Introduction – Offshore funds and Canada Revenue Agency' reach
Gone are the days when offshore bank accounts were outside the Canada Revenue Agency (CRA)'s reach. With the advent of the Common Reporting Standard (CRS), CRA automatically receives financial information of Canadian taxpayers who own bank accounts or assets in other jurisdictions. The CRA has indicated this financial information may be used to identify Canadian taxpayers who have failed to meet their offshore reporting obligations. Under the Income Tax Act, a Canadian taxpayer is required to report any income earned offshore and foreign assets that meet certain criteria. The penalties resulting from a taxpayer's failure to meet these offshore reporting requirements can be severe, and in some instances can amount to more than half of the value of the foreign fund or offshore assets held by the Canadian taxpayer.
Common Reporting Standard: A More Transparent World
Following the 2008 financial crisis, tax agencies around the world turned their attention to the problem of tax evasion. Lack of transparency between tax authorities in different jurisdictions, and between tax authorities and financial institutions of different jurisdictions had historically allowed taxpayers to hide their assets and income. The Common Reporting Standard was developed to address this problem.
The CRS was developed in 2014 by the Organization for Economic Co-operation and Development (OECD). In essence, CRS is an information standard for automatic exchange of information on financial accounts between the tax authorities of various jurisdictions. Many governments, which are signatories, have subsequently implemented the CRS's reporting requirements by introducing legislation at the national level. This legislation in turn requires a jurisdiction's financial institutions to disclose their clients' financial information to the national tax authority (such as CRA). This national tax authority subsequently directs the same financial information (for example, type of account, amount of funds, type of asset, etc.) to the relevant tax authority in other jurisdictions.
Over 100 countries have signed on for the CRS, and the majority have introduced the necessary national legislation. For example, Canada has passed legislation (Part XIX of Income Tax Act) which places an obligation on Canadian financial institutions to gather and further relay their clients' financial information to other signatories of the CRS. In turn, the CRA receives financial information about Canadian taxpayers who have bank accounts and assets in other jurisdictions who are signatories to the CRS.
How does Common Reporting Standard affect Canadian taxpayers?
With the advent of wide spread information sharing brought on by implementation of the CRS, it is ever more critical for Canadian Taxpayers who earn offshore income, or hold offshore assets to make the required disclosures in their annual tax filings. Financial institutions now routinely ask their clients to verify their tax residence. This information is used to relay a client's financial information to the appropriate tax authority. If you are a Canadian taxpayer, your account's information is relayed to the CRA.
For Canadian Taxpayers who have met their offshore reporting obligations, there is no cause for concern. The Income Tax Act imposes two types of reporting obligations on all Canadian taxpayers who earn offshore income or hold offshore assets. Canadian taxpayers are required to include their offshore income in their annual Canadian tax filings. Additionally, Canadian Taxpayers who hold offshore assets, and these assets meet certain criteria, are required to file a Form T1135 annually. The obligation to file a Form T1135 is triggered if certain conditions are met. First, the value of the property (including the amount of funds in an offshore account) must be at least $100,000 in Canadian currency at any time through out the year. Second, the property must fall into one of the "Specified Foreign Property" categories outlined in the Income Tax Act.
So long as there is no discrepancy between what the taxpayer has reported to the CRA, and the offshore financial information disclosed through the automatic exchange of information, there is no cause for concern. The same cannot be said for Canadian taxpayers who have failed to do so, and have neglected, either unknowingly or deliberately, to report their offshore income or to file a T1135 Form for their specified foreign property.
How is CRA going to use the information gathered through CRS
Evidently, the CRS allows the CRA to identify Canadian taxpayers whose annual tax filings are inconsistent with their offshore income or assets. Our Canadian tax Law firm suspects that the CRA is likely to use this information for the purpose of its tax audit selection process.
Penalties, Interest and Possible Criminal Prosecution – Consequences of Failure to Report
Canadian taxpayers who fail to report their foreign income or certain offshore assets can face significant penalties and accrued interest charges if caught by the CRA. The Income Tax Act gives CRA the power to levy penalties on taxpayers who fail to disclose or who underreport their offshore income. The same applies to the Canadian taxpayers who, although required, fail to file a Form T1135 for their offshore assets. Prosecuting the taxpayer for the crime of tax evasion is another option in the CRA's arsenal. If convicted of this crime, a Canadian taxpayer can face up to two years in prison.
For instance, a Canadian taxpayer who earns dividend on stocks held in a foreign account, and fails to disclose this dividend income amount in his or her annual filings, is in contravention of his or her obligation under the Income Tax Act. The penalties and possibility of prosecution applies to this taxpayer if he or she is caught by the CRA.
The same may be true for a Canadian Taxpayer who holds foreign assets, even in instances where the assets do not generate income. Generally, a bank account is, for tax purposes, classified as an asset. Therefore, the CRA considers a taxpayer who holds a savings bank account in a foreign jurisdiction to hold an offshore asset. If, in a given taxation year, the value of the funds in the account exceeds $100,000 CAD, the taxpayer has an obligation to report the existence of this account to the CRA. Failure to report this account by filing a Form T1135 results in the imposition of penalties. Such penalties can be quite burdensome. For example, if certain conditions are present, the penalty can be as high as 50% of the amount of funds in the savings account.
The CRA also has the power to prosecute a Canadian taxpayer who fails to meet his or her offshore reporting obligations. Such a taxpayer would be prosecuted for the crime of tax evasion. The Income Tax Act defines tax evasion broadly: a wide range of taxpayer's actions can put him or her squarely within the boundaries of this crime. Whether a taxpayer meets the "guilty mind" requirement of a tax evasion charge can only be determined on a case by case basis. The CRA, like many other jurisdictions, is aggressively targeting offshore tax evaders, and is more inclined to charge individuals or corporations with the crime of tax evasion.
Tax Tips: Voluntary Disclosure Program as a Remedy for Failure to Disclose Offshore Income and Asset – Timing is Key
A voluntary disclosure application or VDP through one of our top Canadian tax lawyers is an optimal remedy for Canadian taxpayers who have failed to disclose or have underreported their foreign income. The same is true for those who own offshore assets that have not been reported on the Form T1135. For taxpayers who find themselves in this position, the VDP program offers penalty and interest relief. As previously mentioned, the penalties for unreported offshore asset can be as high as 50% of the value of the offshore asset. A successful application to the VDP program can significantly reduce, and in some instances prevent the imposition of penalty in the first place. More importantly, the VDP offers protection from criminal prosecutions by the CRA.
It is important to keep in mind that a taxpayer is eligible for the voluntary disclosure program only if the disclosure of the unreported income or asset is voluntary. Generally, when the CRA has contacted the taxpayer in regards to the unreported income or asset, the taxpayer is no longer eligible, and would be subject to the full scale of penalties and interest applicable under the Income Tax Act. Criminal prosecution for the crime of tax evasion is also an option that the CRA may exercise against such Canadian taxpayer. However, simply filling out a Common Reporting Standard form sent to the taxpayer from a foreign financial institution does not render a taxpayer ineligible for the voluntary disclosure program. A taxpayer's eligibility is nullified when the CRA contacts the taxpayer following his or her disclosure on the bank's Common Reporting Standard letter.
Time is of essence. Speak to one of our experienced Toronto Tax Lawyers about your eligibility for the voluntary disclosure program before it's too late.
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.