As headlines are talking about an unprecedented leak of secret papers and data involving murky and even illegal offshore financial transactions, governments across the world began investigating possible financial wrongdoing by the rich and powerful including prominent politicians and celebrities. Four decades of information amounting to 2.6 terabytes of data consisting of some 11.5 million documents detailing more than 210,000 offshore entities, specifically companies, foundations and trusts, are contained in the Panama Papers, information leaked from Panama law firm Mossack Fonseca. They say they have set up more than 240,000 offshore companies for global clients and have denied any wrongdoing. Canadian Revenue Minister Diane Lebouthillier has announced that CRA will investigate whether some Canadian taxpayers used Panamanian law firm Mossack Fonseca, shell companies and offshore bank accounts to evade Canadian income taxes. "The Canada Revenue Agency (CRA) will initiate risk assessments and, where appropriate, audit activities, based on the information that can be obtained from this data and from its treaty partners," said Chloé Luciani-Girouard, press secretary to Lebouthillier.
The Panama Papers information was leaked over a year ago to Süddeutsche Zeitung, a German newspaper, by an anonymous whistleblower who did not ask for any compensation and who provided the newspaper with Mossack Fonseca encrypted internal documents spanning 40 years. The result was a year long investigation by the International Consortium of Investigative Journalists and over 100 newspapers and TV news organizations in 76 countries, with 376 journalists working in 25 languages to decipher the documents, culminating in the breaking story around the world.
The size of the leak is indeed unprecedented. However the dissemination from large international organizations of massive amounts of confidential client details of tax haven usage, including clear evidence of criminal activities, is becoming common place, further eroding the walls of secrecy that used to be taken for granted in the lucrative offshore financial secrecy world. The involvement of the ICIJ is becoming a key part of these leaks. This is the third time since 2013 that transactions that were intended to remain hidden have burst with fanfare into the public domain. It is a new paradigm that offshore obscurity no longer exists, that participants in questionable offshore structures have to fear the tax and criminal authorities and that an offshore structure, whether opprobrious or legitimate, will be subject to scrutiny by authorities, the press and the general internet public.
An ICIJ analysis of the latest information shows that over 500 banks and their subsidiaries have worked with the Mossack Fonseca firm over the last 40 years to enable bank clients to manage their offshore companies and trusts. HSBC set up more than 2,300 offshore companies through Mossack Fonseca and was itself the source of a large leak 1 year ago. The ICIJ was also involved in the HSBC leak which revealed a list of 100,000 HSBC clients who had been assisted in criminal tax evasion by HSBC. Canadians were included on that list.
In 2013 ICIJ, following the same pattern used for the Panama Papers, orchestrated what was called Offshore Leaks, using 112 journalists in 58 countries to analyze 2.5 million leaked offshore files. They then posted a searchable database with names and addresses of some 100,000 entities in offshore tax havens. The database included Canadian taxpayers, some of whom had a high profile.
Locally, last year the Canadian arm of giant accounting firm KPMG was taken to court by CRA to reveal the names of its clients who were new Canadian immigrants and for whom KPMG had sold and set up offshore tax structures in the Isle of Man tax haven designed to avoid all Canadian taxes on income, a structure CRA has characterized as a sham. Some of those KPMG clients, in conjunction with their Canadian tax lawyers, participated in the CRA voluntary disclosure program prior to the release of their names to CRA and were thus able to avoid penalties and prosecution. It has also been reported that before Süddeutsche Zeitung obtained the Mossack Fonseca leaked information the German taxation authorities purchased a subset of Mossack Fonseca documents which resulted in the tax raids in Germany in early 2015. Apparently those same files have been offered to various tax authorities including the IRS in the United States, Inland Revenue in the United Kingdom and the tax departments in other countries.
The big headlines are about the current governmental investigations, the 12 current and former heads of state and 61 of their associates whose names have been outed as well as the 128 current and former politicians and public officials, 29 Forbes listed billionaires and entertainment and sports figures. But the focus is also the interwoven network of global law firms, banks, consultants and accountants who market and profit from offshore financial obscurity. Almost overlooked is the fact that the story also extends to Canadians who are evading their tax obligations by not reporting offshore income or assets.
The released documents contain the passport details of 350 Canadians, presumably provided to the law firm when their offshore corporations were set up. The leaked documents demonstrate patent wrongdoing, indeed what appears to be criminal activities, on the part of some of the high profile public figures, but they only form a small part of the exposed participants in these offshore structures. There are of course legitimate uses for offshore structures, including legal and legitimate tax planning and minimization strategies. Certainly from a Canadian tax point of view there is no problem with creating an offshore corporate structure, with one key admonition. All offshore assets owned by a Canadian resident in excess of $100,000, whether owned personally or through a corporation, have to be reported to CRA, as does all worldwide income including in particular offshore income.
As with the previous Offshore Leaks and all other tax haven leaks, CRA will carry out a tax investigation of all Canadians whose names are revealed. They will demand information from the Canadians and from third parties. CRA will impose civil penalties and in most cases will prosecute tax haven cheaters for tax evasion. The CRA voluntary disclosure program, mentioned before in the context of the KPMG clients, is available to any Canadian taxpayer provided CRA has not yet begun a tax audit or investigation. Merely having a name revealed as part of the Panama Papers should not in and of itself preclude the benefit of the voluntary disclosure for the 350 Canadians whose passport details were released, or for anyone else caught up in the tax haven data dump. A successful voluntary disclosure filing by our top Toronto tax lawyers means that the taxes owing on undeclared income will have to be paid, but there will be no CRA tax penalties, no tax evasion prosecution and there may be an interest reduction on the outstanding taxes.
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