David Rotfleisch is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm.
Last month, the Canada Revenue Agency announced radical proposed changes to the Voluntary Disclosure Program (VDP). That program is arguably one of the most effective initiatives administered by the CRA, and the proposed changes, if enacted, will have the effect of emasculating and ultimately killing the VDP.
The VDP allows taxpayers who are non-compliant with their taxes to come back into the system without fear of prosecution or civil penalties. It works.
The CRA reports that for 2014-15, the total income from all voluntary disclosures was more than $1.3-billion, with $780-million coming from offshore. According to CRA, there were 19,134 voluntary disclosures received in fiscal year 2014-15. Importantly, the enforcement costs of the VPD are minimal to Canadian taxpayers.
Yet the proposed changes seem to ignore this success and are designed to reduce or eliminate the availability of the VDP in many circumstances.
Situations that qualify only for limited relief include use of offshore accounts and multiple years of non-compliance. Those two categories cover 75 per cent of the voluntary disclosures that my tax law firm submits. Large dollar amounts and sophisticated taxpayers will also be eligible only for limited relief.
Many immigrants have offshore accounts before moving to Canada and are unaware of reporting requirements. The money in an offshore account is not necessarily a result of unpaid taxes. Another common situation is where children inherit an offshore account set up by their parents – and the subsequent tax problem.
Multiple years of non-filing is another case that only qualifies for limited relief and is also often not the result of deliberate malfeasance. I see the same situation over and over. A taxpayer fails to file one return for some reason. It gets ignored and next April rolls around with another tax deadline.
The common reaction is panic and a lack of knowledge as to how to deal with the unfiled returns. The years accumulate and eat at the individual until the pressure causes them to seek professional advice and file a voluntary disclosure.
Is this a situation worthy of opprobrium and denial of penalty-free remedy?
Large dollar amounts won't qualify either. So, is the CRA saying if you owe only a few dollars you are welcome back, but if you have a large debt and they will collect a large windfall, they don't want you? And if you're a sophisticated taxpayer who is offside and decide that you want to pay all that is owing plus interest, your application will also be rejected.
The result is that CRA is removing the incentive for high-net-worth individuals to come clean on their taxes – the very people that the CRA needs in the VDP.
There are also circumstances that won't qualify for any relief at all. Money launderers who want to "come clean" won't qualify at all for the VDP. CRA will have to catch them first, then prosecute them.
There is also an exclusion for corporations with gross revenues of more than $250-million.
A new requirement for the VDP is that payment of estimated taxes must be included with the application. If payment in full can't be made, then payment arrangements supported by "adequate security" may be considered by the CRA. What happens if you don't have enough assets to furnish the security? You don't qualify for relief.
If you're poor, then voluntary disclosure protection is not for you. Perhaps we should go back to the good old days of debtor's prison?
A last nail in the coffin is the abolition of the no-names voluntary disclosure. Right now, you can submit an application without a name to see if the facts qualify for relief. No longer. The new rules, if implemented, will produce a bumper crop of work for lawyers because of the uncertainties.
If the CRA asks you to file those returns, you will be fully penalized even though a lawyer contacted CRA on your behalf before they contacted you.
If the VDP is changed as proposed, it will be seriously broken and on its way to a lamented demise. We won't collect more taxes and the taxes we do collect will come with a higher enforcement price tag. The CRA will be going backward.