Offshore Bank Accounts Under CRA Scrutiny

Reproduced today from the CRA website:

Ottawa, Ontario, September 30, 2010 … The Honourable Keith Ashfield, Minister of National Revenue, Minister of the Atlantic Canada Opportunities Agency and Minister for the Atlantic Gateway, today announced that the Canada Revenue Agency (CRA) has recently received information from the government of France about HSBC account holders.

Since receiving the information, the CRA has continued to analyze account data to ensure that the Canadian holders are declaring all their income for tax purposes. The CRA has begun a series of audits.

“This is just another example of how our government is taking action to crack down on people who unfairly exploit offshore accounts,” said Minister Ashfield. “We know that most Canadians pay their taxes and play by the rules. That’s why we are taking aggressive action to recover money owed to Canadians.”

The CRA can confirm that over 1,000 bank accounts are linked to Canadian taxpayers. The largest accounts are now being audited, and others will follow. All accounts that are linked to Canadian taxpayers will be reviewed.

Through communication with international partners, the CRA continues to benefit from the increased flow of information under its tax treaties. In this regard, the CRA collaborates extensively with the Organisation for Economic Co‑operation and Development, the Seven-Country Working Group on Tax Havens, and the Joint International Tax Shelter Information Centre.

Last year, the CRA uncovered over $1 billion in unpaid federal tax from Canadian taxpayers hiding assets and accounts offshore or through other international transactions. For the same period, the CRA identified another $138 million in unpaid tax through the CRA’s voluntary disclosure program. Just five months into this fiscal year, the number of last year’s disclosures has already been surpassed.

Those Canadians who have undeclared income in foreign jurisdictions can make a voluntary disclosure and pay only taxes owing plus interest. The CRA’s Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct their tax information.

Not reporting income from foreign sources is illegal. Tax recovery continues to grow as a result of the CRA’s international efforts and audit processes. The CRA is committed to continuing collaborative work to protect Canada’s tax base.

CRA Exposes More Offshore Shenanigans

If you’ve been following the UBS scare in the U.S. (see my previous post on this topic) please add the tiny state of Liechtenstein and the relatively large Canadian  institution known as RBC Dominion Securities to the list of names associated with offshore shenanigans.

The CBC reports that the Canada Revenue Agency is investigating 13 taxpayers who set up offshore accounts with LGT Group in Liechtenstein. These accounts were set up with the aid of Colin Ross, a former investment adviser at the Victoria branch of RBC.

Liechtenstein: Small, beautiful, and one of the tax community's best kept secrets

The CRA’s investigation, launched last year, found that certain foundations were set up and used by taxpayers to “masquerade as non-residents.” The agency says the taxpayers were “hiding their investments and other income” and “evading their obligation to pay Canadian tax.”

Of the 13 taxpayers implicated, some have made voluntary disclosures, and will therefore likely escape criminal charges and penalties. Others are under the gun for tax evasion, including  one Victoria woman who told investigators she felt having an offshore account was “glamorous”.

RBC  has released a statement disavowing any wrongdoing as a firm. The CRA is now investigating whether more Canadians are doing the same thing through RBC advisers across the country. But it won’t stop there. Revenue Minister Jean-Pierre Blackburn is quoted as saying “We will go after every other bank to obtain the list of their clients who do business abroad and to see if those clients declare their income.”

WHAT’S YOUR TAX ISSUE?: OFFSHORE EMPLOYMENT

The Tax Issue:

I was wondering If I earn money offshore and do not repatriate any of it back to Canada do I have to pay tax on it. (i.e. Work, Investments, etc…)?

The Answer:

The short answer is YES!

With all the talk recently about UBS, offshore bank accounts and tax evasion, this question comes at a crucial time for any Canadian taxpayer with funds offshore.

Generally, if you are a Canadian resident, you are obligated to declare and pay tax on your world income. So, if you go off to Dubai and earn revenue as a systems consultant there for a few weeks, deposit the funds in a Swiss bank account and never bring the money into Canada, you are still obligated to report the income earned on your Canadian income tax return for the year.

Similarly, any investment income earned while that money sits in an offshore account is taxable in Canada as it is earned.

If the income is from employment, and you meet certain criteria, you may be eligible for an overseas employment tax credit to be deducted on your return. You should consult your tax advisor if you were employed on a long-term project offshore at any time in the year.

The Canadian system operates on the basis of residency alone. So, if you leave Canada permanently, you will no longer be subject to Canadian income tax from the time of departure. As a non-resident you will generally not be subject to tax in Canada, even if you are a Canadian citizen.

So, if you’ve read my previous post on the UBS affair and how it affects us here in Canada, you should be aware that any funds deposited in any offshore account that contains proceeds from taxable earnings you derived while a resident of Canada is subject to the scrutiny of the CRA at any time.

Update: See the case of Bensouilah v. MNR (2009 DTC 1327) for an illustration of Canadian resident taxpayer failing to report employment income earned in Saudi Arabia.

Brian Mulroney and the CRA – Part 2

This is a continuation of my Mulroney rant from last post.

While Mr. Mulroney admits to collecting $225,000 as a retainer for services to be rendered to Karlheinz Schreiber, he claims he did not report the amounts as income for tax purposes because he didn’t feel they were earned yet.

Muroney with Reagan - happier days

Mulroney with Reagan in happier days

Fast forward to 1999, when the amount was finally reported as income. First of all, the event that triggered the reporting was not the fact that anything was earned, it was the fact that Mr. Mulroney was feeling threatened that Schreiber was going to report him to the tax authorities. So, if Mulroney was complying with the tax law as he claimed, why would he worry about such a threat?

Next, if all was above board with this amount of income, why would Mulroney not simply add  it to his tax return for 1999? Here’s a fact: the voluntary disclosures route taken by Mr. Mulroney is only available to taxpayers where negligence penalties are involved.

And why, for heaven’s sake, would he not insist on reporting the full amount when his lawyers came to him with the deal they negotiated with the CRA that allowed him to escape tax on half the cash? That’s what I would do if I were a former Prime Minister conscious of my appearance in the public view.

When asked these very questions, Mr. Mulroney simply blamed it all on his lawyers. Trust me when I say that pleading ignorance and relying on professionals never works with the CRA or the courts. Taxpayers, especially sophisticated taxpayers are always assumed to have knowledge of the contents of the tax returns as evidenced by their signatures and are held responsible for them. For someone like Mr. Mulroney to reply to a direct question concerning his taxes with the statement that he “gave it to (his) tax advisers” is the epitome of brazenness.

Mulroney was followed immediately by Wayne Adams of the CRA who tried to explain to the committee much of what I’ve just said. At the end, Commissioner Oliphant said “I listened to Mr. Mulroney for six hours and I find myself more tired listening to an hour and a half of tax law here”.

Charisma. Mulroney’s got it. Tax nerds like me, not so much.

Canada’s Quieter Campaign

With the UBS ordeal making loud news across the border, Canada , in addition to continuing to piggy-back on the success of the IRS, quietly pursues its own ongoing campaign against off-shore tax evasion. While some may see the CRA’s efforts as slow to the point of non-existent, it is real, and it is progressing.

The Minister of Finance announced last week that it has signed its first Tax Information Exchange Agreement (TIEA) with a non-treaty tax jurisdiction. The sharing of tax information is normally included in Canada’s treaties, but this is different – it applies to non-treaty, traditionally low tax jurisdictions such as Bahamas, Caymen Islands, Jersey and the like. Last week’s agreement with the Netherlands-Antilles is the first in a long list of agreements that will be signed over the next five years.

The bad news, of course, is that these countries will now be happy to turn over information to the CRA that is necessary to help enforce Canadian tax law. Anyone doing business in these jurisdictions would be well advised to start thinking about the future and ensure that they have, in fact been complying with the rules.

The good news is that these countries will become more attractive jurisdictions for foreign business operations from a Canadian tax point of view. Any country that has signed a TIEA with Canada will be eligible for favourable treatment with respect to dividends coming back to Canada. The current rule is that any dividend paid from a non-treaty country is not eligible for exemption under our foreign-affiliate system. Now, any country that has a TIEA with Canada will also qualify for this treatment. So, earnings from active business in these countries can be repatriated to a Canadian parent company on a tax-deferred basis.

Now, back to the bad news. For those countries that do not sign a TIEA with Canada within five years from the day that Canada invites negotiations, active business earnings will not only fail to qualify for tax exempt repatriation, it will also become subject to Canada’s Foreign Accrual Property rules, better known as “FAPI”.

The bottom line? Expect Canada to put the pressure on many tax haven jurisdictions to sign these agreements, allowing the CRA to quietly cast its net over an ever-increasing area of the tax world.

UBS, IRS, CRA and YOU

What’s all this commotion about UBS? Well if you’ve been out of the loop or simply hiding your head in the sand every time you hear those initials, then it is now officially time to wake up.

First, a bit of background. Around a year ago, a former UBS banker named Bradley Birkenfeld came forward to report illegal tactics by the giant Swiss Bank. UBS was luring big money investors to deposit undeclared income in their bank with promises of the famous Swiss secrecy laws. Birkenfeld was a party to a deposit of $200 million by U.S. billionaire Igor Olenicoff, who was convicted, and required to pay $53 million in taxes and penalties.

The IRS is looking into peoples affairs

The IRS is looking everywhere for offshore bank accounts

The IRS pulled a bit more on the thread. They discovered that a special office over at UBS would regularly make trips to North America to lure big time investors. A part of this office was known as the “Canada Desk”. It is estimated that Canadian investors have deposits of more than $5 billion at UBS.

Why all the Fuss This Week?

The IRS has been trying to get UBS to disclose more names and until last week, has been stonewalled by the bank, who claims it would run afoul of Swiss secrecy laws. On August 19, the Swiss government agreed to loosen those laws in order to cooperate with the IRS. As a result, UBS is now required to hand the names of 4,450 of its biggest U.S. depositors to the IRS.

And it’s only the beginning. In IRS commissioner Doug Shulman’s words “This issue is not going away, and people hiding assets and income offshore will find themselves increasingly at risk due to our efforts in this area.”

What about us poor folk north of the border?

The CRA is chasing after this gravy train like a dog after a truckload of Gravy Train. Revenue Minister Jean-Pierre Blackburn is in a tizzy over Canada’s weak enforcement laws and is recommending major changes to the law to help trace the movement of funds offshore. Lawyers for the CRA are reportedly heading off to Switzerland for “discussions” with UBS officials.

From a Canadian perspective none of this seems to have hit home just yet. To date only seven people have come forward to report their offshore activities. But if more taxpayers intend to do so, they shouldn’t wait too long. The voluntary disclosures program in Canada is designed to give some relief to taxpayers who come forward prior to being investigated. So, if a name is divulged to the CRA and an investigation ensues, no relief will be available.

What kinds of consequences do Canadians face? Tax evasion can come with a two-year prison sentence and fines of more than 50 percent of the tax owing, plus interest compounded daily. Canadian taxpayers are required each year to report their offshore deposits if they exceed $100,000. Failure to file this form can lead to fines of up to $24,000 per year.

Americans have a quick decision to make. The IRS has set up a special framework for voluntary disclosures relating to offshore activities, but this framework has a short life span. If they do not come forward by September 23, taxpayers may face the full force of the law, including possible criminal charges. Here in Canada, the problem is not so urgent, but now would seem to be a good time to think about getting your ducks in a row.

Oh, and one more thing – if you are a professional advisor, you should be aware that our friend, Mr. Birkenfeld was sentenced to 3 years in prison for setting his client up with his UBS account. So don’t say I didn’t warn you.