The Federal Court of Canada’s recent judgment in Livaditis v. Canada Revenue Agency is a strong warning to taxpayers contemplating coming forward to make a voluntary disclosure that time is of the essence.
In brief, once a taxpayer or, in certain circumstances, a related person, is contacted by a revenue authority for any reason related to non-compliance, it’s too late to seek protection under the voluntary disclosure program.
Timing will be especially crucial for Canadian taxpayers with undeclared income currently held in offshore banks in light of recent disclosures of secret offshore banking records to the CRA and its clear intent to pursue non-compliant taxpayers.
The federal government’s commitment to pursuing non-compliant taxpayers was further confirmed by the short article in the Oct. 9, 2010, edition of The National Post by Keith Ashfield, Canada’s current minister of national revenue, in which he stated that “we are cracking down harder than ever on Canadians who are not paying their taxes.
We are working with our partners in the OECD and other international bodies on co-ordinated approaches to detecting and prosecuting tax evaders.
Canadians who have not paid their taxes are worried that they may be next; so they are coming forward to declare their assets in numbers never seen before.”
As a result, there’s no time like the present to declare unreported foreign income pursuant to the voluntary disclosure program.
In Livaditis, the issue for the court to decide was whether the CRA’s decision to refuse to grant Peter Livaditis relief under the program was unreasonable.
It had denied him such relief on the basis that his disclosure wasn’t voluntary. In the end, the court concluded the CRA’s decision was reasonable and therefore dismissed Livaditis’
application.
The first paragraph of the court’s judgment summarizes the critical facts that led the CRA to reject Livaditis’ disclosure: “The applicant received a telephone call from a [CRA] official concerning records related to ï¬rst purchasers of units in a condominium.
Shortly thereafter, he disclosed to the CRA that he had failed to report capital gains on the sale of his condo unit in 2006.”
The facts of the transactions conducted by Livaditis and members of his family are straightforward. Livaditis was the president of LaCaille Fifth Avenue Inc., which was developing, among other things, a condominium building in Calgary called Five West.
In 2003, Livaditis and four family members acquired units in Five West prior to construction and resold them in 2006 at a gain. Their gains on the condominium units weren’t reported, however.
The nature of the phone call Livaditis received from a CRA official was in dispute. His affidavit stated that the discussion was brief and generally concerned with buyers of condominium units.
However, the CRA’s deponent swore that Livaditis was informed that the agency had obtained an “unnamed person requirement” that it would serve on LaCaille to obtain the names of people who may have purchased and sold condominium units without declaring any gain.
Three days after the phone call from the CRA, Livaditis and his family members initiated voluntary disclosures. Four days later, the court order requiring production of information and documents concerning the unnamed persons who had acquired units at Five West was served on LaCaille.
The CRA rejected the disclosures filed by Livaditis and his family. Its sole reason for rejecting the disclosures was that they didn’t make them voluntarily. Livaditis and his family members then applied to the Federal Court for judicial review of the CRA’s decision.
According to the court’s review of the CRA’s voluntary disclosure policy, a disclosure “may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation or other enforcement action that has been initiated by the [CRA] or other authorities or administrations with which the [CRA] has information exchange agreements.”
The court stated that in determining whether an enforcement action has occurred, the CRA must consider the
following:
• Whether there was any direct contact with the taxpayer by a CRA employee or other authority or administration for any reason related to non-compliance or the taxpayer was likely to have been aware of the enforcement action.
• Whether any enforcement action had been initiated against a person associated with or related to the taxpayer or a third party and that enforcement action is sufficiently related to the disclosure in issue and is likely to have uncovered the information being disclosed.
The court stated that a negative response to either of these points would mean the disclosure would qualify as voluntary. With respect, the court may have meant to state that a negative response to both of these questions is required for the CRA to accept that the voluntariness criterion has been met.
With respect to the first point - whether there was any direct contact with the taxpayer for any reason related to non-compliance or whether the taxpayer would likely have been aware of the enforcement action - the court was critical of the CRA.
For example, it criticized the federal agency for placing significant weight on the CRA official’s version of events while discounting Livaditis’ side of the story.
In the absence of any genuine reason to favour one version over another, the court concluded that the CRA’s decision was unfair and not deserving of its deference.
Had the only issue been whether the CRA’s conduct was reasonable in this regard, the court would have held in Livaditis’ favour.
However, with respect to the second point, the court sided with the CRA. It stated that this ground for rejecting a voluntary disclosure doesn’t involve or require taxpayer awareness of any enforcement action.
Thus, once the CRA had begun enforcement against LaCaille, Livaditis was disentitled to protection under the program in relation to any issue connected to the enforcement action.
The CRA’s move predated the disclosures and would have uncovered the same information they revealed. Consequently, the court held that the CRA’s action wasn’t unreasonable, thus upholding its decision to reject the disclosures.
The court’s interpretation of the CRA’s policy isn’t strained, although some reasonable criticisms may be made.
By holding that a disclosure isn’t voluntary where an enforcement action has been commenced against a related party, the court established the CRA’s policy as a guiding legal principle.
However, with the greatest of respect to the court, the CRA’s policy is merely policy and not law. Consequently, the court need not apply it strictly.
We submit that a taxpayer may make a truly voluntary disclosure while coincidentally being unaware that an enforcement action has been or is about to be initiated against a related party.
Thus, by applying the CRA’s interpretation, the court has allowed for potentially anomalous outcomes in the future where a taxpayer’s disclosure may be ruled not voluntary because of some unknown pending enforcement action against someone else.
As a result, Livaditis highlights why taxpayers with undisclosed tax obligations need to move forward promptly before the CRA commences any kind of enforcement action that may preclude obtaining protection under the voluntary disclosure program.
Stevan Novoselac and John Sorensen both practise tax law at Gowling Lafleur Henderson LLP.
In brief, once a taxpayer or, in certain circumstances, a related person, is contacted by a revenue authority for any reason related to non-compliance, it’s too late to seek protection under the voluntary disclosure program.
Timing will be especially crucial for Canadian taxpayers with undeclared income currently held in offshore banks in light of recent disclosures of secret offshore banking records to the CRA and its clear intent to pursue non-compliant taxpayers.
The federal government’s commitment to pursuing non-compliant taxpayers was further confirmed by the short article in the Oct. 9, 2010, edition of The National Post by Keith Ashfield, Canada’s current minister of national revenue, in which he stated that “we are cracking down harder than ever on Canadians who are not paying their taxes.
We are working with our partners in the OECD and other international bodies on co-ordinated approaches to detecting and prosecuting tax evaders.
Canadians who have not paid their taxes are worried that they may be next; so they are coming forward to declare their assets in numbers never seen before.”
As a result, there’s no time like the present to declare unreported foreign income pursuant to the voluntary disclosure program.
In Livaditis, the issue for the court to decide was whether the CRA’s decision to refuse to grant Peter Livaditis relief under the program was unreasonable.
It had denied him such relief on the basis that his disclosure wasn’t voluntary. In the end, the court concluded the CRA’s decision was reasonable and therefore dismissed Livaditis’
application.
The first paragraph of the court’s judgment summarizes the critical facts that led the CRA to reject Livaditis’ disclosure: “The applicant received a telephone call from a [CRA] official concerning records related to ï¬rst purchasers of units in a condominium.
Shortly thereafter, he disclosed to the CRA that he had failed to report capital gains on the sale of his condo unit in 2006.”
The facts of the transactions conducted by Livaditis and members of his family are straightforward. Livaditis was the president of LaCaille Fifth Avenue Inc., which was developing, among other things, a condominium building in Calgary called Five West.
In 2003, Livaditis and four family members acquired units in Five West prior to construction and resold them in 2006 at a gain. Their gains on the condominium units weren’t reported, however.
The nature of the phone call Livaditis received from a CRA official was in dispute. His affidavit stated that the discussion was brief and generally concerned with buyers of condominium units.
However, the CRA’s deponent swore that Livaditis was informed that the agency had obtained an “unnamed person requirement” that it would serve on LaCaille to obtain the names of people who may have purchased and sold condominium units without declaring any gain.
Three days after the phone call from the CRA, Livaditis and his family members initiated voluntary disclosures. Four days later, the court order requiring production of information and documents concerning the unnamed persons who had acquired units at Five West was served on LaCaille.
The CRA rejected the disclosures filed by Livaditis and his family. Its sole reason for rejecting the disclosures was that they didn’t make them voluntarily. Livaditis and his family members then applied to the Federal Court for judicial review of the CRA’s decision.
According to the court’s review of the CRA’s voluntary disclosure policy, a disclosure “may not qualify as a voluntary disclosure under the above policy if it is found to have been made with the knowledge of an audit, investigation or other enforcement action that has been initiated by the [CRA] or other authorities or administrations with which the [CRA] has information exchange agreements.”
The court stated that in determining whether an enforcement action has occurred, the CRA must consider the
following:
• Whether there was any direct contact with the taxpayer by a CRA employee or other authority or administration for any reason related to non-compliance or the taxpayer was likely to have been aware of the enforcement action.
• Whether any enforcement action had been initiated against a person associated with or related to the taxpayer or a third party and that enforcement action is sufficiently related to the disclosure in issue and is likely to have uncovered the information being disclosed.
The court stated that a negative response to either of these points would mean the disclosure would qualify as voluntary. With respect, the court may have meant to state that a negative response to both of these questions is required for the CRA to accept that the voluntariness criterion has been met.
With respect to the first point - whether there was any direct contact with the taxpayer for any reason related to non-compliance or whether the taxpayer would likely have been aware of the enforcement action - the court was critical of the CRA.
For example, it criticized the federal agency for placing significant weight on the CRA official’s version of events while discounting Livaditis’ side of the story.
In the absence of any genuine reason to favour one version over another, the court concluded that the CRA’s decision was unfair and not deserving of its deference.
Had the only issue been whether the CRA’s conduct was reasonable in this regard, the court would have held in Livaditis’ favour.
However, with respect to the second point, the court sided with the CRA. It stated that this ground for rejecting a voluntary disclosure doesn’t involve or require taxpayer awareness of any enforcement action.
Thus, once the CRA had begun enforcement against LaCaille, Livaditis was disentitled to protection under the program in relation to any issue connected to the enforcement action.
The CRA’s move predated the disclosures and would have uncovered the same information they revealed. Consequently, the court held that the CRA’s action wasn’t unreasonable, thus upholding its decision to reject the disclosures.
The court’s interpretation of the CRA’s policy isn’t strained, although some reasonable criticisms may be made.
By holding that a disclosure isn’t voluntary where an enforcement action has been commenced against a related party, the court established the CRA’s policy as a guiding legal principle.
However, with the greatest of respect to the court, the CRA’s policy is merely policy and not law. Consequently, the court need not apply it strictly.
We submit that a taxpayer may make a truly voluntary disclosure while coincidentally being unaware that an enforcement action has been or is about to be initiated against a related party.
Thus, by applying the CRA’s interpretation, the court has allowed for potentially anomalous outcomes in the future where a taxpayer’s disclosure may be ruled not voluntary because of some unknown pending enforcement action against someone else.
As a result, Livaditis highlights why taxpayers with undisclosed tax obligations need to move forward promptly before the CRA commences any kind of enforcement action that may preclude obtaining protection under the voluntary disclosure program.
Stevan Novoselac and John Sorensen both practise tax law at Gowling Lafleur Henderson LLP.
