Introduction: Key Criteria Of A Successful Voluntary Disclosure Application Include Completeness, Voluntariness, 1-Year Or 1-Reporting-Period Overdue, Potential Penalties, and Payments.
A Voluntary Disclosure Program (VDP) in Canada is a policy offered by the Canada Revenue Agency (CRA) that allows taxpayers, whether individuals, corporations, and trusts, who have failed to comply with their tax obligations, to voluntarily come forward and correct their prior mistakes. In exchange, the taxpayer may be eligible for relief from penalties, reduced interest, and in some cases, immunity from prosecution. Often, taxpayers may not be aware of their non-compliance until many years have passed since the mistake occurred. As the CRA is entitled to assess or reassess tax matters beyond the normal (re)assessment periods, it is therefore necessary for taxpayers to correct their mistakes as soon as possible whenever they discover the issues.
The VDP is designed to encourage compliance by giving Canadian taxpayers the opportunity to fix issues such as undeclared income, unfiled tax returns, or incorrect information in previous filings, without facing the full consequences typically associated with non-compliance. A VDP applicant must meet specific criteria to qualify for relief via the VDP:
- Voluntariness: The application must be made before the CRA initiates any enforcement action or any investigations in relation to the taxpayer’s disclosure. Generally, every taxpayer only has one opportunity to file a VDP application.
- Completeness: The taxpayer must disclose all relevant prior non-compliance.
- Time: The disclosed non-compliance must be at least one year or one reporting period past due.
- Penalty: There must be a potential penalty related to the applicant’s prior non-compliance.
- Payment: The applicant must either include payment of the estimated tax owing, or a request for a payment arrangement, subject to CRA approval.
Every taxpayer normally has only one opportunity to submit a voluntary-disclosure application. A second VDP application is only considered by the CRA under exceptional circumstances beyond the taxpayer’s control and the second application must address a different issue than the first application.
While a voluntary disclosure application can be submitted to the CRA at any given time prior to any CRA actions and investigations, the maximum relief available is subject to the 10-year limitation period. Only interest and/or penalties accrued within the past 10 years from the Effective Date of Disclosure (EDD) of a voluntary disclosure application, the date on which the CRA receives the application, are eligible for relief.
Potential Relief Available Under The VDP: Waiver Of Penalties And Interest & Immunity From Prosecution
If the CRA accepts a VDP application, then the CRA will process the information in relation to the relevant tax years as filed. Potential relief available includes waiver of penalties and interests, and immunity from prosecution, depending under which the track the VDP application falls.
Voluntary-disclosure applications relating to income tax matters may fall under either the General or Limited Program. VDP applications addressing GST/HST issues may fall under General Program, Limited Program, or the Wash Transactions Category. If a voluntary-disclosure application is accepted under any of the three tracks, the applicant will not be referred for criminal prosecution, with regards to the information disclosed in the application.
The three different tracks offer different relief and are subject to specific requirements. The General Program was intended for general Canadian taxpayers who come forward to correct unintentional errors. Maximum relief provided under the General Program includes full penalty relief, cancellation of up to 50% of the interests accrued within the past 10 years, from the EDD of the VDP application.
The Limited Program offers no interest relief provided for an accepted voluntary-disclosure application. Its available relief is more restrictive. An applicant under the Limited Program is considered to have intentionally avoided his or her tax obligations but nevertheless decides to disclose the non-compliance voluntarily, before the CRA takes any actions. If an application is accepted under the Limited Program, the CRA will not impose gross negligence penalties (GNPs) on the applicant but the CRA will charge other penalties, as applicable, against the applicant.
The Wash Transactions Category only accepts applications in relation to GST/HST issues. GST/HST registrants, whose VDP applications are accepted under this track, may be eligible for full penalty and interest relief on the disclosed transactions pursuant to section 280 of the Excise Tax Act.
Milgram Foundation v Canada (Attorney General), 2024 FC 1405: The CRA’s Decision To Reassess After Acceptance Of A Voluntary Disclosure Application Can Be Abusive.
Generally, once a voluntary disclosure application has been accepted, the CRA should not reassess disclosed tax years without justification. Since September 2024, Milgram Foundation became the new guideline for CRA’s decision to reassess after acceptance of a voluntary disclosure application. This decision is considered by our knowledgeable Canadian tax lawyers and others to be a remarkable victory for taxpayers in Canada. Specifically, the Federal Court ruled that the CRA’s decision to reassess a taxpayer after accepting the taxpayer’s VDP application can be abusive.
Milgram Foundation, a non-resident entity in Liechtenstein, filed a voluntary disclosure application under the Voluntary Disclosure Program (VDP) in 2015, covering its 2003 to 2014 taxation years, after it considered it might be a deemed Canadian resident for income tax purposes during those years. At the time of the VDP application, Milgram Foundation disclosed that it was established in 1964, The CRA accepted the VDP application in 2016 after a subsequent audit. However, in 2018, the CRA sought to reassess Milgram Foundation for its 1998 to 2002 taxation years, alleging that Milgram Foundation made misrepresentations and proposed to issue further reassessments. The CRA found that Milgram Foundation had undisclosed investments from 1998 to 2002 and reassessed accordingly. The CRA did not seek to reassess Milgram Foundation for its 2003 to 2014 taxation years.
Milgram Foundation subsequently appealed the CRA’s decision to the Federal Court, arguing that the CRA’s decision to assess after accepting its VDP application constituted an abuse of process, the decision was unreasonable, and the decision lacked justification as the CRA’s decision only relied upon information previously provided by Milgram Foundation in the application. Milgram Foundation asked the Court to consider whether the CRA’s decision breached Milgram Foundation’s legitimate expectations after the CRA accepted its VDP application. Specifically, Milgram Foundation argued that the CRA’s acceptance of its voluntary disclosure application meant that there was a binding agreement for the CRA. The binding agreement required the CRA not to reassess Milgram Foundation for any taxation years prior to the Effective Date of Disclosure.
The CRA challenged whether the Federal Court had jurisdiction to hear the matter, as it concerns a tax assessment issued by the CRA. Additionally, the CRA took the position that since Milgram Foundation’s voluntary disclosure application only covered information for its 2003 through 2014 taxation years, the CRA’s acceptance of the VDP application did not preclude CRA from reassessing Milgram Foundation’s other taxation years.
Based on the 2024 Supreme Court of Canada decisions in Dow Chemical Canada ULC v. The King, 2024 SCC 23 and its companion appeal, Iris Technologies Inc v. A.G. of Canada, 2024 SCC 24, the Federal Court first confirmed that it was within its jurisdiction to review the CRA’s decision as it pertains to the procedure of issuing the decision to reassess but not the ultimate reassessment. The Federal Court then found that while an acceptance of a VDP application does not create a binding agreement between the CRA and the applicant, as an administrative agency, the CRA must ensure that CRA decisions are align with past practice and administrative adjudications. The court further held CRA’s decision to reassess a taxpayer without valid reasons after accepting the taxpayer’s VDP application violated principles of fairness and amounted to an abuse of process. By accepting Milgram Foundation’s disclosure, the CRA essentially acknowledged that the VDP application was complete. Although the CRA retained the right to audit, the CRA should not reassess the taxpayer unless there is sufficient evidence of misrepresentation due to neglect, carelessness, wilful default, or fraud in relation to the relevant tax years. The CRA cannot claim misrepresentation or intentional omission of information by the taxpayer solely based on information that was previously provided in the taxpayer’s previously accepted voluntary disclosure application. Therefore, an arbitrary reassessment following a VDP acceptance would deviate from the CRA's established practices and the Federal Court has the authority to overturn the decision to reassess if the CRA cannot provide sufficient justifications.
Pro Tax Tips – Make Sure That Your Voluntary Disclosure Is Complete And Voluntary
A successful VDP application needs to be complete and voluntary, notwithstanding other criteria. A complete application generally requires more time to be prepared. Since the Federal Court recognized the finality of CRA’s acceptance of a voluntary disclosure application in Milgram Foundation, it is very important to ensure completeness of a VDP application. If the application is incomplete, it could be rejected. Incompleteness of an application, even after the application was accepted by the CRA, may provide the CRA with justifications to revisit the disclosed tax years.
Yet, to ensure that a VDP application is voluntary, a taxpayer should file a voluntary disclosure application as soon as he or she discovers the non-compliance. It is therefore important for an applicant to conduct a thorough due diligence review within a relatively short period of time prior to submitting the VDP application. If you require legal advice and assistance on conducting a due diligence review of your tax matters or on preparation of a voluntary disclosure application, please contact one of our expert Canadian tax lawyers.
Frequently Asked Questions
Can CRA Reassess Me After My Voluntary Disclosure Application Has Been Accepted By The CRA?
Whether the CRA can reassess a tax year after accepting a Voluntary Disclosure Program (VDP) application depends on the specific circumstances of each case. For instance, if you submitted a VDP application covering tax years prior to 2022 and the CRA accepted it, the CRA should not reassess those earlier tax years—up to and including 2022—unless it uncovers evidence of misrepresentation, which could be due to neglect, carelessness, willful default, or fraud related to those years. In such cases, the CRA may reassess the taxpayer accordingly. In addition, any tax years that were not part of the original VDP application, such as 2023 or future years, remain outside the scope of the accepted disclosure. The CRA reserves the right to review and reassess these later years if necessary. Therefore, while a successful VDP application provides protection for the years disclosed, it does not shield taxpayers from future CRA actions on tax years not included in the application.
What Should I Include In My Voluntary Disclosure Application?
A voluntary disclosure application must be complete and voluntary to be accepted by the CRA, subject to other criteria. There is a bit of competing interest as a complete disclosure may require extended amount of time for due diligence review but a voluntary disclosure must be filed before the CRA takes any actions against the relevant taxpayer and tax years. A voluntary disclosure application should include information in relation to all prior non-compliance, whether any penalties or interests are applicable. The application should also include proof of payment or a request for payment plan in relation to the estimated taxes owing. The application should also include information in relation to tax returns that are at least one year or one reporting period overdue.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.