosures will receive 75 percent relief of any applicable interest and 100 percent relief of applicable penalties. Prompted disclosures will result in 25 percent relief of any applicable interest and up to 100 percent relief of applicable penalties.
Disclosures will not be considered voluntary if an audit or investigation is already pending against a taxpayer regarding the information being disclosed.
According to Pariseau, the upcoming changes will bring the voluntary disclosures program more in line with the status quo that existed before 2018, when the program’s rules became more restrictive and left the CRA less discretion. Before 2018, it was standard to negotiate with the agency over how it would handle a voluntary disclosure.
Pariseau says he filed far fewer voluntary disclosures for clients after the 2018 rules were enacted. The upcoming rules “will be much more interesting for taxpayers,” he says. “The rules are less restrictive, they give more discretion to CRA, they are more beneficial for taxpayers. So it’s a welcome change.”
Pariseau and Kreklewetz both argue that low participation rates in the program likely prompted the upcoming changes.
“I would believe that [the federal government] found that these rules are just not conducive to encouraging voluntary disclosures,” Kreklewetz says.
“What we understand in practice is that [the] CRA realized that their 2018 modifications rendered the program much less appealing for taxpayers, so taxpayers continued to be non-compliant,” Pariseau says, adding this likely reduced the amount of money paid back to the agency.
The lawyer says he was “very reluctant to advise a client to go through the program since 2018 because it was very disappointing most of the time.”
But Kreklewetz says the revamped program is still risky for taxpayers, given the lack of clarity with some of the new rules. He notes that for certain types of voluntary disclosures, like those related to GST/HST, applications must include supporting documentation – such as tax returns, forms, or statements – needed to correct the non-compliance for the last four years. Voluntary disclosures related to income tax must include documentation dating back even longer. However, the CRA also reserves the right to ask for more.
“If I'm a GST registrant or a taxpayer for income tax purposes with 15 years of exposure, for example, how can I predict with any certainty what will happen to me in a voluntary disclosure?” Kreklewetz asks.
“Sure, they ask for four years of disclosure, or six or 10 years of disclosure, but then they find out that I’m required to tell them that I've actually been noncompliant for 15 years. What are they going to do to me?” he adds. “With that level of uncertainty for taxpayers, the name of the game continues to be, hide the ball and just go on with your head down, hoping the CRA doesn’t find you or find your noncompliance.”
While Kreklewetz believes the revamped program will attract more disclosures than the current program, he says one question to ask is: how many more?
“If [the] CRA really wanted to make it seamless and easy to get in and really encourage these disclosures, they should do a couple more things,” he says. These include allowing voluntary disclosures by taxpayers who are actively being audited, and reserving the right to say “all bets are off if they find intentional noncompliance in those situations,” he says; the agency could also offer a maximum liability period that corresponds with the maximum number of years they can waive penalties for.
“I think that’s a fair tradeoff to truly maximize the potential of a voluntary disclosure program,” he says.
