Lately I've noticed a number of articles regarding bank accounts held offshore by Canadian residents. Coincidentally, the increased media attention has occurred while leaks about offshore account information abound.
While there's nothing wrong with having a bank or investment account in a tax haven, if you're a resident of Canada, you must report any income or capital gains earned in those offshore accounts on your Canadian tax return. Failure to report income on a Canadian tax return can result in significant penalties on top of the taxes payable and resulting interest.
In most cases, it's unlikely that much, if any, of the income or capital gains earned in such offshore accounts has ever been reported to the Canada Revenue Agency (CRA). With the details of those accounts possibly becoming public, it can safely be presumed that a number of Canadian resident taxpayers will want to come clean with the CRA.
Fortunately, the CRA has a voluntary disclosure program that provides taxpayers a means of correcting past tax return filings that were done incorrectly. There are certain conditions that must be met and not all errors or misstatements will fall under this program. However, for those taxpayers who do fall under this program, the CRA has stated that it will waive all penalties and will waive interest at its discretion. The taxpayer is still responsible for the taxes that should have been paid.
To qualify for the Voluntary Disclosure Program, four conditions must be met:
1) The disclosure must be voluntary (made before any compliance action has been undertaken by the CRA).
2) A penalty must apply to the items being disclosed.
3) The information is at least one year overdue.
4) The information is complete.
Assuming these conditions are met, it is the CRA's administrative policy to waive penalties related to the errors / misstatements.
Some of the types of errors / misstatements that will be accepted under the Voluntary Disclosure Program include:
- Failure to report taxable income
- Claiming non-deductible expenses on a tax return
- Not filing an information return (such as form T1135 related to foreign assets owned in excess of $100,000)
- Failure to report foreign-sourced income that is taxable in Canada
- Failure to file tax returns (Income tax or GST)
Note that the CRA is unable to grant relief for a disclosure if it's more than 10 years from the calendar year in which the submission is filed.
With the recent activity related to offshore bank accounts, it's highly likely that the CRA is being inundated with voluntary disclosures. If you're planning to apply to the Voluntary Disclosure Program, I suggest you carefully review all of your facts with your accountant to ensure the specific criteria are met.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.