Voluntary Disclosures: Penalties Applied for Prior Years

Under the voluntary disclosures program (VDP), the CRA's common practice has been not to apply penalties and interest for years prior to those covered by the voluntary disclosure. But the release of Information Circular 00-1R6 on December 15, 2017 reflects a general tightening of the program; past practice may not be a reliable guide to the future. In Gauthier (2017 FC 1173), the CRA chose not to follow its policy on prior years, and the taxpayer's request for judicial review was denied. This practice of reassessing prior years may become increasingly common, given that the CRA's apparent view that the proliferation of tax information exchange agreements with other countries has improved its ability to find non-compliers.

In Gauthier, the taxpayer transferred $300,000 to a Bahamas bank in 1978. In an effort to put his affairs in order for his heirs, the taxpayer made a VDP disclosure for 2005 to 2014 taxation years (the normal 10 years allowed) with respect to the Bahamian bank account. The CRA accepted the disclosure and provided relief for penalties and interest for those taxation years. However, the CRA imposed penalties and interest on unreported income and failure to file T1135s for the 1980 to 2004 taxation years based on the information provided in the VDP disclosure. The taxpayer's inability to provide support for the initial transfer of $300,000 appears to have been interpreted by the CRA as misrepresentation attributable to neglect, carelessness, or wilful default, which gives the CRA authority to assess a taxpayer's taxation years beyond the normal limitation period (subsection 152(4)).

The taxpayer argued that the assessment of the earlier years was contrary to the agreement entered into under the VDP and the CRA's usual practice. The FC disagreed with the taxpayer because there was no evidence suggesting that the CRA had agreed not to undertake reassessments for earlier taxation years. Furthermore, judicial review focuses on the reasonableness of the CRA's decision and grants relief when there are procedural defects. Because there was no evidence of unreasonableness or procedural defects, the FC found no merit in preventing the minister from exercising her discretion to reassess. The FC also pointed out that the orderly application of the law takes precedence over the financial and other inconveniences a taxpayer may be facing.

It is unclear why the CRA decided to depart from its usual practice. Paragraph 11 of IC 00-1R6 states that the minister's decisions under the VDP would be made in a manner that promotes the objects of the Act. The explanatory notes accompanying subsection 220(3.1) state that this provision allows the minister to waive interest and penalties when extraordinary circumstances outside a taxpayer's control have prevented the taxpayer from meeting his or her income tax obligations. It can thus be said that an object of the Act is to provide relief when the non-compliance does not arise from the taxpayer's own conduct. On this premise, the CRA's reassessment in the Gauthier case may have merit. That said, the reassessment substantially increases the uncertainty associated with a VDP disclosure. Taxpayers may well be discouraged from coming forward and becoming compliant under the VDP if they suspect that the CRA may reassess earlier taxation years not subject to a VDP disclosure.

Priscila Padilla
Grant Thornton LLP, Toronto
[email protected]


Canadian Tax Focus
Volume 8, Number 2, May 2018
©2018, Canadian Tax Foundation