CRA indicates it can accommodate bifurcating a GST/HST VDP application into wash transaction and Category 2 components

A taxpayer is making a GST/HST voluntary disclosure respecting wash transactions (e.g., the wrong entity in a corporate group claimed input tax credits), so that, without more, the application would fall under Category 1 (complete waiver of interest and penalties). However, if there are other errors as well, CRA will generally split the application into a Category 1 application respecting the wash transaction, and a Category 2 (General program) or Category 3 (Limited program) application for the other errors, “provided there is no indication of tax avoidance, deliberate or wilful default, or carelessness amounting to gross negligence.” Where such elements are present “then the VDP application as a whole will fall under Category 3” (i.e., usually no relief provided other than from a gross negligence penalty).

Neal Armstrong. Summary of 28 February 2019 CBA Roundtable, Q.7 under ETA s. 281.1(2).