Voluntary Disclosure Tax Tips & Other Information

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The following are tax tips that are relevant to voluntary disclosures.

Purpose of Voluntary Disclosure
The Canada Revenue Agency's (CRA) Voluntary Disclosures Program (VDP) also known as Tax Amnesty or Tax Pardon is a fairness initiative that gives taxpayers the opportunity to come forward and to correct inaccurate or incomplete information, or to disclose previously unreported information, without incurring penalties or income tax evasion charges or prosecution.

You must meet 4 Conditions to qualify for a valid disclosure.
     (a) The CRA determines that the disclosure is voluntary;
     (b) The CRA determines that the disclosure is complete;
     (c) The disclosure involves a penalty; and
     (d) The disclosure must include information that is:
          (i) at least one year past due, or
          (ii) if less than one year past due,
          not initiated simply to avoid the late filing or installment penalties.

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Lawyer-Client Privilege extended to Accountants
Communication between a taxpayer and his/her accountants is not subject to privilege and can be seized by the authorities including the Canada Revenue Agency. However, communications made and materials prepared by accountants are privileged when the accountant is the client’s agent for the purpose of obtaining legal advice. That is, when the lawyer hires the accountant.

The pitfall of using your own Accountant
A lawyer may hire the client’s own accountant to prepare the tax filings for the voluntary disclosures. However, if a settlement cannot be reached with CRA, third-party liability rules may preclude the accountant from acting further for the client because of his knowledge of the possible tax evasion. This is why many lawyers and clients prefer using outside accountants to prepare the required tax filings.

Policy Change - October 27, 2005
No-Name Voluntary Disclosure Policy

The no-name disclosure policy provides that should a taxpayer decide to proceed with a no-name (hypothetical) disclosure the identity of the taxpayer must be provided to the CRA within 90 calendar days from the "effective date of disclosure". The "effective date of disclosure" for a no-name disclosure is either the date of receipt by a CRA tax services office of a written voluntary disclosure submission or the receipt of a completed form VDP-1 - Taxpayer Agreement Form, as used for the VDP.

During this 90-day period the taxpayer is protected from the application of penalty and from prosecution. The no-name voluntary disclosure file will be closed, without further contact from the CRA, if at the end of this 90-day period the identity of the taxpayer remains unknown. No extension to this 90-day period will be allowed to identify the taxpayer.

In addition, a final and complete submission of the disclosure is expected within these 90-days.

Filing your 2005 income tax return
If you are hesitating about filing your 2005 Canadian personal income tax return (T1) by the deadline of May 1, 2006 because you have not filed returns for previous years, you should make a voluntary disclosure (tax amnesty application) with the Canada Revenue Agency (the Canadian income tax department) and file your 2005 return on time.

A voluntary disclosure (tax amnesty) application
can be submitted to the Canada Revenue Agency (Canadian tax department) for an individual even if the individual is a shareholder or director of a corporation and the corporation is the subject of a request to file returns or an audit.

Tax disclosure must be “substantially” complete
The position of the Canada Revenue Agency (Canadian tax department) is that a voluntary disclosure (tax amnesty) must be substantially complete in order to be accepted as valid. However a taxpayer must only make his reasonable best efforts to ensure that his disclosure is substantially complete, rather than meet some arbitrary test as to what constitutes completeness.

VD may be accepted, even if you received a note from CRA
A voluntary disclosure (tax amnesty) application may be considered to be voluntary if a computer generated notice to file a return was generated by the Canada Revenue Agency (Canadian tax department) if the notice was not received by the taxpayer or if a significant amount of time has passed since the date of the last notice and the date of the disclosure.

Interest reduction & relief
The Canada Revenue Agency (Canadian tax department) has recently changed its rules for interest reduction on a voluntary disclosure (tax amnesty application). They will no longer waive or reduce interest for years prior to 1995

Pension income is taxable
Foreign pension income must be included in your tax returns. If you haven’t done so, you can apply for a voluntary disclosure to report these amounts.

Remuneration to family members may be deductible, even when filing tax returns under the VDP.
In the recent Tax Court of Canada income tax case of Aprile v The Queen the court allowed the taxpayer to deduct $7,000 in expenses paid to his 11 and 13 year old sons. The taxpayer testified as to the exact duties performed by each son, including the number of hours worked. He also testified that he paid his sons in kind rather than by way of cheque.

CRA powers of inquiry & investigation
The Canada Revenue Agency (the Canadian income tax department) has wide powers of inquiry and investigation under the Canadian Income Tax Act, including the power to demand records and information. A person who refuses to comply with the requirement to provide information is subject to prosecution under section 238 of the Tax Act. Consider retaining a Canadian taxation lawyer for assistance.

CRA powers subject to Canadian Charter of Rights
Once the Canada Revenue Agency (the Canadian income taxation department) commences an investigation to look for evidence of tax evasion, the protections afforded by the Canadian Charter of Rights are applicable and CRA can no longer use its statutory audit and investigation powers such as the requirement to provide information set out in the Income Tax Act

Penalties on unreported income
In the case of Boucher v. The Queen, 2004 FCA 46, the Federal Court of Appeal held that penalties can be applied for unreported income even if the unreported income is offset by losses of previous years.

Keeping original Documents
If CRA (Canada Revenue Agency) has challenged any Canadian income tax returns that you have filed, be sure that you keep all original documents related to the year being challenged until the matter is finally settled.

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Thanks to Rotfleisch & Samulovitch for providing some of the above tips.