The federal tax-collection agency is testing a new strategy to crack down on tax-evasion schemes, reviewing every single electronic funds transfer (EFT) of more than $10,000 that goes from Canada to four foreign jurisdictions in a given year, reports the Globe and Mail
The first two targets were the Isle of Man and the island of Guernsey, which are low-tax jurisdictions located respectively west and south of Britain. The review is near completion in these two cases, and two more reviews of undisclosed jurisdictions are under way, to be completed by the end of March, 2017.
According to figures provided to The Globe and Mail, the plan is delivering results. The CRA has reviewed some 20,000 EFTs of more than $10,000 to the Isle of Man and Guernsey, worth a total of about $7-billion (or an average of $350,000 per transaction).
As a result of this work, the CRA has identified and started to audit 166 high-risk taxpayers. In addition, the agency has sent more than 1,000 “nudge” letters to taxpayers with dealings on these islands to remind them of their obligations to report income earned abroad.
For 2017-18, the CRA is planning to review about 100,000 EFTs in four new jurisdictions. The identity of these locations remains secret, to keep taxpayers on their toes. The agency is aiming to recoup lost revenue but also deter Canadian taxpayers from trying their luck on aggressive tax-avoidance schemes.
The CRA has been accused in the past of letting tax cheats off with light settlements – including a number of cases on the Isle of Man – but is now seeking to toughen its public image.
“Canadians who try to hide income offshore to avoid paying their fair share of taxes need to understand that the CRA is now in a better position to identify them and deal with their cases,” said Chloé Luciani-Girouard, the spokeswoman for National Revenue Minister Diane Lebouthillier. “Tax cheats must face consequences for their actions.”
Tax lawyer Michael Friedman said the CRA is not only identifying new sources of revenue by looking at transfers in specific locations but also creating a “sense of caution.”
“My suspicion is this will be the greater source of ultimate tax revenue for the government – taxpayers not undertaking transactions that they may have otherwise,” said the leader of the tax group at McMillan LLP in Toronto.
Mr. Friedman added that after a number of leaks and court cases involving financial institutions around the world, he has seen a “growing aversion” toward aggressive tax planning among taxpayers with holdings in places such as Switzerland, Israel and across the Caribbean.
The CRA’s new strategy comes after the previous government forced financial institutions to report international EFTs of $10,000 or more as of January, 2015. The work is being funded out of a $444-million budget increase awarded this year by the current government to “crack down on those who deliberately choose to use tax schemes and offshore jurisdictions to hide income,” Ms. Luciani-Girouard said.
The work on the targeted jurisdictions comes in addition to the CRA’s response to the so-called Panama Papers. As reported by The Globe in September, the CRA has launched 85 detailed audits of taxpayers as a result of its review of the massive leak of confidential information from Panamanian law firm Mossack Fonseca in the spring.
In addition, the CRA’s Offshore Tax Informant Program, announced in 2013, has received more than 3,000 tips as of Oct. 31. As a result, almost 200 taxpayers are under audit and 124 active files are under review. Informants are eligible for an award worth 5 per cent to 15 per cent of any federal tax that is collected.
“The signal that the CRA is sending to Canadians is that you have to make sure that you are in compliance with your tax obligations or they are going to find you,” said Alex Klyguine, a tax lawyer at Borden Ladner Gervais LLP in Toronto