As Canada’s federal Goods and Services Tax / Harmonized Sales Tax (GST/HST) regime continues to become more complex, taxpayers are faced with numerous compliance challenges. Recognizing that unintended mistakes will be made, the Canada Revenue Agency (CRA) has a Voluntary Disclosure Program (VDP) which allows taxpayers to disclose such errors and/or omissions. When the conditions of the program have been met, a properly made application will allow taxpayers to rectify past tax mistakes and minimize the application of penalties and/or interest—this can even alleviate the threat of prosecution in some instances.
Canada’s GST/HST is created by the Excise Tax Act (ETA). The ETA creates not only the GST/HST regime, but it also sets out the tax compliance and filing obligations of taxpayers. Part of this regime includes various interest and penalty provisions that may apply where a taxpayer fails to properly meet their obligations as set out in the legislation. The Voluntary Disclosure Program is rooted in Section 281.1 of the ETA which provides the Minister of National Revenue with discretionary authority to waive any otherwise applicable penalties and interest imposed on a taxpayer by the ETA. The Minister has delegated authority to exercise this discretion to certain officials within the Canada Revenue Agency.
The CRA created a principles-based approach to administering this discretionary authority on behalf of the Minister known as the Voluntary Disclosures Program. The program rules and how they pertain to the GST/HST can be found in the CRA’s administrative guide New Memorandum 16-5 titled “Voluntary Disclosures Program“.
It is worth noting that this program was revamped significantly in December of 2017. Disclosures, even those which related to mistakes made before 2018, must comply with the current guidelines as set out in New Memoranda 16-5.
Although the nuances of the program have changed over time, the underlying intention of the program continues to be the promotion of voluntary compliance by taxpayers. The program in its current form is intended to ensure that taxpayers who are compliant are in no worse position than those who are not compliant.
As the CRA states:
The VDP is not intended to serve as a vehicle for registrants to intentionally avoid their legal obligations under legislation administered by the CRA.
[Paragraph 6 of New Memo 16-5]
Types of GST/HST Errors and Omissions That May Be Disclosed
There are several scenarios where a taxpayer may wish to make a GST/HST-related voluntary disclosure. This could include situations where the taxpayer failed to properly collect GST/HST on a revenue stream, failed to remit taxes collected, failed to file a tax return when required to do so, or claimed GST/HST tax credits, refunds, or rebates which the taxpayer was not eligible to receive.
Making an Application for Disclosure Under the Program
There are five conditions that must be met for an application under the voluntary disclosure program to be considered valid and therefore accepted by the CRA.
The taxpayer must show that the application meets the following criteria:
- The disclosure is voluntary. Generally, this means the disclosure has been made prior to any enforcement action having been commenced by the CRA.
- The disclosure is complete. The disclosure package should include all tax returns, tax schedules, and any other information required to ensure the error or omission is fully disclosed and rectified.
- The information disclosed would otherwise result in the application of potential penalty and/or interest.
- The information disclosed relates to an error or omission that is at least one reporting period past due.
- Payment of the estimated owed tax is enclosed with the disclosure, although in certain instances the CRA may be willing to accept a payment arrangement instead.
Should any one of these conditions not be met, it is possible the CRA will not accept the application, resulting in the taxpayer being subject to any applicable penalty and interest provisions.
How Applications are Processed Within the Program
When a taxpayer makes an application for disclosure under the current program, the application will be reviewed and, if accepted, may be processed under one of three different categories. The categories have different requirements for acceptance and provide different types of relief to the taxpayer.
Category 1—GST/HST “Wash Transactions”
Category 1 specifically provides relief for applications involving GST/HST wash transactions that are eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1, Reduction of Penalty and Interest in Wash Transaction Situations. For examples of eligible wash transactions, please see the CRA memorandum, however, they can be thought of as situations where the error did not result in a negative impact on the federal treasury.
Under Category 1, 100% of penalties and interest will be relieved. However, all outstanding taxes will need to be paid.
Category 2—General Program
Category 2 provides relief for applications disclosing routine non-compliance or tax reporting errors. Under Category 2, 100% of penalties and 50% of interest will be relieved. However, all outstanding taxes will need to be paid.
Category 3—Limited Program
Category 3 provides limited relief for applications that disclose non-compliance where there is an element of intentional conduct on the part of the registrant or a closely related party.
Under Category 3, any applicable gross negligence penalties will be relieved only. Any other penalties and interest will be applied in full. However, all outstanding taxes will need to be paid.
It should be noted that when an application under the program is accepted, the CRA will not refer the taxpayer for criminal prosecution.
The length of time it takes for a disclosure application to be processed depends on several factors including the complexity of the disclosure and the number of disclosures already in the queue. It is our experience that a moderately complex GST/HST disclosure will take about a year from the date of the initial application until it has been finally processed and a determination made.
Results of the Disclosure
Upon receipt of an application under the program, the CRA will decide to either accept the application (more information may be requested as part of the review), or to deny the application.
When the CRA accepts an application, the taxpayer will receive a formal written response indicating the application has been accepted and will identify in which category the application has been placed—Wash, General, or Limited.
When the CRA denies an application, the taxpayer will receive a formal written response citing the reasons that the application has been denied. It is important to note that when the CRA denies an application because further information was requested, but not provided within an appropriate timeframe (typically 90 days from the effective date of the disclosure), the CRA will deny any later application for the same matter.
CRA is NOT REQUIRED to automatically grant relief to every taxpayer who makes an application within the program. Furthermore, the CRA is generally of the view that a taxpayer will only be entitled to make one application under the voluntary disclosure program. The program is not intended to allow the same taxpayer to make repeated disclosures of multiple mistakes.
There have been countless instances where applications have not been accepted— typically on the grounds that one or more of the conditions have not been met. Judicial review has confirmed that the CRA has the authority to create the program and choose what to accept/not accept (so long as the rules of administrative law are properly followed).
There are, however, procedures that allow for a second administrative review of an application denial. If such a second review also results in a denial, the taxpayer may seek a judicial review through the Federal Courts.
The Voluntary Disclosure Program is a useful tool for taxpayers who have identified tax errors or omissions. It would be prudent, however, for a taxpayer to thoroughly review the requirements and benefits of the program before making a disclosure to ensure the best chance of an application being accepted.
This newsletter content should be used for general informational purposes only and not as a substitute for consultation with professional tax, legal, or other competent advisors. Before making any decision or taking any action based on the information contained on this website, you should consult with a DMA professional.
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