solving sales tax non-compliance through the canadian ... tax non-compliance... · through the...

McCarthy Tétrault LLP / mccarthy.ca

Solving Sales Tax Non-Compliance Through the Canadian Voluntary Disclosures Programs

Deloitte Tax Law LLP. A law firm affiliated with Deloitte LLP.


Statutory Basis for Sales Tax • Section 281.1 ETA provides statutory basis for Sales Tax

VD

• Gives CRA discretion to waive or cancel listed interest and/or penalties • Interest on late remittances, payments or instalments [subsection 281.1(1)]

• Penalty on late net tax remittances for reporting periods before April 2007 [paragraph 281.1(2)(a)]

• Penalty for failure to file [paragraph 281.1(2)(b)]

• Penalty for failing to file electronically [paragraph 281.1(2)(b)]

• Penalty for failing to provide mandatory information on electronic return [paragraph 281.1(2)(b)]

• The statutory basis is incomplete re: prosecution

2



Statutory Basis for Sales Tax

• Consequently, VDP is highly administrative

• IC 00-1R4 “Voluntary Disclosures Program” (April 2014) sets out CRA’s policies

• It summarizes the guidelines CRA will follow in deciding whether to accept a disclosure as valid

• Guidelines are not exhaustive and are subject to change at any time – history of significant program changes

3



Statutory Basis for Sales Tax • See also:

• GST/HST Memorandum 16.2, Penalties and Interest (January 2009)

• GST/HST Memorandum 16.3, Cancellation or Waiver of Penalties and/or Interest (January 2009)

• GST/HST Memorandum 16.3 .1 Reduction of Penalty and Interest in Wash Transaction Situations (April 2010)

4



Statutory Basis for Customs

• Section 3.3 of the Customs Act: provides the Minister / any officer designated by the CBSA President with the power to waive or cancel all or portion of any penalty or interest

• CBSA D11-6-4, Relief of Interest and /or Penalties Including Voluntary Disclosure issued October 29, 2014: most recent iteration of the CBSA’s policy

• D11-6-4 summarizes voluntary disclosure program eligibility criteria

5



Statutory Basis for Customs (cont’d) • “Penalty”: defined in the D Memorandum as meaning

“administrative monetary penalty (AMP) referred to in sections 109.1-109.3 of the Act”

• Other penalties that might be imposed pursuant to the Customs Act:

1. Seizure and forfeiture, pursuant to section 100 of the Customs Act.

2. Ascertained forfeiture, pursuant to section 117 of the Customs Act.

3. Criminal sanctions, pursuant to section 160 of the Customs Act.

6



Statutory Basis for Customs (cont’d) • It is unclear why a CBSA voluntary disclosure policy

does not shield a disclosing party from criminal liability (given that the CRA policy does shield a disclosing party from criminal liability)

• Providing a shield from criminal liability seems to be consistent with the purpose of the voluntary disclosures program (i.e., promote compliance by encouraging disclosures)

7



Four Conditions for Sales Tax

1. Voluntary:

• Registrant has initiated the disclosure before “enforcement action” has been commenced that could lead CRA to the issue being disclosed

• “Enforcement action” is defined broadly. It may include: (i) an audit or investigation by CRA or any other authority; (ii) a request, demand or requirement for information issued by CRA; or (iii) direct contact by a CRA agent in respect of any non-compliance issue

• The key is “could lead CRA to issue”

8



Four Conditions (Cont’d) 2. Complete:

• CRA requires that registrant provides complete and accurate facts and documentation for all relevant taxation years

• Registrant may not limit a disclosure to selected errors, omissions or reporting periods

3. Monetary penalty:

• A penalty could possibly apply with respect to the disclosure

4. One year overdue:

• The disclosure must include information that is at least one year past due

9



Four Conditions (Cont’d) • A customs voluntary disclosure must meet the following

conditions:

• Voluntary (i.e., not prompted by action taken by theCBSA / other government department or person in authority related to the client or the subject of the disclosure)

• Involves a potential penalty and/or specified interest or potential action against the goods or person.

10



Four Conditions (Cont’d) • It is complete when all of the following are disclosed (if

applicable):

• all incidences of non-compliance for which the client could be subject to a trade compliance verification and reassessment.

• all incidences of non-report or failure to account for the same or similar imported goods for the six years prior to the disclosure.

• In the case of exported goods, all incidences of non-compliance up to six years prior to the disclosure in addition to the current year.

• It takes account any special considerations relating to regulated / restricted imports and exports / prohibited goods, and in general:

• (i) it is non-repetitive; and

• (ii) the client explains how the non-compliance occurred, how it has been corrected or what measures have been put in place to reduce the future risk

11



General Relief for Sales Tax

1. Penalty relief:

• Registrant will not be charged any penalties

• Waived penalties include:

gross-negligence penalties [section 285]

pre-April 2007 6% penalty for late remittance of net tax [former paragraph 280(1)(a))]

late filing penalty [section 280.1]

12



General Relief for Sales Tax (Cont’d)

2. Partial Interest relief:

• CRA generally grants a 4% reduction in the interest rate applicable to net tax owing for reporting periods preceding the three most recent years

3. Prosecution:

• CRA undertakes to drop criminal or penal prosecution [sections 326 and 327]

13



General Relief for Customs

• Waiver of AMPS penalties and interest

• No waiver of criminal liability

• Not expressly dealt with:

• waiver of seizure, forfeiture or ascertained forfeiture

• wash transactions involving GST

14



Wash Transactions

1. Definition of “Wash Transaction”:

• When a taxable supply is made and the supplier has not remitted an amount of net tax by virtue of not having correctly charged and collected the tax from the recipient who is a registrant entitled to claim a full ITC

• Where tax is collected and reported (or ITCs are claimed) by the wrong entity within a closely related group or between associated persons, all the members of which are engaged exclusively in commercial activities

• Where a full ITC is not available to the recipient, the transaction will not be considered a wash transaction

15



Wash Transactions (Cont’d) 2. CRA’s Published Policy:

• The CRA will consider waiving or cancelling the portion of the interest payable and any pre-April 2007 penalty to a flat 4% of the unremitted GST/HST

• Can be done by the auditor

• However, where a disclosure involving a wash transaction has been made, the interest will be waived and the CRA will seek only the taxes that should have been collected originally by the supplier, or the ITCs not accounted for properly

2. CBSA’s Published Policy:

• CBSA’s D memorandum does not illuminate its position respecting wash transactions

16



• Officially, registrant who makes a valid disclosure will have to: Pay all taxes that should have been collected and remitted

originally by the supplier

File amended GST/HST returns for each relevant reporting period

• In practice: CRA generally only requires payment of taxes and filing of

amended returns for all reporting period for which documents are available

The period covered by the disclosure will vary depending if wash transactions are involved or not

Scope of a Voluntary Disclosure 17



• The 10-Year Limitation:

The application for relief must be made within 10 years of the end of the reporting period in respect of which the interest or penalty applies

See Bozzer v. R., 2011 FCA 186 (F.C.A.)

Scope of a Voluntary Disclosure (Cont’d) 18



“Named” vs. “No-Name” Disclosure

• “Named” disclosure: Identity revealed to CRA or CBSA in initial submission requesting a file number

• CBSA requires the completion of a form titled: Client Agreement For Voluntary Disclosure Application

• “No-name” disclosure:

The registrant has 90 days from the day a VDP officer is assigned to the file to reveal its identity and provide a full and complete disclosure

Allows registrants to prepare worksheets/supporting documentation and (sometimes) to initiate preliminary discussions regarding their situation with a VDP officer

When to start preparing?

19



“Named” vs. “No-Name” Disclosure (Cont’d)

Prior to a registrant revealing its identity, a VDP officer may confirm verbally that, based on the information:

• Nothing the registrant has disclosed would invalidate the disclosure;

• The disclosure will cover specific reporting periods.

However, CRA and CBSA consider that anonymous discussions are non-binding.

20



Typical Timeline

• Preliminary letter to CRA or CBSA – beginning of protection:

Nature of omission

Dollar amounts

Type of return or information slip

Reporting periods

Primary business for corporations

First three characters of postal code

21



Typical Timeline (Cont’d) • Assignment of an agent / file number and preliminary

discussions:

Limited discussions possible – only to confirm the validity of the disclosure and the reporting periods – or more?

Limited technical expertise at the VDP

• Disclosure of client’s identity and filling of amended GST/HST returns or CBSA form B2 Adjustment Requests and blanket spreadsheets:

End of the 90-day period

• CRA and CBSA’s acceptance of the disclosure:

Written notification of the acceptance of the disclosure

• CRA Reassessments / CBSA Detailed Adjustment Statement

22



Québec VDP

• Revenu Québec administers both GST and QST in Québec:

Rules/policies/process are very different

Wash transactions:

Will normally cover the 4-year period preceding the reporting period within which relief is requested

Registrant won’t be allowed to initiate the disclosure on a no-name basis

23



Québec VDP (Cont’d) Extensive review of numbers / supporting documentation:

Much more demanding. All numbers are discussed and/or validated with Revenu Québec’s VDP officers and adjustments are frequently requested

Revenu Québec is demanding when it comes to proving that a given transaction is a wash transaction

Settlement letter:

Parties have to sign a settlement letter in which all terms agreed upon are described and summarized.

The terms of the disclosure binding

24



Practical Tips

• Initiate disclosure as soon as possible. Protection granted is retroactive to the day request is sent for file to be opened

• Pay as soon as possible (avoid further interest accruing on balance owing)

• Registrants conducting a disclosure are expected to comply with tax legislation on a going-forward basis

• Process takes approximately 9-12 months to complete

• Know your VDP officers

25



Practical Tips (Cont’d)

• CRA’s VDP is in Shawinigan (Québec) if you are a resident of or your principal place of business is in the Atlantic provinces, Québec, Ontario, Manitoba, Saskatchewan or Alberta (the Prairie Region), Nunavut or the Northwest Territories

• CRA’s VDP is in Surrey (British Columbia) if you are a resident of, or your principal place of business is, British Columbia, or Yukon

• The CBSA office closest to where the disclosing party maintains its book and records will assume responsibility for a customs voluntary disclosure

26



Contact information

Mr. David Roulx, associate McCarthy Tétrault LLP 1000, De La Gauchetière St. West Suite 2500 Montréal, QC H3B 0A2 Canada Telephone: 1 (514) 397-5661 Fax: 1 (514) 875-6246 Email: [email protected]

Mr. Nicolas X. Cloutier, partner McCarthy Tétrault LLP 1000, De La Gauchetière St. West Suite 2500 Montréal, QC H3B 0A2 Canada Telephone: 1 (514) 397-4102 Fax: 1 (514) 875-6246 Email: [email protected]

27



Contact information

Calgary 700, 850 – 2 St., SW Calgary, AB T2P 0R8

Mr. Daniel L. Kiselbach Deloitte Tax Law LLP Suite 2800 – 1055 Dunsmuir Street Vancouver, BC V7X 1P4 Canada Telephone: 1 (604) 640-3821 Fax: 1 (604) 640-4184 Email: [email protected]

28



VANCOUVER Suite 1300, 777 Dunsmuir Street P.O. Box 10424, Pacific Centre Vancouver BC V7Y 1K2 Tel: 604-643-7100 Fax: 604-643-7900 Toll-Free: 1-877-244-7711 CALGARY Suite 4000, 421 7th Avenue SW Calgary AB T2P 4K9 Tel: 403-260-3500 Fax: 403-260-3501 Toll-Free: 1-877-244-7711 TORONTO Suite 5300, TD Bank Tower Box 48, 66 Wellington Street West Toronto (Ontario) M5K 1E6 Tel: 416-362-1812 Fax: 416-868-0673 Toll-Free: 1-877-244-7711

MONTRÉAL Suite 2500 1000 De La Gauchetière Street West Montréal QC H3B 0A2 Tel: 514-397-4100 Fax: 514-875-6246 Toll-Free: 1-877-244-7711 QUÉBEC Le Complexe St-Amable 1150, rue de Claire-Fontaine, 7e étage Québec QC G1R 5G4 Tel: 418-521-3000 Fax: 418-521-3099 Toll-Free: 1-877-244-7711 UNITED KINGDOM & EUROPE 125 Old Broad Street, 26th Floor London EC2N 1AR UNITED KINGDOM Tel: +44 (0)20 7786 5700 Fax: +44 (0)20 7786 5702

Vancouver Four Bentall Centre 2800 – 1055 Dunsmuir Street Vancouver BC V7X 1P4 Tel: 604-669-4416 Fax: 604-681-4184 Toronto 181 Bay Street Brookfield Place Suite 1400 Toronto ON M5J 2V1 Tel: 416-601-6150 Fax: 647-497-6865 Calgary 700, 850 – 2 Street SW Calgary AB T2P 0R8 Tel: 403-267-1700 Fax: 403-920-9333 Montreal 1 Place Ville-Marie Bureau 3000 Montreal QC H3B 4T9 Tel: 514-393-3537 Fax: 514-390-1808

McCarthy Tétrault LLP 29


solving sales tax non-compliance through the canadian ... tax non-compliance... · through the...

Documents