From: AlanBaggett@volcanomail.com   
      
   Canada: When Is Voluntary Disclosure Voluntary?: CRA SOTW   
      
   21 August 2012  Article by Elsa Adamick    
      
   In the recent decision of Worsfold v. The Queen (2012 FC 644), the Federal   
   Court held that a taxpayer's disclosure under the Voluntary Disclosures   
   Program (the "VDP") was "voluntary", even though the Canada Revenue Agency   
   (the "CRA") had started an    
   enforcement action against a related party. Worsfold confirms that a link   
   between the enforcement action and the disclosed information is what is   
   important—not a link between the parties—when considering whether a   
   disclosure made alongside an    
   existing enforcement action is voluntary. Also, given that the sequence of   
   events was integral to the findings in this case, this decision underscores   
   the importance of keeping detailed records at every stage of a voluntary   
   disclosure.   
      
   As most tax practitioners know, the VDP allows taxpayers to voluntarily   
   correct inaccurate or incomplete information, or disclose information not   
   previously reported in previous dealings with the CRA. In order to be "valid",   
   a disclosure must meet four    
   conditions: (i) it must be voluntary, (ii) it must be complete, (iii) it must   
   involve the application or potential application of a penalty, and (iv) it   
   must generally include information that is more than one year overdue. If the   
   taxpayer's disclosure    
   is accepted as valid, the Minister may exercise her discretion under   
   subsection 220(3.1) of the Income Tax Act (the "Act")1 to cancel or waive   
   penalties or interest otherwise payable under the Act.2 As the VDP is purely   
   an administrative program, no    
   appeal to the Tax Court is available if the CRA decides that the disclosure   
   does not satisfy the four requirements. Instead, a dissatisfied taxpayer may   
   request a second level review within the CRA, and if the disclosure is again   
   deemed invalid, the    
   taxpayer may apply for judicial review to the Federal Court on the basis that   
   the decision is unreasonable.   
      
   In Worsfold, the principal applicant was a permanent resident of Canada who   
   had not filed any tax returns or reported income to the CRA since his arrival   
   to Canada in 2001. He was a director of a Canadian company (Stoneridge Inc.)   
   in which he held a non-   
   controlling, indirect, one-third interest. He was also the sole director and   
   shareholder, and employee, of a British Virgin Islands company that provided   
   management consulting services. The other applicants were his wife, the   
   British Virgin Islands    
   company, and a family trust whose trustees included the principal applicant   
   and his wife.   
      
   In this case, the timeline of events was important. The principal applicant   
   had contacted a tax lawyer in September 2005 about "tax amnesty", after which   
   he scheduled a meeting with the lawyer for October 5, 2005. Two days before   
   the scheduled meeting, a    
   CRA auditor advised Stoneridge Inc.'s secretary that the CRA was planning an   
   audit of Stoneridge Inc. On October 5, 2005, the principal applicant met with   
   the tax lawyer, who, on the same day, submitted a voluntary disclosure on the   
   principal applicant's    
   behalf. The other applicants' disclosures were submitted later in connection   
   with the primary applicant's disclosure. At both the first and second level   
   review stages, the CRA decided that all of the applicants' disclosures were   
   invalid because they were    
   not voluntary. The primary reason given was that the CRA had initiated an   
   audit on a related taxpayer (i.e., Stoneridge Inc.) prior to the date of the   
   disclosures. The CRA policy documents applicable at the time provided that, in   
   determining whether a    
   disclosure was voluntary, an officer could consider whether it was made with   
   the knowledge of an audit, investigation, or other enforcement activity that   
   had been initiated by the CRA, and in some cases, could consider whether there   
   had been enforcement    
   activity on "related program lines, partners of the taxpayer, or corporations   
   related to the taxpayer". Further, the CRA's internal VDP Guidelines stated   
   that if a VDP officer discovered that enforcement actions had been taken   
   against a disclosing    
   taxpayer, the following questions should be asked:   
      
    Was any direct contact made with the client or is the client likely to   
   have been aware of the enforcement action?    
    Is it likely that the CRA would have uncovered the information being   
   disclosed based on this enforcement action?    
      
   If the answer to either of these questions is "No", the disclosure may be   
   considered voluntary. Clients should be given the benefit of the doubt.   
      
   Significantly, in the second level review decision, the VDP officer noted that   
   it was reasonable to expect that the secretary or accountant of Stoneridge   
   Inc. would have immediately informed the principal applicant about the audit   
   of the company. Thus,    
   it was also reasonable to conclude that the principal applicant's disclosure   
   was made with knowledge of the audit. With respect to the other applicants,   
   the VDP officer found that their disclosures were not voluntary because it was   
   reasonable to believe    
   that their information disclosed to the CRA would have been discovered during   
   the course of the Stoneridge Inc. audit. The applicants applied for judicial   
   review.   
      
   At the Federal Court, the applicants argued that the VDP officer's decision   
   was based on two unreasonable findings of fact: (i) the principal applicant   
   had knowledge of the Stoneridge Inc. audit, and (ii) the CRA, through the   
   Stoneridge Inc. audit, would    
   have uncovered the disclosed information because the applicants were related   
   to Stoneridge Inc. The applicants also argued that the VDP officer failed to   
   follow the VDP Guidelines in considering whether the existence of the   
   Stoneridge Inc. audit    
   invalidated their disclosures.   
   The Court found the VDP officer's decision to be unreasonable for two reasons.   
   First, there was no evidence that any of the applicants knew of the Stoneridge   
   Inc. audit on the effective date of disclosure. On the contrary, the evidence   
   showed that the    
   principal applicant was the one who initiated the voluntary disclosure   
   process. The Court also noted that the VDP officer essentially ignored the   
   principal applicant's evidence regarding his initiation of the VDP process and   
   did not give any of the    
   applicants the "benefit of the doubt", despite the recommendation contained in   
   the VDP Guidelines.   
      
      
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