Tax Dispute Resolution: Monthly Review Vol. 1, No. 1
The Year 2017 In Review
When it comes to tax controversies in Canada, 2017 will be no doubt be chiefly remembered for the government’s July tax proposals related to private corporations. There were other notable items in the world of tax dispute resolution that are worth revisiting, however. Here is our select summary of things you might want to note for the coming year:
Eligibility for the Voluntary Disclosure Program
The Canada Revenue Agency has now clarified that the revisions to the Voluntary Disclosure Program (“VDP”) will be effective March 1, 2018. These changes restrict eligibility for the program. The changes were prompted, at least in part, by CRA’s concern that the VDP not be used as a vehicle for some taxpayers to avoid their lawful tax reporting obligations. You can find our previous blogs about these changes here and here.
What Do You Need to Know About the VDP Changes?
The previous requirements for acceptance into the program will remain and are that:
- the disclosure must be voluntary;
- the disclosure must be complete;
- it must involve the application of a penalty; and
- it must relate to a taxation year that is at least one year past due.
CRA has added the condition that taxpayers include payment of the estimated tax owing with their VDP application. If they are unable to make payment of the estimated tax at the time of the application they may be considered for payment arrangements, subject to approval from the CRA Collection’s Division. No guidance is given as to eligibility for payment arrangements beyond the requirement that full disclosure of taxpayer assets and liabilities will be required.
Under the changes there are now two tracks for disclosures, a Limited Program and a General Program. If an application is accepted under the Limited Program taxpayers are limited to an assurance that they will not be referred for criminal prosecution and will not be charged gross negligence penalties in relation to tax on amounts reported.
The Limited Program will generally be for cases where there is an element of intentional conduct on the part of the taxpayer. CRA has listed a number of factors relevant to consider in assessing these types of cases, as follows:
- efforts made to avoid detection through the use of offshore vehicles or other means;
- the dollar amounts involved;
- the number of years of non-compliance;
- the sophistication of the taxpayer; and
- the disclosure is made after an official CRA statement regarding its intended specific focus of compliance, (such as the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to taxpayers working in a particular sector about a compliance issue).
The General Program
Under the General Program taxpayers will be assured that they will not be referred for criminal prosecution, they will have all penalties waived and they may be granted partial interest relief. The partial interest relief generally translates to 50% of the applicable interest for the years preceding the three most recent years for which there was a required tax filing.
There will be a considerable amount of discretion exercised by CRA under the new VDP, including discretionary consideration as to what constitutes intentional non-disclosure and what are acceptable payment arrangements. Although CRA has commented that they expect that experienced VDP officers will reasonably exercise discretion, we anticipate significant potential for challenges of such decisions.
What Should You Do as a Result of the Changes?
First of all, if you have clients who are considering making a voluntary disclosure, try to act quickly to get their application in before March 1.
As mentioned, the changes to the VDP were in response to CRA’s concern that the VDP not be used as a vehicle for some taxpayers to avoid their lawful tax reporting obligations. However, there are many unintentional situations where the changes to the program will negatively impact taxpayers.
Estate administrators will be particularly at a disadvantage where they discover unreported income previously unknown to any family member. They may not be able to put forward information to demonstrate that the non-reporting was not as a result of intentional conduct.
In our experience, clients who make voluntary disclosure applications often unintentionally fall behind in reporting for a number of years, to the point that they are afraid to come forward. Knowingly having failed to report significant amounts of income can support an inference of intentional non-reporting, which is tantamount to an admission of tax evasion. Serious considerations would need to be made as to how to frame an application, especially where there is a risk that such clients may not be able to enter into acceptable payment arrangements but would otherwise qualify for the Limited Program.
Once March 1 rolls around there will be many cases where taxpayers will have to give careful consideration to the manner in which they apply for the VDP. Consultation with legal advisors is advisable.
Fixing Tax Mistakes: What’s Possible After Fairmount Hotels?
For a number of years, tax practitioners have looked to equitable remedies, including the doctrine of rectification, to fix errors in planning and implementing commercial transactions that have led to unintended tax liabilities. While not technically a decision from 2017, the implications of the 2016 Supreme Court of Canada decision in Fairmont Hotels Inc. are still developing.
The Supreme Court ruled that, while courts can rectify agreements that have been inaccurately recorded in commercial documents, they cannot use rectification to change the agreements themselves. Taxpayers must now use extra caution in entering into commercial documents to ensure that all intentions, including tax intentions, form part of the parties’ agreements. A number of cases from different provinces have adopted the decision in 2017 to hold that the commercial agreements in question did not contain the required tax intentions. Rectification is still available to avoid a tax disadvantage arising from a transaction, but only where it is established that avoiding the tax disadvantage was the original motivation for the transaction. However, the Fairmount case certainly restricts the number of times when rectification will be available to fix tax mistakes.
In our view, superior courts retain wide jurisdiction to relieve taxpayers from the effect of their mistakes. However, there is now some question of which remedies might still be available, and in what circumstances? The Alberta Court of Appeal recently declined to rely upon its general equitable jurisdiction to relieve Harvest Operations Corp. of its mistakes where doing so would undermine the rectification doctrine. However, equitable remedies can take different forms, such as rescission of documents. Although rectification will now apply in a more limited range of cases there are still some circumstances where other equitable remedies are available to fix tax mistakes.
CRA Audit Powers: Reminders That There Can Be Limits
When we assist clients undergoing tax audits, we are usually confronted with Canada Revenue Agency requests, or demands, for extensive client records. In 2017 the Federal Court of Appeal issued the decision in BP Canada Energy Company v. Canada (Minister of National Revenue) which serves as a reminder that access to client records is not unrestricted.
In BP, CRA sought to compel the company to provide its tax accrual working papers. Publicly-traded companies are required to prepare these documents pursuant to various securities regulations and accounting standards. BP Canada was reluctant to produce them, believing that by doing so they would provide a roadmap to CRA auditors of its potential tax exposure.
The Court noted that CRA’s questions prompting the original request for these documents had been answered by BP. Acceding to CRA’s demand for the records, therefore, would have amounted to affirmation that CRA has general and unrestricted rights to access taxpayer information. The Court held that CRA was not entitled to this information.
In doing so, the Court held that BP Canada had no choice but to prepare tax accrual working papers as part of its financial reporting obligations. Permitting CRA to access the documents in a general and unrestricted manner would be tantamount to forcing the taxpayer to perform a self-audit.
Later in 2017 the Federal Court denied CRA’s request to compel Cameco Corporation to produce 25 employees for interviews as part of an audit. Relying on the principle from the BP Canada decision that CRA is not vested with unlimited audit powers, the Court held that the time and cost associated with the request was not proportional to the information being sought. It was again recognized by the Court that while CRA has broad powers to administer and enforce the Act, these powers are not unlimited.
These cases are helpful in setting limits to CRA demands for records and useful for the purpose of managing the audit process. The cases both reinforce the point that while CRA has extensive rights to examine client records, they are not without limits. There must be both a legitimate audit purpose and, in some cases, Courts are willing to consider if audit requests are proportional to the resources that clients will have to expend in meeting the requests.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the Tax Dispute Resolution group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.
Canada (Attorney General) v. Fairmount Hotels Inc. 2016 SCC 56
Graymar Equipment (2008) Inc. v. FRPD Investments Limited Partnership, 2014 ABQB 154 at para 76. This decision was written by Justice Brown, while he was on the Alberta Court of Appeal. Justice Brown also wrote the majority decision in the Fairmount Hotels case.
Douez v. Facebook, Inc. 2017 SCC 33 at para 37
 2017 ABCA 393
 2017 FCA 61
Canada (National Revenue) v Cameco Corporation, 2017 FC 763 (under appeal).