Recently the Canada Revenue Agency (the "CRA") has stepped up its enforcement of Canadian tax laws as they relate to individuals that own foreign property and/or earn foreign income. Examples of this stepped up enforcement include:
1. the CRA's new "Offshore Tax Informant Program" (OTIP) (colloquially referred to as the "whistleblower program") which offers financial awards to individuals with information about major cases of international tax non-compliance;
2. the dramatic expansion of the details required by the CRA to be disclosed on an annual basis by certain taxpayers with foreign property or foreign income, which include (e.g. on form T1135):
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the cost of and income earned from the gains or losses on the disposition of foreign property,
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the countries in which such foreign property is located, and
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other identifying details regarding the foreign property (e.g. the name of the bank or other entity holding funds outside Canada, the name of non-resident corporations in which taxpayers hold shares, the name of non-resident trusts in which taxpayers hold an interest, debt owed to taxpayers by non-residents, a description of land and other property held outside Canada); and
3. the implications of failing to report (accurately or completely) information on such foreign property or foreign income.[1]
This enforcement effort is supported by the Department of Finance (Canada) ("Finance") initiatives through which the CRA will be able to obtain information from foreign banks and other financial institutions and the proposed introduction of statutory provisions aimed at identifying what Finance feels are inappropriate instances of "treaty-shopping" and denying the benefits that would otherwise arise therefrom.
Finance continues to negotiate an ever increasing number of Tax Information Exchange Agreements with other countries,[2] and the CRA has acquired (and likely continues to acquire) lists and information from foreign financial institutions and others regarding supposed Canadians with offshore accounts.[3] This initiative has also been bolstered by the implementation of the Foreign Account Tax Compliance Act ("FATCA")[4] in the United States of America (the "US"). FATCA, effectively, forces non-US financial institutions to disclose to the Internal Revenue Service (the "IRS") certain information about their US accounts (this includes accounts of certain foreign entities with substantial US owners, which owners may be US citizens who are also Canadian citizens and who have resided in Canada for the majority of their lives). However, FATCA has also brought about an intergovernmental agreement between Canada and the US regarding the sharing of information in respect of Canadian residents.[5] This agreement provides that certain information on accounts held by US residents and U.S. citizens at Canadian financial institutions is to be reported directly to the CRA (instead of the IRS). The CRA will then exchange the information with the IRS, pursuant to the provisions of the Canada-United States Tax Convention (1980). The IRS is also obligated to provide the CRA with detailed information on certain accounts of Canadian residents held at U.S. financial institutions (i.e., foreign accounts held by Canadian residents which may or may not have previously been reported to the CRA by the Canadian residents).
At the same time the CRA has continued targeting particular groups of individuals to determine whether individuals within such groups have unreported taxable income.[6]
Sufficed to say that taxpayers with undisclosed income (whether such income is derived from Canadian or foreign sources), unreported foreign property (whether held personally or through some entity, such as, for example, a trust, foundation, or stiftung settled in a foreign jurisdiction), and taxpayers who have made other errors and omissions in respect of their Canadian tax filing obligations would be wise to consider making a voluntary disclosure of such errors and omissions to the CRA as soon as possible.
Canada has a self-reporting tax system, meaning that taxpayers are responsible for correctly reporting their incomes in their tax returns and filing tax returns within the times required under the law. As a general statement, this responsibility is not diminished by the fact that taxpayers' tax returns are prepared by an accountant or tax return preparer.
The "Voluntary Disclosures Program" provides taxpayers with a potential avenue to reduce or eliminate penalties and some interest which might otherwise be assessed by the CRA and avoid prosecution in respect of under-reported or unreported income and other tax errors and omissions.[7]
Taxpayers making tax errors or omissions (intentionally or unintentionally) may, following an audit by the CRA, be assessed for tax on under-reported or unreported income, payroll amounts which should have been, but were not, withheld and other amounts, along with non-deductible interest, and substantial penalties.
Penalties imposed for various failures under the Income Tax Act (Canada) are numerous and may be substantial. For example, as a general statement, a penalty may be assessed in the amount of 10% of the unreported income and could be as much as 50% of the tax owed where the CRA determines that a taxpayer was grossly negligent. The Income Tax Act (Canada) also provides that taxpayers can be prosecuted criminally for tax evasion where, in the opinion of the government, the amount of undisclosed income or the circumstances warrant such prosecution.
It is important to note that the CRA may reassess taxpayers at any time (i.e., beyond the normal reassessment period of three years) where there is a misrepresentation attributed to carelessness, neglect, wilful default or fraud. Very generally, a "misrepresentation" is simply an error. The CRA takes an expansive view of the circumstances in which misrepresentations or errors or omissions by taxpayers are such that it is entitled to reassess taxpayers beyond the normal reassessment period. The CRA may also assess a taxpayer at any time where the taxpayer has failed to withhold and remit tax from amounts paid to certain recipients (e.g., non-residents)
Accordingly, where tax errors or omissions have been made, taxpayers should not simply assume that the passage of time will eliminate the risk of audit and the assessments of additional tax, interest and penalties and/or prosecution.
How to Make a Voluntary Disclosure?
To make a voluntary disclosure, a taxpayer makes a submission to the CRA in which the taxpayer discloses the relevant errors and omissions and the relevant facts surrounding the errors and omissions.
Upon submission of the voluntary disclosure, the CRA will then send the taxpayer a letter confirming receipt of the disclosure and setting out the next steps in the process and indicating additional information that the CRA requires.
What is the advantage of making a voluntary disclosure?
If a taxpayer's voluntary disclosure is accepted by the CRA, the taxpayer will not be liable for penalties which might otherwise be assessed in respect of the under-reported/unreported income. Such penalties, if independently discovered by the CRA on an audit, can be substantial. Partial interest relief may also be provided in respect of taxes owing.
Further, if a taxpayer's voluntary disclosure is accepted by the CRA, the CRA will not prosecute the taxpayer criminally in respect of the errors and omissions described in the voluntary disclosure.
What conditions must be met in order for the Canada Revenue Agency to Accept a Voluntary Disclosure?
In order for a voluntary disclosure to be accepted by the CRA, certain conditions must be met, including:
1. Voluntary - a disclosure will be voluntary as long as the taxpayer is not aware of: (i) any enforcement action directed towards the taxpayer that is currently underway or about to start; or (ii) an enforcement action directed towards a related party that is likely to uncover the errors and omissions being disclosed;
2. Complete - full and accurate facts and documentation must be provided for all taxation years where there was previously inaccurate or unreported information. It must be emphasized that in order for a voluntary disclosure to be complete, all tax errors and omissions made by a taxpayer for all taxation years must be disclosed in a voluntary disclosure. Currently, under the Voluntary Disclosures Program, relief from penalties and prosecution will only be granted for the past ten years. Herein lies a challenge for taxpayers with errors and omissions extending beyond ten years. In order for a taxpayer's voluntary disclosure to "complete", the taxpayer must disclose all errors and omissions, even those that occurred more than ten years ago. However, under the terms of the Voluntary Disclosures Program, the CRA has stated that it will only provide relief for errors and omissions of the taxpayer in the past ten taxation years.[8]
3. The disclosure must involve the application of a penalty; and
4. The disclosure must include information which is at least one year past due.
What if a taxpayer is unsure if they wish to undertake a voluntary disclosure?
Apart from consulting with a tax professional regarding the advisability of a voluntary disclosure, a voluntary disclosure can initially be made on a "no-names" basis (meaning no identifying information is provided to the CRA). Upon receipt of a "no-names" voluntary disclosure, the CRA will generally provide ninety days for the taxpayer to provide identifying information to the CRA. During this ninety day period, the taxpayer and/or the taxpayer's advisors may attempt to engage in discussions with the CRA Voluntary Disclosures Officer regarding the manner in which the voluntary disclosure may be completed, though such Voluntary Disclosures Officers appear to be significantly less willing to engage in such discussions of late, as compared to prior years.
A "no-names" voluntary disclosure can be made and then abandoned by a taxpayer, but the CRA has administratively stated that it will only accept a future voluntary disclosure for the same taxpayer in respect of the same errors and omissions on a "named" basis.
In the past, taxpayers and/or their counsel had the opportunity to discuss the facts surrounding the "no-names" voluntary disclosure and the manner which the disclosure might be resolved with a CRA Voluntary Disclosures Officer, providing the taxpayer with a better sense of how the voluntary disclosure may be resolved. For example, discussions between the taxpayer and a Voluntary Disclosures Officer regarding how many years for which the CRA might require disclosure and/or the manner in which amounts disclosed or entities involved in a disclosure would be characterized by the CRA following making a full disclosure were once quite common. More recently, however, there seems to have been less willingness on the part of the CRA to have such discussions or engage in any type of negotiations prior to the taxpayer making a full "named" disclosure to the CRA. This, despite the fact that such (without prejudice) discussions are contemplated in paragraph 27 of Information Circular IC-00-1R3--"Voluntary Disclosures Program".
Will the Canada Revenue Agency accept the disclosure made by the taxpayer, no questions asked?
Information provided to the CRA in the course of a voluntary disclosure is subject to audit. Voluntary Disclosures Officers of the CRA are not auditors and, following submission, they will generally refer the "named" voluntary disclosure to the CRA's audit division. To the extent that the disclosure is not considered to be complete, the disclosure may not be accepted as a voluntary disclosure (meaning that the relief provided under the "Voluntary Disclosures Program" may not be available to the taxpayer).
Who can make voluntary disclosures?
Voluntary disclosures can be made by individuals, corporations, sole proprietorships, partnerships, employers and trusts. Residents and non-residents (including non-Canadian entities which do not exist in Canada, such as foundations, stiftungs and types of entities which may be characterized as trusts or corporations) of Canada can make voluntary disclosures.
Can voluntary disclosures only be made in respect of income tax errors and omissions? Can voluntary disclosures be made under other taxing statutes?
Voluntary disclosures can be made in respect of errors and omissions with respect to payroll withholdings (income tax, Canada Pension Plan contributions, Quebec Pension Plan contributions and Employment Insurance premiums), GST/HST/QST and under certain other taxing statutes. Voluntary disclosures may also be made in respect of errors and omissions under certain provincial statutes as well (e.g., a voluntary disclosure can be made in respect of errors and omissions under Ontario's Employer Health Tax Act).
How can the Taxation Group at Fasken Martineau help?
Members of the Taxation Group at Fasken Martineau have extensive experience in providing practical and cost-effective advice to clients with respect to the voluntary disclosure process, drafting both "no-names" and "named" voluntary disclosures, and liaising with Voluntary Disclosures Officers of the CRA and other agencies to complete voluntary disclosures.
Some examples of matters, among others, in which Fasken Martineau Taxation lawyers have assisted clients in making voluntary disclosures include:
- resident and non-resident employers failing to withhold and remit payroll amounts (income tax, Employment Insurance premiums, Canada Pension Plan contributions) in respect of remuneration paid and taxable benefits provided to employees and failing to report such benefits in T4 information returns;
- individuals failing to report interests in and income from offshore entities, such as foundations, stiftungs and trusts settled in countries other than Canada;
- non-resident entities which are deemed, under the Income Tax Act (Canada), to be resident in Canada failing to comply with their Canadian tax responsibilities;
- entities failing to withhold and remit tax as required under Regulation 105 of the Income Tax Regulations on payments of fees to non-residents in respect of services performed in Canada;
- failing to register, charge, collect and remit GST/HST;
- unreported and under-reported income of individuals (e.g., Canadian resident individuals failing to report cash remuneration or income from Canadian and non-Canadian sources received in prior years); and
- companies failing to include remuneration paid to, or on behalf of, employees for the purposes of computing Employer Health Tax obligations.
If taxpayers have concerns about under-reported or unreported income, or that they may not otherwise be in compliance with tax laws, it is in the taxpayers' interest to consult with a tax lawyer as soon as possible. Communications with a lawyer regarding errors and omissions should be privileged and delays may preclude the ability to make a voluntary disclosure since, as noted earlier, a voluntary disclosure and the relief which may accompany it, are only available if the CRA has not first identified the relevant errors and omissions and commenced an audit or other enforcement action.
For further information about the "Voluntary Disclosures Program," or about making a voluntary disclosure, please contact Nicolas Simard, a Partner in the Montréal office of Fasken Martineau, at +1 514 397 5288 or nsimard@fasken.com.
[1] The penalty for filing a T1135 “Foreign Income Verification Statement” (or other foreign property/income reporting form) more than 100 days late is $2,500. This penalty can, in circumstances where the CRA considers the taxpayer to have knowingly (or in circumstances amounting to gross negligence) failed to file such a form, be increased to the greater of $24,000 and 5% of the cost or fair market value of the foreign property. Although leniency in respect of these penalties was afforded in the past, the CRA is now automatically assessing penalties for late filed forms. In addition, under recent changes that may be implemented by the CRA, the normal reassessment period for an individual may also be extended from three years to six years if an individual has failed to report income from foreign property when required to do so on his/her income tax return and Form T1135 was not filed, was not filed on time, or was inaccurately filed. Note that an individual may also be required to file certain forms in respect of, for example, transfers or loans to a non-resident trust and distribution from and debt owing to a non-resident trust and penalties may be imposed for failing to file such returns when required to do so. In addition to the penalties for not filing the proper foreign income and property reporting forms, additional penalties may apply in respect of unreported foreign income, as further described below.
[2] For example, as at the date of this document, in 2014, Tax Information Exchange Agreements between Canada and Bahrain, the British Virgin Islands and Liechtenstein entered into force. In 2013, a Tax Information Exchange Agreement between Canada and Panama entered into force. Several other Tax Information Exchange Agreements are in force. For example, among others, there are Tax Information Exchange Agreements between Canada and Guernsey, Jersey, the Isle of Man, the Turks and Caicos Islands, St. Kitts and Nevis, the Bahamas, San Marino, Anguilla, St. Vincent and the Grenadines, Bermuda, the Cayman Islands and the Netherlands in Respect of the Netherlands Antilles. Tax Information Exchange Agreements between Canada and Antique and Barbuda, Belize, Cook Islands, Gibraltar, Grenada, Liberia, Montserrat and Vanuatu are currently under negotiations.
[3] See the "2013 Fall Report of the Auditor General of Canada" http://www.oag-bvg.gc.ca/internet/English/parl_oag_201311_09_e_38803.html which reports states, in part, that "In recent years, the Canada Revenue Agency has received lists and information with names of supposed Canadian taxpayers with offshore accounts. The first list that the Agency received, in 2007, was provided by an informant and contained information on 182 supposed Canadians with accounts at a bank in Liechtenstein. The Agency continues to receive large amounts of information about taxpayers with investments in other countries. Our audit looked only at the Liechtenstein bank list. We examined whether the Agency adequately conducted compliance actions for those named on the Liechtenstein bank list and used the intelligence gained to confirm or update its detection and audit procedures for offshore banking." Lists containing the names of other offshore customers, including Canadians from UBS AG, HSBC and other lenders, have also been released, some of which lists have been obtained by the CRA.
[4] Enacted in March 2010.
[5] Signed February 5, 2014. As at the date of this article, this agreement is not yet in force.
[6] See, for example, M.Maimona, "CRA cracking down on middle-income tax cheats" National Post (August 5, 2013) at http://business.financialpost.com/2013/08/05/cra-cracking-down-on-middle-income-tax-cheats/, G.Marr, "Get Ready condo flippers, Canada Revenue Agency is hunting you" National Post, (April 20, 2013) at http://business.financialpost.com/2013/04/20/get-ready-to-pay-income-tax-on-your-condo-profit/ and J.Golombek, "Wealthiest Canadians Targeted for CRA Audits" National Post (February 4, 2011) at http://www.nationalpost.com/related/topics/Wealthiest+Canadians+targeted+audits/4219444/story.html.
[7] For further information regarding the Voluntary Disclosures Program and the Canada Revenue Agency's administration in respect thereof, please see the CRA's Information Circular IC-00-1R4--"Voluntary Disclosures Program" (March 21, 2014) at http://www.cra-arc.gc.ca/E/pub/tp/ic00-1r4/README.html.
[8] In CRA Document No.: 2011-0401921C6 – "2011 STEP Conference—Q14—voluntary disclosure" (June 3, 2011), the CRA stated "A taxpayer must disclose the entire story surrounding the non-compliance. That is all years and all unreported income must be included as part of the initial disclosure. Only after reviewing the entire story can the CRA determine which years will require an (re)assessment. This can only be done on a case by case basis and taking into account the materiality of the amounts disclosed. There are no legislative restrictions to assessing any year if the requirements in the applicable legislation are met. As a result, the CRA will not provide assurances that they will not assess beyond 10 years. We will apply the legislation as it relates to statute-barred years and assess income in the year it was earned. If we identify that the disclosure is not 'complete' then there are consequences. Don't come forward with half the information. If we suspect there is income which has not been disclosed, we will ask more questions, gather more information and possibly open additional years, with the possibility of penalties being added. We will also cross-reference amounts disclosed to third-party information at our disposal. If the disclosure is incomplete, it could be denied and referred to audit. Please ensure we get the 'complete' story up front."