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Federal Court Makes Decision on Voluntary Disclosures

Subject: Voluntary Disclosure Number: 05-17 Date: 7/11/2005

No-names basis submission that was accepted by CRA cannot be disregarded by CRA afterwards if facts have not changed.

In a recent Federal Court case (Karia 2005 FC 639), the Court had to deal with the issue of whether a disclosure can qualify as a voluntary disclosure if filed while other official investigations are under way. The Court also considered the extent to which the CRA is bound by correspondence that they provide in respect of unidentified voluntary disclosure candidates.

The taxpayer was investigated by the Peel Regional Police as part of a fraud investigation, which had nothing to do with the CRA. After a police search had been executed on the taxpayer, his lawyer contacted the CRA, on a "no-names" basis, to see if he could make a voluntary disclosure on behalf of his client. The lawyer admitted to the CRA that the taxpayer had been subjected to a search warrant by the police and had been charged with "a minor fraud." The lawyer followed up his conversation with a letter, on a no-names basis, requesting written confirmation from the CRA that they would accept a voluntary disclosure. The CRA confirmed that they would accept the voluntary disclosure. The lawyer then revealed the taxpayer's name and the name of his corporation.

The CRA rejected the voluntary disclosure on the basis that the voluntary disclosure had been filed with knowledge of enforcement action by an authority with which the CRA had an existing information exchange agreement. In support of this argument, the CRA referred to the Information Circular 00-1R, which, they said, confirmed the existence of the agreement. In fact, there was no "written agreement" but only an "informal relationship."

The Federal Court concluded that the CRA could not challenge the voluntary disclosure because of the police investigation since the CRA had already given assurances that the disclosure could proceed. The Court stated that the taxpayer had advised the CRA that the police investigation was ongoing and was never told that this would be a problem. The Court made it clear that the CRA could be held to its original promise. Based on previous cases, if the CRA's promise had breached a tax law, then the CRA might not have been bound by their original correspondence.

This is a significant case, which provides voluntary disclosure candidates with a substantial amount of comfort where a comfort letter has been given by the CRA.

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