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December 21, 2017 Canada Revenue Agency revises GST/HST Voluntary Disclosures Program Executive summary On 15 December 2017, the Canada Revenue Agency (CRA) released Goods and Services Tax/Harmonized Sales Tax (GST/HST) Memorandum 16.5, Voluntary Disclosures Program, as well as a separate document relating to the Voluntary Disclosures Program (VDP) for income tax and source deductions, Information Circular IC00-1R6. These documents follow the CRA's proposed changes released 9 June 2017 and the closing of the consultation period 8 August 2017. See previous EY Global Tax Alerts, Canada Revenue Agency releases proposed changes to income tax Voluntary Disclosures Program, and Canada Revenue Agency releases proposed changes to GST/HST Voluntary Disclosure Program, both dated 22 June 2017. Notably, the CRA is separating the VDP policy for disclosures involving income tax and source deductions from the VDP policy for GST/HST, excise tax, excise duties, softwood lumber products export charges and air travelers security charges. Major changes to the CRA's VDP policy for GST/HST include the following:
There are several significant differences between the June 2017 proposals and those contained in Memorandum 16.5. These changes are discussed in more detail below. The new VDP policies will apply as of 1 March 2018. For a registrant to qualify for VDP relief under the current regime, the CRA must receive the application, including the applicant's name, on or before 28 February 2018. Detailed discussion Background The VDP applies to disclosures relating to 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, 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 CRA released proposed changes to the VDP on 9 June 2017, which were outlined in a draft GST/HST Memorandum (the June 2017 proposals). Submissions were invited over a 60-day online consultation period. During this process, a number of concerns were raised, including whether:
This Alert focuses on the VDP policy for GST/HST, excise tax, excise duties, softwood lumber products export charges, and air travellers security charges. The CRA has also released 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. Refer to EY Global Tax Alert, Canada Revenue Agency revises income tax Voluntary Disclosures Program, dated 20 December 2017, for information on the VDP policy changes for disclosures involving income tax and source deductions. Introduction of three tracks The CRA will 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 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:
Track 3 – Limited Program: Limited relief may be provided for applications disclosing non-compliance where there is an element of intentional conduct on the part of the registrant or a closely related party. This includes (without limitation) situations such as the following:
For the purposes of determining the category under which to process a VDP application, the CRA will consider factors such as:
Notably, VDP applications by "large corporations" (i.e., corporations with gross revenue exceeding CA$250 million in at least two of their previous five taxation years, and any related entities) will generally be considered under the Limited Program. This measure did not appear in the June 2017 proposals for GST/HST, although it did appear as part of the VDP proposals relating to income tax. During the consultation process, various stakeholders had raised concerns about limiting VDP relief where large corporations were involved. The grounds for limiting access to the VDP on the basis of a corporation's annual revenues were unclear at best and arguably contravened principles of administrative fairness. Nevertheless, it appears the CRA has opted to extend the large corporation policy to the GST/HST VDP, although it is arguable the CRA will apply a more lenient administration policy in other respects. For example, the June 2017 proposals indicated the Limited Program would apply for applications disclosing major non-compliance, including any circumstance in which a high degree of registrant culpability contributed to the compliance failure. In contrast, Memorandum 16.5 specifically refers to an element of intentional conduct. Arguably, this change indicates the CRA will require a higher degree of culpability before referring a VDP application to the Limited Program. In addition, the June 2017 proposals indicated situations involving large dollar amounts, sophisticated registrants and multiple years of non-compliance would generally be viewed as non-compliance suitable for processing under the Limited Program. As noted above, these are now "factors" the CRA will consider in determining the appropriate category for VDP processing. Conditions of a valid application In order for a VDP application to qualify for relief, the application must:
In general, the CRA will not consider an application to be voluntary if one of the following conditions exists:
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:
This differs from the June 2017 proposals, which had indicated that for Track 2 treatment, the application would have to be made for the six calendar years before the application's filing date. A registrant may submit a written request for additional time to submit required information if extraordinary circumstances prevent the registrant from providing the information. If the applicable books and records no longer exist, the registrant should make all reasonable efforts to estimate the relevant amounts. Under current policy, a VDP application must involve the application or potential application of a penalty. Memorandum 16.5 states the CRA will consider disclosures involving the application or potential application of interest as well. Registrants may not seek relief through the VDP if neither a penalty nor interest applies, although the CRA suggests submitting the information for normal processing regardless. VDP applications must include information relating to a reporting period that is at least one reporting period past due. However, Memorandum 16.5 indicates the CRA will consider an application that also includes more recent information. Registrants will be required to include payment of any related tax when submitting a VDP application. The CRA may consider alternative payment arrangements in certain situations. 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 CRA may also require security in certain circumstances. Interest relief Where the CRA accepts a VDP application, interest relief in respect of assessments resulting from the application is available as follows:
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 under the Limited program. However, the CRA will not assess a gross negligence penalty even if the facts establish that the registrant is liable for such a penalty. Prosecution relief Where the CRA has accepted a VDP application, it will not refer a registrant for criminal prosecution for tax offences. Circumstances where no VDP relief will be granted In general, the CRA will not consider VDP applications in the following circumstances:
Application form The CRA recommends that registrants use Form RC199, Voluntary Disclosures Program (VDP) Taxpayer Agreement, for all applications made under the new policy. A registrant that does not use Form RC199 should include all of the information requested in that form. This represents a more lenient approach than the June 2017 proposals, which had indicated a registrant must use Form RC199 for VDP applications. The application's effective date of disclosure is the date the CRA receives a completed and signed application. Where a registrant has received assistance from an advisor with respect to the application, the advisor's name should generally be included in the application. However, if a registrant's authorized representative submits the application, the form must be signed by both the registrant and the authorized representative. No-name disclosure 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.1 The CRA has confirmed it will provide registrants with "an opportunity to participate in preliminary discussions… on an anonymous basis," and that such discussions will continue to be informal and non-binding. If complex or technical reporting issues are involved, the CRA may refer a registrant to a CRA official in a specialized audit area for discussion on an anonymous basis. Notably, such discussions do not constitute acceptance into the VDP. As a result of the information provided in Memorandum 16.5, it is not clear whether the CRA will administer no-name disclosures in full accordance with current policy. Second VDP application In accordance with current policy, a registrant will generally be 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 are beyond the registrant's control and 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. ——————————————— 1 See IC 00-1R5, Voluntary Disclosures Program, 26 – 30. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), East
Ernst & Young LLP (Canada), Central
Ernst & Young LLP (Canada), West
——————————————— PDF version of this Tax Alert
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