Coming Clean Before the CRA Finds Out: The Voluntary Disclosures Program

By Thomas Fellhauer
Categories: Blog, Tax

In light of recent happenings in the United States, tax amnesty programs have been receiving considerable media attention.

On August 19, 2009, the United States Internal Revenue Service (the “IRS”) and the United States Department of Justice reached a settlement with the Swiss Confederation.  Pursuant to the settlement the IRS will receive from UBS, Switzerland’s largest bank, information regarding approximately 4,450 Swiss bank accounts held by United States citizens.

The IRS expects this information to assist them in uncovering large amounts of hidden offshore income of wealthy Americans.

With the threat of prosecuting thousands of Americans for tax evasion relating to hidden offshore income, the IRS and the United States Department of Justice have instituted a temporary voluntary disclosure procedure for taxpayers with unreported income from hidden offshore accounts, whereby taxpayers had until September 23, 2009 to come forward to disclose income and avoid harsher civil penalties, where applicable, and possible criminal prosecution.  On September 21, 2009, the IRS announced that the temporary voluntary disclosure procedures would be extended until October 15, 2009.

Canada’s Voluntary Disclosures Program is an ongoing program deriving its legislative authority from the Income Tax Act, Excise Tax Act, Excise Act, 2001, Air Travellers Security Charge Act and the Softwood Lumber Products Export Charge Act.

Under Canada’s Voluntary Disclosures Program, a taxpayer who makes a valid disclosure under the Income Tax Act will be required to pay taxes owing plus interest, but can avoid penalty or prosecution.  Further the CRA has the discretion to grant partial relief in the application of interest against a taxpayer in respect years preceding the three most recent years of returns required to be filed.

Penalties and interest often add up to be a substantial portion of the amounts that must be paid to the CRA.  As a result, disclosure through the Voluntary Disclosures Program, can save a taxpayer a significant amount of money.

Taxpayers are entitled to begin the voluntary disclosure process on an anonymous (“no-names”) basis.  This allows the taxpayer’s lawyer, to have preliminary discussions with a Voluntary Disclosures Program officer to establish the terms of disclosure and what settlement options may be available.  Should the taxpayer wish to proceed with the voluntary disclosure, the identity of the taxpayer must be disclosed by 90 days.

In order to qualify for the Voluntary Disclosure Program, the disclosure must meet the following four conditions.

  1. The disclosure must be voluntary.  In order to be considered voluntary, the taxpayer must not be aware of or have knowledge of an audit, investigation or other enforcement action set to be conducted by the CRA, or initiated by the CRA, with respect to the information being disclosed.
  2. The disclosure must be complete.  The taxpayer must provide full and accurate facts and documentation for the years to which the disclosure relates.
  3. The disclosure must involve the application of a penalty.  A penalty, such as a late filing penalty, failure to remit penalty, instalment penalty, ommission penalty, or gross negligence penalty, must apply or have the potential to apply to the disclosure.
  4. The disclosure must relate to information that is at least one year past due.

A ten-year limitation period limits the tax amnesty provided under the Voluntary Disclosures Program to any taxation year that ended within the previous 10 years before the year in which the submission is filed.

For more information, please contact a member of the Tax Law Team at Pushor Mitchell LLP.

Tom Fellhauer      250-869-1165