Data from the Canada Revenue Agency (“CRA”) confirms that voluntary disclosures (“VDs”) of offshore assets, gains and income hit record levels in 2015. This proliferation of VDs is attributable to various factors, including increased public awareness of:
- international tax compliance issues through media reports;
- the CRA’s Offshore Tax Informant Program; and
- the imminent automatic exchange of international information under the common reporting standard.
However, the strongest impetus for the proliferation of offshore VDs may be the recent letter writing campaign by Swiss financial institutions, requiring confirmation that their clients are tax-compliant in their home jurisdiction. Foreign financial institutions, particularly Swiss-based, are now seeking written confirmation from Canadian taxpayers’ professional advisors that the taxpayer is, or is becoming, tax compliant in Canada.
Some Canadians are being advised either that their offshore accounts will be “frozen” or “liquidated” as of the end of 2015. Having an account liquidated would result in at least two undesirable consequences. First, liquidating capital assets would create a taxable event in Canada and, depending on the extent of unrealized capital gains, the resulting tax payable could be substantial. Second, the former account holder receiving back the offshore funds would need to deposit the funds with another financial institution and, in any case, ensure appropriate future tax compliance. A substantial receipt of offshore funds by a Canadian financial institution would automatically trigger a report to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”). FINTRAC routinely supplies the CRA with information from Canadian financial institutions concerning receipts of offshore funds in excess of $10,000. The CRA could use this information to commence audits.
Given these developments and the ongoing pressure on non-compliant Canadian taxpayers to address their historic tax issues, there is no time like the present to commence a VD.
The CRA's VD program is a tax compliance program allowing taxpayers to come forward proactively to report past tax non-compliance. A successful VD results in the waiver of all civil penalties that could potentially be assessed for the last ten calendar years, a reduced rate of interest on unpaid tax and the waiver of any criminal prosecution risk.
There are four criteria for a valid VD. It must:
- be voluntary;
- be complete;
- involve a potential penalty; and
- involve information that is more than one year out of date.
If a VD is not commenced proactively, but rather in response to any enforcement action by the CRA or another administration or authority, and that enforcement action would have uncovered the information being disclosed, the VD would likely be rejected by the CRA on the basis of not being voluntary. Consequently, any taxpayers with unreported Swiss accounts, or unreported accounts in other jurisdictions, should come forward immediately and certainly no later than the end of 2015 to commence VDs. There is a high likelihood that as of early 2016 it may be too late. Tardy taxpayers could find themselves unable to successfully remedy their tax non-compliance going forward, without facing significant penalty and potential prosecution exposure.