When Is Voluntary Disclosure Voluntary?

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.

VDP

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.

Worsfold

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...