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CRA Plans to Strengthen Its Voluntary Disclosure Program

061617_Thinkstock_123821271_lores_kwThe Voluntary Disclosure Program (VDP) will no longer be “one size fits all.”

The Canada Revenue Agency (CRA) says it is planning major changes to the program and has launched an online consultation allowing taxpayers to have a say about the proposals.

The disclosures program gives taxpayers an opportunity to voluntarily come forward and correct previous omissions in their dealings with the CRA. As a result, they may, under certain conditions, avoid prosecution, penalties and possibly interest on the amounts owed.

The CRA conducted an extensive review of the program in response to a recommendation by the House of Commons Standing Committee on Finance. The agency also benefited from the advice and recommendations by the Minister’s Offshore Compliance Advisory Committee, an independent committee of tax experts.

Recommended Changes

Here are some of the instances where that panel of tax experts urged a reduction in a taxpayer’s relief from interest and penalties:

  • Deliberate or willful default or carelessness amounting to gross negligence,
  • Active efforts to avoid detection through offshore vehicles or other means,
  • Large dollar amounts of tax avoided,
  • Multiple years of noncompliance,
  • Repeated use of the VDP,
  • A disclosure motivated by CRA statements regarding its intended focus of compliance or by broad-based CRA correspondence or campaigns,
  • Avoidance transactions undertaken or continued after implementation of the Common Reporting Standard, or
  • Any other circumstance in which a high degree of culpability contributes to the failure to comply.

The committee stated that tax relief could be reduced by increasing the period for which full interest must be paid or by denying relief from civil tax penalties.

Actual Proposed Changes

The most significant policy change follows the committee’s first recommendation that the VDP should offer less generous relief in certain circumstances. Major cases of noncompliance that are disclosed won’t receive the same level of relief as they would through the current program.

A number of other tightening measures are being proposed, including measures that would:

  • Require the payment of the estimated taxes owed as a condition of qualifying for the program,
  • Exclude applications that involve transfer pricing,
  • Eliminate applications from corporations with gross revenue exceeding $250 million,
  • Exclude applications that involving income from crimes,
  • Change the way the amount of interest relief is calculated, and
  • Cancel relief if it’s discovered that a taxpayer’s application wasn’t complete due to a misrepresentation attributable to willful default.

“Our government has made cracking down on tax cheats a priority, because when everyone pays their fair share, we all continue to benefit from the social programs that improve our quality of life,” Minister of National Revenue Diane Lebouthillier said in announcing the plan to amend the program.

The VDP applies to disclosures relating to income tax, excise tax, excise duties under the Excise Act, 2001, source deductions, GST/HST and charges under the Air Travellers Security Charge Act and the Softwood Lumber Products Export Charge Act, 2006.

How the Program Currently Works

The VDP has two tracks for income tax disclosures. The first is a General Program. If accepted, these applications will be eligible for penalty relief and partial interest relief.

The second track is a Limited Program, which provides limited relief for applications that disclose major non-compliance, including one or more of the following situations:

  • Active efforts to avoid detection through the use of offshore vehicles or other means,
  • Large dollar amounts,
  • Multiple years of noncompliance,
  • Disclosures made after an official CRA statement regarding its intended focus of compliance, and
  • Any other circumstance in which “a high degree of taxpayer culpability contributed to the failure to comply.” For example, a taxpayer who has been transferring undeclared business income earned in Canada to an offshore bank account since 2010.

Relief Provided Under the VDP

1. Penalty Relief. If a VDP application is accepted as having met all required conditions, the taxpayers won’t be charged penalties. The agency’s ability to grant penalty relief is limited to any taxation year that ended within the previous 10 years before the calendar year in which the application is filed.

Taxpayers also won’t be referred for criminal prosecution with respect to their disclosure (such as for tax offences) and won’t be charged a gross negligence penalty even where the facts establish that the taxpayer is liable for such a penalty. However, taxpayers will be charged other penalties when they apply.

2. Interest Relief. In addition to penalty relief, if an application is accepted, taxpayers may receive partial relief from interest related to assessments for years preceding the three most recent years of returns required to be filed (subject to the limitation period).

Generally, interest relief will be 50% of the applicable interest for those periods. Full interest charges will be assessed for the three most recent years of returns required to be filed. No interest relief will be provided to taxpayers whose application is accepted under the Limited Program.

The CRA urges taxpayers to participate in the consultation, saying everyone has a role to play to ensure the tax system is more innovative, responsive and fair for all Canadians. The consultation allows taxpayers to have their voices heard and to play a role in shaping policy.

Questions to Consider

Among the questions the CRA would like taxpayers to address in the online consultation are:

1. Is VDP the right program for taxpayers to fix mistakes? The CRA wants to know if the VDP should apply to those who make errors on their income tax returns, or just to those who knowingly choose to avoid paying taxes.

2. Do the changes strike the right balance? When conducting its review, the CRA considered comments made by the Offshore Compliance Advisory Committee about striking the right balance between helping those who were fully compliant and having appropriate consequences for those who were seriously breaking the rules.

You can find out more by going to CRA’s web page.

Next Steps

Comments are requested by August 8, 2017. The CRA plans to announce changes to the program in the autumn of 2017. The consultations will assist the Government of Canada on determining the next steps for the VDP policy.

Don’t Gamble With Your Retirement

The consensus is, as increasing numbers of baby boomers start to retire, nearly 30 per cent of modest-income and middle-income earners are not saving enough to be able to replace the recommended 90 per cent of pre-retirement expenses once they stop working.

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Risks to Consider

While you discuss your plans with your accountant, be certain you take into account these risk factors:

  • Inflation: Price rises over the long term pose a serious threat to your retirement income stream. The gradual gains in the cost of living erode your purchasing power. Structure your investment portfolio to keep pace with inflation.
  • Healthcare: Canadians are living much longer than before because of advances in prescription drugs, awareness of healthy lifestyles and improved healthcare. While it’s great that we can enjoy life longer, for many retirees, this may mean outliving their savings.
  • Rates of return: When you build your investment portfolio, you and your adviser generally use average rates of return. Be certain they are realistic. You may be counting on an eight per cent return but average out to just five per cent.
  • Taxes: It may be difficult to get your head around this concept, but it is possible that you can put too much money into your RRSP. Registered plans and funds, when combined with government or company pensions, life annuities, rental income, and part-time business income, can leave you with a hefty, and unnecessarily high, tax bill. If retirement income sources bump you up into the top tax bracket, each dollar you withdraw from your RRSP may be slashed by as much as 50 per cent after taxes.

In fact, a lot of Canadians simply admit that they are doing a poor job at building savings.

That doesn’t mean that Canadians are going to live in retirement poverty. Not at all. According to the Organization for Economic Cooperation and Development, Canada has the second lowest poverty rate for senior citizens after the Netherlands.

The problem, instead, is that many retirees won’t be able to maintain their current lifestyles after they stop working. They may not be able to spend as much going to restaurants, taking vacations or driving the same class of car.

If you are in your late 40s, early 50s or even older, and feel you are not putting enough aside for a comfortable retirement, you still have time to speed up your savings and build a substantial safety net for the years after you stop working.

First, calculate your total savings and the precise amount you will need for retirement, taking into account the potential risks outlined in the right-hand box. Knowing how short you are from your needs can help motivate you to change your savings behavior. Then consider and discuss with your accountant, these tips and how they might fit into your retirement-planning strategy:

1. Utilize your peak earning years to substantially boost savings. Typically, the final years of employments are peak income years. Rather than enhancing your lifestyle with each pay increase, put pay raises into savings vehicles. Look for ways to downgrade your lifestyle without crimping it, add the savings to your retirement fund. Making this change now also means you are likely to be more satisfied with a lower lifestyle when you stop working.

2. Consider asking your non-working spouse to take a job. If your children are out of the house or don’t require much supervision, it may make sense for your spouse to work and put all the earnings toward retirement. Alternatively, or in addition, you might want to take on a second, part-time job or start a business for additional income.

3. Sell your house. If you can sell your current home and get by in a smaller dwelling, you can reduce living expenses and put the difference in savings.

If you are like many Canadians, the bulk of your retirement income may come from withdrawals from Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs), or both. Ask your accountant how you can make the most of these plans.

One advantage of the TFSA is that the more you put into one the more money you can live off of tax-free during retirement.

Consider that you may actually be at the same or a higher marginal tax rate after you retire (see right-hand box about risks). If you are likely to bump up into a higher bracket, ask your accountant if it would be reasonable for you to delay RRSP contributions and make the most of a TFSA.

For middle-aged individuals, a combination of the two accounts might benefit you. The current low limit on TFSA contributions won’t let you accumulate enough for retirement, but it does offer more planning flexibility in estate and retirement income planning.

In any event, consider contributing the maximum to both types of tax-advantaged accounts. If your employer offers group plans, take advantage of them and the company’s matching contributions.

The following chart compares the features of TFSAs and RRSPs and can help guide your discussion with your accountant and your ultimate decision:

TFSA RRSP
No need for earned income to build contribution room Earned income is needed to be able to contribute
Annual contribution limit for 2017 is $5,500 Contribution limit is 18 per cent of previous year’s earned income or the limit set by Ottawa, whichever is lower
You need not contribute every year but can accumulate room You need not contribute every year but can accumulate room
Withdrawals, including investment gains or interest, are tax-free Withdrawals, including deposits and investment earnings or interest are taxable
Contributions are not tax-deductible Contributions are deductible and provide a refund at your marginal tax rate
Withdrawals are added to the next year’s contribution limit Early withdrawals are not added to the contribution limit and are taxed heavily
Need not be converted to a Registered Retirement Income Fund (RRIF) Must be converted to an RRIF at age 71, and minimum annual withdrawals are required
Withdrawals are not used to calculate OAS clawback RRSP and RRIF withdrawals are income used in calculating the OAS clawback

Avert Penalties, Confirm Customer GST Registrations

When your company sells a commercial property, one party must pay a Goods and Services Tax (GST). And occasionally, the burden of responsibility can create a problem. If the buyer isn’t registered for GST, it’s your company’s responsibility to collect the GST on the sale and remit it to Canada Revenue Agency (CRA).

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The GST Advantage

Even if your company qualifies as a small supplier that may not have to register for GST, it can make economic sense to get a number.

Generally, a business doesn’t have to register for GST if it is a sole proprietorship, partnership, or corporation whose total taxable revenues before expenses are $30,000 or less annually ($50,000 for such public service bodies as charities, non-profit organizations, municipalities, or universities.)

However, registration may give your company a tax advantage: It can claim tax credits for the GST/HST paid on such operating expenses as commercial rent, utilities, office supplies, as well as meal and entertainment expenses, reimbursements to employees or partners and capital property. And that can lead to a GST refund.

But if the buyer is registered, the responsibility shifts to the buyer who must report the tax and can claim any available Input Tax Credits to offset the GST (see right-hand box). On the face of it, this is an uncomplicated transaction and your company is in the clear.

But a Tax Court ruling suggests that you might want to double check the accuracy and validity of GST numbers to avoid an unpleasant surprise.

In the court case, the buyer of a commercial property claimed the company was registered for GST and provided a number. During an audit of the sale, however, the number was discovered to be invalid. The CRA had cancelled the purchaser’s registration.

But it wasn’t the buyer who wound up having to pay the GST — it was the seller. The Tax Court ordered the seller not only to pay the tax that should have been collected, but also to pay penalties and interest, despite the buyer’s misrepresentation in the deed of the sale about the validity of its GST number. (Lee Hutton Kaye Maloff & Paul Henriksen v. The Queen)

In theory, of course, the seller could bring a civil court action against the buyer to recover the GST it was forced to pay. In practice, however, that would mean incurring more expenses for legal fees. Moreover, the seller would still be liable for the penalties and interest. The Excise Tax Law doesn’t provide for the recovery of those costs.

A simple way to avoid this problem is to request CRA confirmation of a purchaser’s GST registration status.

There are other tax and GST issues involved in the sale of real estate and other commercial goods, so consult with your professional advisor before your company completes a major sale to make sure everyone understands the consequences of the transaction.

File Timely Returns or Risk Losing Refunds

lores_hourglass_blue_timer_bzFailing to file a tax return is not an option in Canada when you owe taxes.

Eventually Canada Revenue Agency (CRA) will ask for the returns to be sent in. Sometimes, taxpayers simply ignore the requests. If this goes on long enough, the CRA will mail an arbitrary estimated assessment of income earned and taxes owed. The assessments can be quite generous in favour of the agency and eye-opening for the taxpayer.

At that point, taxpayers usually start to make payments on their arrears to avoid collection proceedings. By making payments the taxpayers get time to file their late returns and correct the balances owed to the actual tax liability, which is generally lower than the assessment.

On the surface, this seems like a good strategy: The CRA starts getting some of the money it is owed and the wage earner avoids collections calls. Once the returns are filed the balance owed is adjusted, usually down to the actual amount you owed. And all is right with the world. Or is it?

There can be a downside to this tactic. The CRA is becoming increasingly tough on late returns and has refused to issue refunds for tax returns that are filed after the three-year limit allowed by the Income Tax Act. So, taxpayers can still be denied a refund of overpayments when they file their returns more than three years late.

On top of that, there are filing deadlines that also apply to allow CRA to deny refunds of overpayments of Canada Pension Plan or Employment Insurance that were either a result of employer payroll deductions or CPP calculated on self-employment income.

Individual taxpayers can appeal the refund denial or to ask the CRA to consider applying overpayments to other balances owed. This is not possible for corporations, however. Corporate taxpayers must be very careful before making payments on accounts for any returns filed more than three years after the filing date.

Taxpayers can also file a formal Notice of Objection. In that case, the facts will be reviewed and the CRA may issue a reassessment. If taxpayers are still not satisfied they can take the issue to court, but the costs of battling the tax agency in court can be high.

It is also to file a request under taxpayer relief, if there were extenuating circumstances that prevented the filing the return within the three year time period if a taxpayer is experiencing financial hardship. This could result in a reduction of some penalties or interest, or the CRA could decide to pay refunds beyond the three-year limit.

If you have fallen behind in your tax filings, received a demand to file or estimated tax assessments, especially for any taxes due more than three years ago, discuss the issue with your accountant who can help assess your situation and determine the best course of action.

U.S. Protectionism Tops List of Canadian Business Leaders’ Concerns

060117_Thinkstock_610668524_lores_kwFirst it was the lumber spat. Then came the milk battle. Trade issues with the United States are a hot spot these days.

And now, after U.S. President Trump backed a G7 pledge to fight protectionism, we head into negotiations starting in August for the retooling of the North American Free Trade Agreement (NAFTA). Meanwhile, a new IMF statement warns of major shocks to the Canadian economy that could come from a revised NAFTA.

Biggest Worries

In the midst of all this talk about trade, those in leadership positions at public and private businesses were asked in a recent survey: What is the top challenge to growth of the Canadian economy? U.S. trade protectionism was the top answer. Some 23% of Canadian chief executives, chief financial officers and chief operating officers cited “protectionist trade sentiments in the United States” as their top economic concern, according to the CPA Canada Business Monitor (Q1 2017).

The Harris Poll conducted the survey from March 30 to April 18, a time when Trump appeared to have softened his position on the North American Free Trade Agreement.

Trump was elected in 2016 with a campaign promise to renegotiate NAFTA, which comprises Canada, the United States and Mexico. Yet in February, when meeting with Prime Minister Trudeau, the U.S. president publicly said he would only “tweak” Canada’s side of the agreement and focus on the “unfair” U.S. commercial relationship with Mexico.

Since the Business Monitor survey ended, however, Trump has boosted tariffs on Canadian lumber shipments and came close to signing an executive order to pull the U.S. out of NAFTA. At the last minute, he reportedly told reporters: “I decided rather than terminating NAFTA, which would be a pretty big, you know, shock to the system, we will renegotiate.” Trump added that if he is “unable to make a fair deal,” he will terminate the trade pact.

Oil and Economies

Second on the list of threats to the Canadian economy, the survey showed, is oil prices, with 17% of respondents saying they’re concerned about this. Tied in third place at 14% were “uncertainty surrounding the Canadian economy” and “the state of the U.S. economy.”

Still, the national economy seems less threatening to executives than it did a year ago: 38% of respondents described themselves as optimistic about the economy, up from 32% in the previous quarter and significantly higher than 22% a year earlier. Another 47% said they are neutral and only15% said they are pessimistic. Despite potential volatility, a cautiously optimistic mood still prevails.

“This quarter’s results reinforce Canada’s underlying economic momentum,” says Joy Thomas, president and CEO of CPA Canada. “Uncertainty remains a constant shadow over the country’s growth prospects because of trade and oil prices but the business leaders are not allowing themselves to be paralyzed by it as demonstrated by the climb in optimism.”

Respondents to the Business Monitor survey appear quite bullish about when it comes to expectations about their own companies:

  • 58% are optimistic about the next twelve months, up from 54% in the previous quarter.
  • 69% said they’re anticipating revenue growth over the next year.
  • 63% reported they expect an increase in profits, up from 57% in the previous quarter.

Canada’s Tax System

The survey also asked if the leaders would welcome a comprehensive review of Canada’s tax system. There was overwhelming support for the idea. More than 7 in 10 (72%) agreed that such a review is required. Of the responses, when asked what a review could accomplish:

  • 89% said it would keep Canada’s “personal and corporate tax rates competitive with other advanced economies.”
  • 88% said it would “reduce complexity, while maintaining a fair and efficient tax system.”
  • 86% said it would “modernize the tax system in line with current business and economic realities” and attract investment.
  • 84% expected it would “reduce administrative costs for business and government.”
  • 72% said it would “keep the tax base broad, with fewer tax preferences.”
  • 71% said it would “reduce the possibility of unacceptable tax planning.”
  • 68% said it would “increase compliance by taxpayers.”

IMF Issues Statement about Canada

Meanwhile, the International Monetary Fund (IMF), in its latest report on the state of the Canadian economy, noted that the imposition by the U.S. of higher tariffs or new non-tariff barriers under a revised NAFTA “would undercut growth prospects in Canada, leading to a permanent reduction in investment and consumption.” It added that if the U.S. administration pushes ahead with its plans to cut the U.S. corporate tax rate, Canada may become “less attractive as an investment destination.”

The IMF explained: “While the global economy has improved with stronger manufacturing activity, the renegotiation of NAFTA, U.S. policies on tax reform and climate change, and the timing and form of the U.K.’s withdrawal from the EU could tilt policies toward protectionism and economic fragmentation. This would have significant consequences for Canada, an economy that is highly reliant on trade and cross border flows.”

Regarding the Canadian tax system, the IMF said: “A more simple and efficient tax system is important to encourage greater participation in the labor market, and promote investment and innovation, so that Canada’s tax competitiveness will be preserved with the rest of the world.”

The IMF also warned that the property transfer taxes on purchases by foreign residents introduced by the British Columbia and Ontario governments target capital flows and discriminate against non-resident buyers. It said the provinces should replace these measures, with possible alternatives including “a combination of prudential and tax-based measures that discourage speculative activity without discriminating between residents and non-residents.”

Four Tips for Global-Thinking Businesses

If you’re among those who see the winds of potential U.S. trade protectionism as a threat, but you’re still considering expanding beyond Canada, here are four tips that may help you:

1. Decide if your business is ready. Some products sell well in foreign markets, but others aren’t so welcome. There are cultural differences, so conduct market research very carefully. Understanding supply and demand for your product or service can help you forecast potential sales and decide whether you can reach a reasonable profit margin.

2. Plan a global strategy. For some companies, expanding globally is as simple as setting up an e-commerce website and marketing to customers in a target area. Others may require an overseas branch. Either way, you need a detailed plan that includes a thorough risk assessment. Working with established logistics partners that have experience in your markets can help you establish a clear strategy.

It’s also important to ensure your business is equipped to handle the demands of international trading. Consider starting in just one or two markets that offer low risks and high potential. Overexpansion could derail your international ambitions.

3. Know the laws. You must follow local regulations governing the import and export of goods. It’s simple enough to ship goods, but the laws can be complex and violating them can be costly. Rules governing foreign ownership of assets and taxation can be particularly high hurdles.

4. Play the long game. Your company’s senior management should be committed to any overseas move, including functions in human resources, operations and finance — then be prepared to wait. It’s not uncommon for companies in a foreign market to work with negative cash flow for up to five years, if not more. Be ready to sustain operations if they’re losing money and possibly put up even more money for unpredicted challenges and potentially more complex bureaucracies. And don’t underestimate the effect of currency fluctuations on profit.

Consult with your tax and other advisors. They can help you sort out a global plan as well as understand the laws and taxes in the countries where you may want to expand.