Practice David J. Rotfleisch Taxation

Recent tightening of the Voluntary Disclosures Program

The Canada Revenue Agency's VDP and the Gauthier decision

Author: David J. Rotfleisch

TORONTO, September 26, 2019 – The Voluntary Disclosures Program ("VDP") allows taxpayers to correct inaccurate or incomplete information and disclosure information not reported in a tax return that had previously been filed or should have been filed. Those who file under a VDP application that is accepted by the Canada Revenue Agency ("CRA") would owe any taxes owing plus any applicable interest but would generally be provided relief from prosecution and, in some cases, interest and penalties that would have been applied if the taxpayer had not come forward under the VDP. As stated under subsection 220(3.1) of the Income Tax Act, the CRA can waive or cancel all or part of any penalty and interest otherwise payable within a 10-year limit from the relevant tax year.

However, recent trends in the CRA's common practice have seen a general tightening of how the program is run. In Gauthier (2017 FC 1173), the taxpayer had transferred $300,000 to a bank account in the Bahamas. Years later, wanting to put his affairs in order, the taxpayer made a VDP application for the years from 2005 to 2014, within the normal 10-year limit allowed, concerning this Bahamas bank account. The CRA accepted this disclosure and provided relief from penalties and interest for those taxation years. However, utilizing the information provided in the voluntary disclosure, the CRA saw fit to reach beyond the 10-year limitation period to reassess this account from the period from 2004 to as far back as 1980. Consequently, it imposed penalties and interest for unreported income and failure to file tax returns for those years.

The CRA's Assessment of the Original Transfer and the Taxpayer's Grounds for Objection

Subsection 152(4) of the Income Tax Act authorizes the CRA to assess or reassess and add interest or penalties to the taxpayer at any time for a taxation year provided that the taxpayer has made any misrepresentation that is attributable to neglect, carelessness, wilful default or fraud. In this case, the CRA seems to have decided the taxpayer's inability to provide support for the initial transfer of $300,000 was sufficient to deem it as such. The taxpayer objected to the use of his disclosure to reassess previous taxation years noting that it was against the CRA's common practices to reach beyond the period covered by the voluntary disclosure. Traditionally, it has been the CRA's common practice to not apply penalties and interest for years before those covered by the voluntary disclosure. The reasons for doing so are presumably similar to that of most limitation periods, that as long periods of time pass, documentation ends up being lost or disposed of which often means that the taxpayer could have a harder time objecting to the reassessment.

As the jurisdiction of the Tax Court of Canada does not include judicial review of the CRA's discretionary decision making, the taxpayer applied to the Federal Court seeking an injunction prohibiting CRA from reassessing for the earlier years. There, the taxpayer argued that that issuing any assessment concerning the adjustment proposal prepared by the CRA on November 7, 2017, would be contrary to the agreement entered into following the voluntary disclosure. For their part, the CRA disputed the taxpayer's argument that the alleged agreement contained in the letter dated June 17, 2015, and the additional Circular constituted an agreement, arguing that the Circular should not be read literally.

The Outcome in Gauthier and the Future of the VDP

In the end, Justice Martineau agreed with the CRA that the there was insufficient evidence to find a binding agreement, adding that "The public interest — i.e. the orderly application of the ITA — takes precedence here over the financial and other inconveniences that the applicant may face by having ... to follow the normal challenge procedure set out in the ITA." However, he also stated that the more appropriate and effective recourse for raising the admissibility of the assessment based on any agreements or representations made by the CRA was a question better left to the Minister and Tax Court of Canada as they the authority to cancel an assessment.

The implications of the case are disturbing for taxpayers across Canada. It suggests that applying under the voluntary disclosure program is an admission of guilt to either neglect, carelessness, wilful default or fraud to past filings. It's a catch-22 in which the taxpayer applying for the VDP application to avoid penalties, automatically ends being penalized and effectively punished for participating in the VDP. If CRA and the courts continue to hold this position, it will likely have a chilling effect on the VDP in the future.

Tax Tips – Disclose All Relevant Information to Your Lawyer to Avoid Being Reassessed Beyond the Scope of the VDP

The case in Gauthier reflects a wider stance by the CRA to more aggressively pursue past non-compliers. These reassessments add significant uncertainty to the VDP. It's just one more reason to disclose to your Canadian tax lawyer all relevant tax information during the VDP application including information from tax years not covered by the VDP. The information you disclose is protected by solicitor-client privilege and will allow your Canadian and NC tax lawyer to help you navigate the process to get the best possible result from a VDP application.

This article was originally published on Mondaq. David J. Rotfleisch, CPA, CA, JD, is the founding Canadian tax lawyer of Rotfleisch & Samulovitch, P.C., a Toronto-based boutique income tax law firm ( With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. Contact David at

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