You can’t stay in the shadows. That’s what tax advisors are telling Canadian high net-worth (HNW) individuals who have assets in foreign countries and are looking for guidance in the new era of international tax surveillance.
“There is so much exchange of information between different countries now that the Canada Revenue Agency [CRA] has the means to confirm people’s [offshore] assets,” says Robert Kepes, a tax lawyer and partner with Morris Kepes Winters LLP in Toronto. “The idea of high net-worth individuals living in secrecy is just not on anymore.”
The international hunt for hidden assets has been largely led by the U.S., which uses 2010 legislation, known as the Foreign Account Tax Compliance Act, to gather information about the offshore holdings of its taxpayers. Since then, more than 100 countries, including Canada, have signed an international financial information-sharing agreement known as the Common Reporting Standard, which was developed by the Organization for Economic Co-operation and Development in 2014.
Recently, the CRA also began conducting extensive searches of taxpayers’ affairs by using data-mining techniques to search large volumes of historical taxpayer data. And there seems little doubt that some HNW Canadians have been using foreign jurisdictions to hide significant wealth from the CRA. This past June, the agency released a report containing an estimate that Canada is losing up to $3 billion annually in tax revenue as a result of offshore tax evasion. The amount being hidden, the report states, could be as much as $240 billion. This new vigilance is altering the tax-planning landscape for Canadian HNW individuals. Says Christine Perry, a tax and estates lawyer with Keel Cottrelle LLP in Toronto: “We try to structure any planning that we’re preparing for [clients] as if it’s going to be audited and reviewed. We’ve accepted that there’s full disclosure of everything that’s going on, and I think that’s the way you have to approach these kinds of things.”
Of course, holding assets offshore is not illegal. What’s not permitted is failure to report those assets. Says Mitchell Stein, assistant professor of managerial accounting and control at the Ivey Business School at Western University in London, Ont.: “Compliance is key. Seeking out a knowledgeable [international tax] advisor and being willing to pay for those services is key. This is not something to do on the cheap.”
Many clients are already noticing the changes. For example, the incidence of clients receiving letters or requests from the CRA for additional information about certain accounts, particularly foreign holdings, has increased, Perry says: “In the past, it would be rare that someone would receive this type of letter from [the CRA].”
These developments have contributed to increased interest from clients in making use of the CRA’s Voluntary Disclosures Program (VDP), Perry adds. The VDP allows taxpayers to become compliant in exchange for relief from penalties and prosecution, although taxes and interest still are owed.
“When you go through the VDP process,” Perry says, “I find that people are more willing than they were 10 years ago to say, ‘Yeah, I have to move forward with this, and it’s the right thing to do and I’m going to do it’.”
Another motivating factor for some older clients, Kepes says, is the desire to clean up their affairs, in terms of tax non-compliance, before they pass away so that heirs aren’t left bearing the burden of putting things right with the CRA. If no action is taken before death, “the person’s tax liability [related to the non-compliance] passes on to the estate, and now the estate has to deal with it,” he says.
However, it’s critical that non-compliant taxpayers contact the CRA proactively; the VDP is not available to a taxpayer once the CRA has begun an audit process on that taxpayer. “Once you receive an audit letter, your ability to participate in a VDP disappears,” Perry says. “Now, you’re assured that you’re going to be paying penalties.”
In March, the CRA revamped the VDP to make qualifying for it tougher. There now are two VDP streams: a “limited” stream for taxpayers who are deemed to have engaged in intentional non-compliance; and a “general” stream for taxpayers in cases in which non-compliance is inadvertent. The limited stream offers fewer opportunities for relief from penalties.
The CRA is taking a harder line on non-compliance, Perry says. For example, in the past, the agency might have waived penalties related to a first-time failure to file a Foreign Income Verification Statement, an annual reporting requirement for taxpayers who own specified foreign assets with a cost of $100,000 or more. However, in recent years, the CRA has assessed the penalties more strictly. Says Perry: “If you do have an infraction, you’re more likely to have the penalty applied.”