22 June 2017 Global Tax Alert News from Americas Tax Center Canada Revenue Agency releases proposed changes to income tax 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 highly anticipated proposed changes to the Voluntary Disclosures Program (VDP) that would narrow its application and offer less generous relief or, in some cases, no relief, to non-compliant taxpayers. The proposal follows an extensive review of the VDP recommendations made in 2016 by both the House of Commons Standing Committee on Finance and the Offshore Compliance Advisory Committee. 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. The proposed changes include the following major changes to the CRA s VDP policy for income tax and source deductions: Multiple tracks for VDP relief: Rather than a one size fits all program, applications will be processed under different tracks (as discussed below) with more limited relief for major cases of non-compliance. Restricted entry: The CRA proposes to exclude VDP applications made by corporations with gross revenue exceeding CA$250 million in two of the last five years, as well as VDP applications involving transfer pricing matters or disclosures of income earned as proceeds of crime.
2 Global Tax Alert Americas Tax Center Imposing additional conditions on applicants: For example, taxpayers will now be required to pay the estimated taxes owing at the time they apply for VDP relief. 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 goal of the VDP is to promote voluntary compliance with Canadian tax law. The VDP applies to disclosures of noncompliance involving income tax, source deductions, GST/HST, excise tax, excise duties, softwood lumber products export charges and air travellers security charges. Subject to certain eligibility requirements, taxpayers may correct inaccurate or incomplete information they have previously provided to the CRA or disclose information they have not previously provided. Under the current administrative policy, a taxpayer that makes a valid disclosure is liable for the taxes owing (plus interest), but is not subject to penalties or prosecution. In some cases, interest may be reduced as well. For income tax purposes, subsection 220(3.1) of the Income Tax Act (the Act) provides the necessary legislative discretionary authority to the Minister of National Revenue to waive or cancel penalties and interest. The current policy is outlined in Information Circular IC00-1R5, Voluntary Disclosures Program. The proposed changes released by the CRA on 9 June 2017 are outlined in a draft version of Information Circular IC00-1R6, Voluntary Disclosures Program, and a draft version of new GST/HST Memorandum 16.5, Voluntary Disclosures Program. The former provides information on the CRA s proposed VDP policy for disclosures related to income tax and source deductions, whereas the latter provides information on the CRA s proposed VDP policy for disclosures related to GST/HST, excise tax, excise duties, softwood lumber products export charges, and air travellers security charges. This separation of the VDP policy is intended to address the different circumstances and complexities related to transaction-based taxes. The CRA indicates, however, that the information provided in draft IC00-1R6 and draft GST/HST Memorandum 16.5 is not intended to restrict the spirit or intent of the legislation, or to unduly limit the Minister s discretion. The following discussion focuses on the VDP policy changes for disclosures involving income tax and source deductions. Refer to our separate Global Tax Alert for details on the changes to the VDP policy for GST/HST, excise tax, excise duties, softwood lumber products export charges, and air travellers security charges. Introduction of two tracks Under the proposed changes, VDP applications will be processed under two tracks: Track 1 General Program: Applications accepted under the General Program are eligible for penalty relief and partial interest relief. The criteria to qualify under the General Program remain unchanged from the current VDP policy. Track 2 Limited Program: Applications accepted under the Limited Program are eligible for reduced relief. The Limited Program will apply to cases involving major noncompliance. The CRA will determine on a case-by-case basis whether an application involves major non-compliance and must be processed under the Limited Program. The CRA proposes that major non-compliance has occurred if one or more of the following are present: Active efforts were taken to avoid detection through the use of offshore vehicles or other means Large dollar amounts Multiple years of non-compliance A sophisticated taxpayer The disclosure is made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns Any other circumstance in which a high degree of taxpayer culpability contributed to the failure to comply For example, the CRA noted that it would consider a taxpayer that has transferred undeclared business income earned in Canada to an offshore bank account since 2010 as having committed major non-compliance, and consequently would have to proceed with a VDP under the Limited Program. Applications processed under the Limited Program will be reviewed for completeness by a specialist area prior to the VDP application being accepted.
Global Tax Alert Americas Tax Center 3 Penalty relief Track 1: If an application is accepted under the General Program as a valid disclosure, the taxpayer will not be charged any penalties, subject to the 10-year limitation period in subsection 220(3.1) (consistent with the current VDP policy). In addition, the taxpayer will not be subject to criminal prosecution for tax offenses related to the disclosure. There is thus no change between a valid disclosure under the proposed General Program and a valid disclosure under the current program. Track 2: If an application is accepted under the Limited Program as a valid disclosure, the taxpayer will not be assessed a gross negligence penalty (even where the facts establish that the taxpayer is liable for such a penalty) and will not be subject to criminal prosecution for tax offenses related to the disclosure. However, relief from other applicable penalties (e.g., late filing penalties) will not be granted. Interest relief Track 1: If an application is accepted under the General Program as a valid disclosure, the taxpayer may be granted partial interest relief for assessed years prior to the three most recent years of returns required to be filed, subject to the 10-year limitation period in subsection 220(3.1). However, unlike a valid disclosure under the current program, this interest relief will generally be limited to 50% of the applicable interest for those periods. Track 2: Even if an application is accepted under the Limited Program as a valid disclosure, the taxpayer will receive no interest relief. Circumstances where no VDP relief will be granted Under the proposed changes to the VDP, the following applications will no longer be accepted by the CRA under the VDP: Applications by corporations with gross revenue in excess of CA$250 million in at least two of their last five taxation years Applications relating to transfer pricing adjustments or transfer pricing penalties Applications reporting income from proceeds of crime Applications that depend on an agreement being made at the discretion of the Canadian competent authority under a tax treaty provision (for example, S-corporation agreements under paragraph 5 of Article XXIX of the Canada-US Treaty) These proposed changes will require large corporations and multinationals to be diligent in meeting all of their tax compliance requirements and in determining appropriate transfer prices. Other administrative changes Cancellation of VDP relief Under the proposed changes, the CRA will expressly have the ability to cancel VDP relief if the disclosure application is subsequently found to be incomplete due to a misrepresentation attributable to neglect, carelessness, wilful default or fraud. Payment of estimated taxes A taxpayer will be required to pay the estimated tax owing at the time the VDP application is filed. Alternative payment arrangements (supported by adequate security) may be considered by the CRA in extraordinary circumstances. However, to support the inability to pay, the taxpayer will be required to make full disclosure and provide evidence of income, expenses, assets and liabilities. This proposed change may be onerous for some taxpayers, and as a result may discourage taxpayers who do not have the money readily available to pay the estimated taxes from making a disclosure. Application form Taxpayers will be required to use Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, for all applications made under the new policy. The CRA indicates that the form must include the following information, which is not explicitly set out in the current administrative policy (paragraph 44 of IC00-1R5): Whether a previous application has been made by the taxpayer under the VDP (a second application will normally only be considered by the CRA if the circumstances surrounding the second application are both beyond the taxpayer s control and, as newly proposed, relate to a different matter than the previous application) Whether the income is from a foreign source, and if yes, the jurisdiction(s) involved The name of the advisor who provided assistance to the taxpayer, if any, in respect of the subject matter of the VDP application
4 Global Tax Alert Americas Tax Center Objection rights The current CRA administrative policy (outlined in paragraph 63 of IC00-1R5) allows a taxpayer to file a notice of objection if the taxpayer disagrees with an assessment or reassessment that has resulted from a disclosure. This right is removed under the proposed changes to the VDP. Instead, the CRA will apply the rule in subsection 165(1.2) of the Act, which prohibits a taxpayer from filing an objection to an assessment of penalties and interest made under subsection 220(3.1) of the Act. This change in policy will apply to VDP applications that have been accepted under the General Program or the Limited Program. In addition, if a taxpayer s application is accepted under the Limited Program, the taxpayer 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 relates to that disclosure. This waiver will not prevent a taxpayer from filing an objection in circumstances involving calculation errors, characterization issues (e.g., income vs. capital treatment), or to an issue unrelated to the matter disclosed in the VDP application. Looking forward Overall, the proposed changes appear to align closely with the recommendations put forward by the House of Commons Standing Committee on Finance and the Offshore Compliance Advisory Committee. As noted at paragraph 8 of the proposed circular, the information set out therein is ultimately administrative guidelines and is not meant to unduly limit the Minister s discretion under the Act. However, there is a concern that these changes may unduly restrict access to the VDP for certain taxpayers or in certain circumstances, and create more onerous conditions for making a valid disclosure. For taxpayers currently contemplating a disclosure, it is advisable to contact your local tax professional regarding how to proceed. Subject to any modifications that result following the 60-day consultation period, the new circular will take effect on 1 January 2018.
Global Tax Alert Americas Tax Center 5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto Linda Tang +1 416 943 3421 linda.y.tang@ca.ey.com Mark Kaplan +1 416 943 3507 mark.kaplan@ca.ey.com Phil Halvorson +1 416 943 3478 phil.d.halvorson@ca.ey.com Trevor O Brien +1 416 943 5435 trevor.obrien@ca.ey.com Ernst & Young LLP (Canada), Montreal Albert Anelli +1 514 874 4403 albert.anelli@ca.ey.com Angelo Nikolakakis +1 514 879 2862 angelo.nikolakakis@ca.ey.com Nicolas Legault +1 514 874 4404 nicolas.legault@ca.ey.com Nik Diksic +1 514 879 6537 nik.diksic@ca.ey.com Ernst & Young LLP (Canada), Calgary Karen Nixon +1 403 206 5326 karen.r.nixon@ca.ey.com Mark Coleman +1 403 206 5147 mark.coleman@ca.ey.com Ernst & Young LLP (Canada), Vancouver Eric Bretsen +1 604 899 3578 eric.r.bretsen@ca.ey.com Ernst & Young LLP, Canadian Tax Desk, New York Terry McDowell +1 212 773 6332 terry.mcdowell@ey.com Andrea Lepitzki +1 212 773 5415 andrea.lepitzki@ey.com EY Law LLP, Toronto Daniel Sandler +1 416 943 4434 daniel.sandler@ca.ey.com Manjit Singh +1 416 932 5969 manjit.singh@ca.ey.com EY Law LLP, Calgary David Robertson +1 403 206 5474 david.d.robertson@ca.ey.com EY Law LLP, Montréal Louis Tassé +1 514 879 8070 louis.tasse@ca.ey.com EY Law LLP, Ottawa Roger Taylor +1 613 598 4315 roger.taylor@ca.ey.com
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