Jan

Voluntary Disclosure Program – Foreign Property Reporting

Posted By: Bobby B. Solhi on January 17, 2014 at 3:42:28 in All , Articles , Case Comments

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Voluntary Disclosure Program - Specified Foreign Property

By:Bobby B. Solhi, J.D. and Cornelia Yeung

The Voluntary Disclosure Program (the “VDP”) is a discretionary program administered by the Canada Revenue Agency (the “CRA”) to promote compliance with Canada’s tax laws.

Under the CRA’s voluntary disclosure program, a taxpayer may voluntarily come forward and correct inaccurate or incomplete information previously provided to the CRA. Taxpayers may also disclose information that was not previously provided.

Where a taxpayer makes a valid disclosure under the VDP, the CRA has the authority to waive all applicable penalties, partial interest relief and prevent criminal prosecution.

The CRA’s authority to grant relief is now limited to the prior 10 taxation years. The CRA will consider voluntary disclosure under the VDP even if it exceeds the limitation rule although not required to grant relief under the VDP provisions. If a request is denied or partly granted, the CRA will provide an explanation of the reasons and factors for the decision.

In order to be eligible for relief under the VDP, the taxpayer must fulfill certain statutory requirements as stated in the CRA’s administrative directives:  1) the applicant must be a taxpayer including an individual, corporation, trust and partnership; and 2) the application must respect the limitation period of 10 years.

Conditions

In basic terms, a disclosure must fulfill four conditions in order to qualify as a valid disclosure.  The disclosure must be voluntarily, complete, involve the application or potential application of a penalty, be at least one year past due or, if less than one year, concern a previously filed return that contains information that is at least one year past due.

For a disclosure to be voluntary, it must be done before you become aware of any compliance actions taken by the CRA against you.  What constitutes a compliance action is often the source of misunderstanding by both taxpayers and the CRA.  See, for example, the Federal Court’s decision in Worsfold, et al. v. MNR where the Court considered whether the taxpayer made a valid disclosure under the voluntary disclosure program.

Methods of Disclosure

A voluntary disclosure application can be made either by way of a “Named” Disclosure or “No-Name” Disclosure. The two methods include the same consideration and review but it is the timing of the identification of the taxpayer that differs.

The “Named” Disclosure Method is a disclosure where the identification of the taxpayer is stated on the initial disclosure submission. For a “No-Name” Disclosure Method, taxpayers can proceed with preliminary discussions about their situation on a “no-name” basis.   The CRA will only provide a final and determinative decision on a no-name disclosure after the identity of the taxpayer is revealed.

You can learn more about the requirements on our Voluntary Disclosure Program page.

Specified Foreign Property

An area of great concern to the CRA is unreported foreign property.  In more specific terms, the CRA requires that Canadian residents report on their interest or ownership in “specified foreign property” each year as part of their tax returns.    Specified foreign property is a defined term in the Income Tax Act (Canada) and generally includes:

  • funds held in foreign bank accounts,
  • shares in foreign companies,
  • interests in certain non-resident trusts or non-resident entities, and
  • real estate situated outside Canada.

Specified foreign property does not include property used or held exclusively in the course of carrying on an active business, personal-use property, or property used mainly for personal use and enjoyment.

The reporting requirements noted will apply where the cost-base of all specified foreign property, taken in the aggregate, is equal to or greater than $100,000 CAD.

Specified foreign property is reported using Form T1135 – Foreign Income Verification Statement

Penalties for Non-Compliance

The CRA is actively investigating taxpayers to determine whether they have been compliant with the reporting of their foreign property.  The consequences can be severe for the unwary. There are penalties that may apply where the taxpayer is either late in filing, fails to file the T1135, or files it with incorrect or missing information.

A voluntary tax disclosure to the CRA is often the best manner through which to remedy omissions or errors in one’s tax returns.  A successfully voluntary disclosure application will eliminate penalties, criminal prosecution, and partially off-set the interest amounts.

You can contact us to learn more about the Voluntary Disclosure Program.

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