22June 2017 Global Tax Alert News from Americas Tax Center Canada Revenue Agency releases proposed changes to GST/HST Voluntary Disclosure Program EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/services/ Tax/Americas-Tax-Center---borderlessclient-service Executive summary On 9 June 2017, the Canada Revenue Agency (CRA) released proposed changes to the Voluntary Disclosures Program (VDP). The changes follow an extensive review of the program in response to the recommendation to the Government by the House of Commons Standing Committee on Finance in October 2016, as well as recommendations made by the Offshore Compliance Advisory Committee on 5 December 2016. Notably, the CRA intends to separate the VDP policy for disclosures involving income tax and source deductions from the VDP policy for Goods and Services Tax (GST)/Harmonized Sales Tax (HST), excise tax, excise duties, softwood lumber products export charges and air travellers security charges. Major changes to the CRA s VDP policy for GST/HST include the following: Applications will be processed under three different tracks, and less generous relief, or, in some cases, no relief will be available in major cases of noncompliance. VDP relief will not be available if a registrant attempts to increase the amount of input tax credits, rebates or other credit adjustments without any corresponding increase in tax liability. Registrants will be required to pay the estimated tax owing at the time they apply for VDP relief.
2 Global Tax Alert Americas Tax Center The CRA is seeking input on the proposed changes during a 60-day online consultation period ending 8 August 2017. The final changes to the VDP policy will be announced in the fall and will apply as of 1 January 2018. Detailed discussion Background The VDP applies to disclosures relating to income tax, sources deductions, GST/HST, excise tax, excise duties, softwood lumber products export charges and air travellers security charges. Subject to certain eligibility requirements, registrants may correct inaccurate or incomplete information they have previously provided to the CRA or disclose information they have not previously provided. Under the current policy, a registrant that makes a valid disclosure is liable to the taxes owing (plus interest) but is not subject to penalties or prosecution. In some cases, the interest may be reduced, waived or cancelled as well. For GST/HST purposes, section 281.1, section 284, and subsection 284.1(3) of the Excise Tax Act provide the legislative discretionary authority to the Minister of National Revenue to waive or cancel penalties and interest. The proposed changes released by the CRA on 9 June 2017 are outlined in a draft new GST/HST Memorandum 16.5, Voluntary Disclosures Program (the draft GST/HST memorandum). The draft GST/HST memorandum addresses GST/HST, excise tax, excise duty, softwood lumber products export charges, and air travellers security charges VDP matters. The CRA has also released a draft version of Information Circular IC00-1R6, Voluntary Disclosures Program, which provides information on the CRA s VDP policy for disclosures related to income tax and source deductions. Both documents and the changes to the VDP they contain will be finalized this coming fall and will be applicable after 31 December 2017. This Alert focuses on the changes to the VDP policy for GST/HST, excise tax, excise duties, softwood lumber products export charges, and air travellers security charges. Refer to our separate Global Tax Alert for details on the changes to the VDP policy changes for disclosures involving income tax and source deductions. Introduction of three tracks The CRA proposes to process GST/HST VDP applications under three tracks: Track 1 GST/HST wash transactions: Full interest and penalty relief may be provided for GST/HST wash transactions. Under GST/HST Memorandum 16.3.1, Reduction of Penalty and Interest in Wash Transaction Situations, a wash transaction refers to a situation where a supplier has failed to charge and collect GST/HST from a registrant that is entitled to claim a full input tax credit (ITC). A wash transaction may also occur within a closely related or associated group of persons where ITCs are claimed by the wrong entity. Track 2 General Program: Track 2 provides relief for applications disclosing non-compliance or errors, including situations involving: Wash transactions that are ineligible for a reduction of penalty and interest in accordance with policies set out in GST/HST Memorandum 16.3.1 Reasonable errors Failure to file information returns No gross negligence or deliberate tax avoidance Over-claimed rebates As an example of Track 2 application, the CRA cites a hypothetical scenario where a registrant claimed excessive ITCs due to an accounting error. Track 3 Limited Program: Limited relief may be provided for applications disclosing major non-compliance. The CRA will consider an application to involve major non-compliance if one or more of the following are present: GST/HST charged or collected but not remitted Active efforts to avoid detection (e.g., participation in the underground economy) Large dollar amounts Multiple years of non-compliance A sophisticated registrant Deliberate or wilful default or carelessness amounting to gross negligence Any other circumstance in which a high degree of registrant culpability contributed to the failure to comply
Global Tax Alert Americas Tax Center 3 Conditions of a valid application Under the proposed changes, in order for a VDP application to qualify for relief, the application must meet the following requirements: Be voluntary Be complete Involve the application or potential application of a penalty or interest Include information that is at least one reporting period past due Include payment of the estimated tax owing The CRA may consider alternative payment arrangements (supported by adequate security) in extraordinary circumstances. However, to support the inability to pay, the registrant will be required to make full disclosure and provide evidence of income, expenses, assets and liabilities. The draft GST/HST memorandum stipulates that a registrant s VDP application for a particular issue must be made for taxation years or fiscal or reporting periods where there was previously inaccurate, incomplete or unreported information regarding their tax affairs as follows: For Track 1, the four years before the application s filing date For Track 2, the six years before the application s filing date For Track 3, all relevant years Under current policy, a VDP application must involve the application or potential application of a penalty. The proposed changes specifically provide that the CRA will consider disclosures involving the application or potential application of interest as well. Interest relief Where the CRA accepts a VDP application, interest relief in respect of assessments resulting from the application is available as follows: For Track 1, 100% interest relief For Track 2, relief for 50% of the applicable interest For Track 3, no interest relief The Minister may grant interest relief for interest that accrued during the previous 10 calendar years before the calendar year in which the registrant files the VDP application. Penalty relief Where the CRA accepts a Track 1 or Track 2 VDP application, full penalty relief will be provided, subject to the 10-year limitation period (consistent with current VDP policy). Penalty relief is generally not available for a VDP application Track 3. However, the CRA will not assess a gross negligence penalty even if the facts establish that the registrant is liable for such a penalty. Circumstances where no VDP relief will be granted In addition to current VDP application restrictions (for example, the CRA does not accept VDP applications relating to statutory elections), the draft GST/HST memorandum indicates that VDP applications will not be accepted where a registrant is attempting to increase the amount of input tax credits, rebates, or other credit adjustments without any corresponding increase in tax liability for the relevant period. Application form Registrants will be required to use Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, for all applications made under the new policy. No-name disclosures (see below) may also be made using Form RC199. If a registrant s authorized representative submits the application, the form must be signed by both the registrant and the authorized representative. Currently, registrants who are unsure if they want to submit a VDP application may engage in informal and non-binding preliminary discussions with the CRA on a no-name basis. These discussions occur before the registrant s identity is revealed. On the basis of the preliminary information provided by the registrant, the VDP officer may confirm whether there is anything that would immediately disqualify the registrant from VDP consideration. If all the required information for a complete disclosure (other than the registrant s identity) has been submitted and the registrant so requests, the officer may review the information and advise the registrant on the tax implications of the disclosure, without prejudice. While no-name disclosures will remain available under the new administrative policy, neither the draft GST/HST memorandum nor Information Circular IC00-1R6 provide much detail beyond confirming that preliminary discussions will be informal, non-binding and general in nature. As a result, it is not clear whether the CRA will administer noname disclosures in full accordance with current policy.
4 Global Tax Alert Americas Tax Center Second VDP application In general, a registrant is entitled to obtain the benefits of the VDP only once. The CRA will not normally consider a second application unless the circumstances surrounding the second application meet the following: Are beyond the registrant s control Relate to a different matter than the first application Objection rights If a registrant s application is accepted under Track 3, the registrant will be required to waive their right to object in relation to the specific matter that was disclosed in the VDP application, and any assessment (or reassessment) of taxes that specifically relate to that disclosure. This waiver will not prevent a registrant from filing an objection in circumstances involving calculation errors, characterization issues (e.g., taxable vs. exempt supplies), or to an issue unrelated to the matter disclosed in the VDP application. Endnote 1. See IC 00-1R5, Voluntary Disclosures Program, 26 30.
Global Tax Alert Americas Tax Center 5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), East Jean-Hugues Chabot +1 514 874 4345 jean-hugues.chabot@ca.ey.com Daniel P. Legault +1 514 879 8176 daniel.p.legault@ca.ey.com Manon Jubinville +1 514 874 4391 manon.jubinville@ca.ey.com Ernst & Young LLP (Canada), Central Dalton Albrecht +1 416 943 3070 dalton.albrecht@ca.ey.com Jan Pedder +1 416 943 3509 jan.s.pedder@ca.ey.com Sania Ilahi +1 416 941 1832 sania.ilahi@ca.ey.com Ernst & Young LLP (Canada), West Katherine Xilinas +1 604 899 3553 katherine.xilinas@ca.ey.com David D. Robertson +1 403 206 5474 david.d.robertson@ca.ey.com
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