Tax authorities target undisclosed foreign assets

The so-called “educational” letters have traditionally been aimed at individual taxpayers claiming employment expenses and business owners claiming business or rental losses. Last December the revenue agency announced that it will launch its sixth “Office Audit Letter Campaign” at the beginning of this year and send approximately 33,000 educational and intent-to-audit letters to select groups of individual taxpayers and business owners as part of its efforts to encourage voluntary compliance.

But in a move that surprised tax professionals, the CRA expanded the campaign for the first time to remind select taxpayers to properly disclose offshore assets under the T1135-Foreign Income Verification Statement. Failure to file the requisite forms can lead to criminal prosecution and gross negligence penalties equal to 50 per cent of the tax related to the unreported income, points out the letter, adding that taxpayers can use resort to the voluntary disclosures program if they did not comply with the rules.

The specific criteria used to select the recipients of the letter is unknown and is the subject of rife speculation among tax professionals. Some speculate that the CRA may have received information provided by foreign banks operating in Canada in response to “unnamed person requirements” issued by the federal tax office. Others wonder whether reports from Canadian banks to Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), the federal anti-money laundering agency, provided CRA information regarding foreign transfers to Canada, while yet others think that credit card processors may have provided information over the use of cash cards linked to offshore accounts. In any case, “CRA’s objective is to put pressure on taxpayers but also to gather intelligence to help it to detect taxpayers who may have undeclared offshore income,” remarked Nicolas Simard, a Montreal tax lawyer with Fasken Martineau DuMoulin LLP.

Up until 2007, when an informant provided the CRA with a list of 192 names of accounts at a bank in Liechtenstein, Canadian tax authorities had scant knowledge about the practices and schemes used by offshore tax evaders. That is changing, testified last year Richard Montroy, CRA’s assistant commissioner with the compliance programs branch, before the Standing Committee on Public Accounts. “What we learned from the list is how people structure their affairs to get under the radar screen,” said Montroy. “What transactions they do, what countries they go through to hide their assets, whether they use intermediaries or tax professionals…We know now where to look.”

Taxpayers who have taken advantage of the CRA’s voluntary disclosures program too have provided invaluable insights into offshore tax evasion, notes a performance audit conducted by the Office of the Auditor General that examined whether the CRA conducted adequate compliance actions on taxpayers on the Liechtenstein list. The 2013 Auditor General report found that the CRA has begun to analyze disclosures through its voluntary disclosures program to assist its audit work on offshore accounts.

The letter writing campaign and the voluntary disclosures program are part of a growing arsenal of tools the federal government is using to fight offshore tax evasion. The federal tax office established in 2013 an Offshore Compliance Division, comprised of 70 employees with an expertise in auditing and data analysis, and launched a whistleblowing program in January 2014 modelled on the far more generous U.S. counterpart which provides rewards as high as 30 per cent. In one case, the U.S. Internal Revenue Service paid out US$104 million to a whistleblower after collecting $5 billion U.S. in back taxes from Swiss banks. The Canadian program pays between five and 15 per cent but only if the CRA successfully collects more than $100,000 in taxes owed.

On top of that, as of this January, the CRA has another instrument at its disposal. As part of a larger package of reforms from the 2013 federal budget that specifically targets international tax evasion or avoidance, certain financial intermediaries, including banks, will now have to report to the CRA incoming and outgoing international electronic funds transfer of $10,000 or more. The rate of return on every dollar invested by CRA for these new programs is “fairly significant,” ranging between 8:1 and 10:1, testified Montroy. “Finally, with all these measures the CRA us beginning to be proactive instead of reactive over offshore tax avoidance,” said Simard.

With tax authorities and financial institutions clamping down on undisclosed offshore accounts, the era of offshore bank secrecy is all but over, said Jules Brossard, a Montreal tax lawyer with De Grandpré Chait LLP. Canada has 92 tax treaties currently in force, five that have been signed but are not yet in force, and is currently negotiating or renegotiating with six countries, including Australia, China, Israel, Malaysia and the Netherlands. Moreover, Canada has signed 22 tax information and exchange agreements, and is negotiating with eight countries. That’s aside from the multinational tax swap initiative that comes into force in 2018. In an initiative launched by the Organization of Economic Co-operation and Development (OECD), 51 countries will begin automatically exchanging tax information collected by financial institutions in 2017, and 35 countries — including Canada — will join in 2018. Signatories include traditional tax havens such as Liechtenstein, the British Virgin Islands, and the Cayman Islands.

“You can run but you can’t hide. It’s impossible,” said Brossard. “There is so little to gain by delaying and the risks are so high. If you’re a Quebecer you could get between 70-to-75 per cent of the money (held in an offshore account), and if you live in any other Canadian province you’re looking at 80-to-85 per cent. So it’s a no-brainer.”

It therefore makes little sense for Canadian taxpayers with undisclosed offshore assets to turn a blind eye to the voluntary disclosure program, deemed by tax professionals as one of the most generous in the world. Tax professionals suggest that taxpayers apply for relief under the voluntary disclosure program on a “no-names” basis. That would allow a taxpayer to gain a better understanding of the CRA’s position on the potential availability of relief under the program and the implications of the taxpayer’s disclosure being rejected — without the taxpayer having to reveal its identity, said Friedman. The taxpayer then has 90 days from the date of disclosure to disclose their identity and provide a full and complete disclosure. “While the CRA considers discussions on a no-names basis as non-binding, you have a strong indication of where the CRA will ultimately land, otherwise the no-names process would be of little value,” said Friedman.