The question of whether the Canada Revenue Agency can be bound by settlement agreements it makes has been up in the air for many years, with accountants and their small business clients waiting to see which side the Tax Court of Canada would take. With the decision in the case of Sifto Canada Corp. v. Her Majesty the Queen, the TCC ruled that the Minister of National Revenue is legally bound by lawfully executed settlement agreements and is thereby prevented from reinvestigating and reassessing the subject covered by the agreement.
Sifto is a Canadian company that sold rock salt to a related company domiciled in the United States between 2002 and 2006. It discovered it had sold this rock salt at a price below the "arm’s length transfer price," or the price that would be charged on the open market. Sifto made a voluntary disclosure notifying the CRA of the additional income realized from these transactions.
Under the Mutual Agreement Procedure, the CRA arranged for a settlement agreement with the U. S. tax authority containing the new transfer price and the tax reassessment from the unreported income. Sifto accepted the offer. But the Minister later reassessed Sifto for the same 2002 to 2006 income after discovering an upward adjustment to the transfer price.
The TCC sided with Sifto and held that both the agreement under the MAP and the Voluntary Disclosure Program were binding and prevented the Minister from further audits and reassessments.
Voluntary Disclosure Program
Canada’s Voluntary Disclosure Program essentially gives your clients who discover a legitimate error, oversight, or other unintentional omission from their tax returns a second chance to file this information with the CRA without the threat of criminal prosecution and heavy fines. The program was amended in March 2018 to tighten the application standards due to the potential of taxpayers avoiding paying taxes on time by relying on this program. The CRA will not consider an application for the VDP for any taxpayer under investigation or it is considering investigating. To qualify for relief, the application must:
- Be voluntary
- Be complete
- Involve the potential of a penalty and/or interest
- Include information that is at least one year past due
- Include payment of the estimated tax owed
There are two tracks for accepted applications
- Used when facts indicate an element of intentional conduct on taxpayer’s part and for corporations with over $250 million in gross revenue
- Taxpayers do not face criminal prosecution or gross negligence penalties
- Taxpayers may face other penalties and interest as applicable
- Used for all other disclosures
- No criminal prosecution, penalties, or fines
- The CRA provides partial interest relief for years preceding the three most recent years
This decision makes it clear the CRA is bound by settlement agreements reached under Canada’s Mutual Agreement Procedure program. You and your small business clients should ensure a settlement agreement is conducted properly since you probably won’t be able to renegotiate it. Clients can also assume that once a matter is settled under a voluntary disclosure, it stays settled, since the CRA is bound by the original settlement and may not raise the same issue again.
It’s also quite possible that the government may place tighter restrictions on the VDP and investigate applicants much more thoroughly, making it more difficult for your clients to get accepted or negotiate a settlement under the program. There are reports that the CRA has started asking taxpayers to waive their rights of objection and appeal in MAP cases.