The following article was published by the Canadian Tax Foundation. John Loukidelis “A Voluntary Disclosure Gone Wrong” (2021) 21:3 Tax for the Owner-Manager 10.
In 4053893 Canada Inc. v. Canada (National Revenue) (2021 FC 218), the court dismissed an application by the taxpayer (referred to herein as “405”) for judicial review of the CRA’s denial of relief under the voluntary disclosure program (VDP). The court found that the denial of relief was reasonable given the record in front of the CRA. The record included information given to a CRA agent by 405’s sole shareholder in a telephone conversation.
Mr. H was the sole shareholder of 405. He and 405 had failed to file tax returns for more than 10 years. The CRA sent a number of letters to Mr. H about his unfiled returns. In 2016, the CRA wrote to him again, and a CRA agent also spoke to him. During the telephone call, Mr. H told the agent about 405. He confirmed that 405 was active and that it had unfiled returns. The agent responded by informing Mr. H that both he and 405 were required to file tax returns. The CRA agent made notes about the call, in accordance with the CRA’s usual practice.
About five months after this conversation, 405 purported to make a voluntary disclosure by filing its unfiled returns. Mr. H then filed personal tax returns showing that he had received dividend and employment income from 405.
The CRA denied VDP relief to 405 on the basis that its disclosure was not truly voluntary. The CRA decided that its enforcement actions against Mr. H were “likely to have uncovered the information being disclosed” by 405 (see paragraph 32 of Information Circular IC 00-1R5, “Voluntary Disclosures Program,” which was applicable at the time). 405 sought judicial review of the CRA’s decision.
In a judicial review application, the court does not review a CRA decision on a standard of correctness. Rather, it merely determines whether the impugned CRA decision was a reasonable one that met the requirements of “justification, transparency and intelligibility” set out in Canada (Minister of Citizenship and Immigration) v. Vavilov (2019 SCC 65). If the court finds that the decision was unreasonable, it generally refers the matter back to the CRA for reconsideration. Except in rare cases, the court does not substitute its own decision for the CRA’s.
In response to 405’s first application, the court referred the decision back to the CRA because it had not explained adequately how its enforcement action against Mr. H would have led it to discover 405’s non-compliance (2019 FC 51). The CRA reconsidered the matter and confirmed that it should not have accepted 405’s voluntary disclosure. 405 sought judicial review a second time.
In its second application, 405 argued that the CRA’s enforcement action against Mr. H likely would not have uncovered 405’s delinquency because the actions taken against Mr. H before 2016 had not done so. It also argued that the actions that the CRA said it would take against Mr. H in 2016—the issuing of arbitrary assessments—would not have uncovered the link to 405 (because Mr. H would not have been forced to report any employment or dividend income from the corporation). Finally, 405 said that the second decision still did not explain how it was likely that the CRA would have uncovered information regarding 405.
The court rejected all of these submissions. It agreed that what was likely to have been discovered had to be considered in light of CRA practice, but it noted that the CRA’s 2016 action included the telephone call to Mr. H that revealed his link to 405 and the company’s failure to file returns. Moreover, the enforcement action in fact prompted Mr. H to file returns that reported income received from 405. The CRA’s second decision referred to both of these key facts, which, in the court’s view, provided a reasonable justification for the refusal to provide VDP relief.
4053893 Canada Inc. shows the difficulty facing a taxpayer who wants to apply for judicial review of the CRA’s denial of relief under the VDP. Even if the application for judicial review is accepted, the final result may be a reconsideration that corrects the deficiencies of the CRA’s first attempt. Moreover, the case shows that what a taxpayer says to the CRA, including during a telephone conversation, can and will be used against the taxpayer or related persons for the purposes of enforcing the Act.
