The authors are partners at Lerners LLP in Toronto, where they practice tax law.
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The Canada Revenue Agency wants to collect tax on billions of dollars hidden in offshore accounts. But its own policies may be its biggest obstacle.
Last year, more than 14,000 U.S. taxpayers disclosed the existence of their offshore bank accounts to the Internal Revenue Service. This sudden display of candour was prompted by a high-profile probe of Swiss banking giant UBS by the IRS. These disclosures, which were made under a temporary tax amnesty program, will net billions of dollars in back taxes.
Now the Canada Revenue Agency (CRA) wants a piece of the action. Canadians may hold as much as $100-billion in hidden offshore accounts. But the CRA lacks the political and economic muscle wielded by its U.S. counterpart to pressure foreign banks to disclose information. Ottawa's demands that UBS disclose the names of Canadian account holders were met with a resounding yawn.
Still, nearly 100 Canadians were spurred by the IRS actions to disclose the existence of their UBS accounts under the CRA's tax amnesty initiative, the Voluntary Disclosures Program (VDP). Other Canadian taxpayers, with accounts at other institutions, came forward after media reports about "Project Jade," the CRA's investigation of RBC Dominion Securities and its alleged involvement in setting up bank accounts in Liechtenstein for Canadian clients.
In December, then-revenue minister Jean-Pierre Blackburn announced that the CRA would question all Canadian banks about their business in Liechtenstein and other tax havens. Financial institutions in these jurisdictions are under increasing pressure to compromise client confidentiality rules that have long been regarded as sacrosanct.
These events have sparked widespread interest in the VDP as a way for Canadians to correct errors or omissions in their tax filings. But the program is burdened by restrictions and ambiguities that may discourage taxpayers from coming forward. For many, the VDP offers too much stick, and not enough carrot.
Let's start with the carrot - the waiver of criminal prosecution, fines and civil penalties, regardless of the amount of tax evaded, or the type of evasion involved. In theory, a taxpayer who qualifies for the VDP would only have to pay back taxes and arrears interest. This is a significant concession, given that fines and penalties can total 50 per cent to 250 per cent of the tax evaded.
The IRS's amnesty program, in contrast, required the payment of penalties, in addition to back taxes and interest, although criminal prosecution was waived. But the IRS also agreed to disregard unreported income earned prior to 2003. Without that six-year limit, it is doubtful that so many U.S. taxpayers would have chosen to take advantage of the program.
There is no six-year limit in Canada. In fact, there is no limit at all - and therein lies the stick. Once an offshore account is disclosed, there is nothing to prevent the CRA from demanding the payment of back taxes and arrears interest across the entire life of the account, even if it has existed for decades. With arrears interest compounded daily, and fluctuating currency exchange rates, the resulting tax bill could be staggering.
Even worse, the CRA has adopted the position that it has no authority to waive penalties - which are equal to 50 per cent of the tax and interest on those penalties - past the first 10 years. For those with disclosures going back 20 or 30 years, that's not much of an amnesty.
The VDP is also inconsistent: Too many important decisions are left to the discretion of the CRA employees who administer it. Some choose, as a matter of both fairness and expediency, to disregard income beyond the 10-year mark. Others take a more hard-line approach. Some will offer a reduction on the arrears interest rate, but others will not, because the VDP lacks clear guidelines on when this discount should be applied. This makes it impossible to anticipate what the implications of a disclosure would be, and the amount they would have to pay. A series of reforms in 2007, designed to standardize how the VDP operates nationally, failed to address all of these problems.
While the CRA boasts that the VDP is more popular than ever, the taxes it has collected are no more than a drop in the bucket. Perhaps hundreds, if not thousands, more Canadians would make voluntary disclosures if the outcomes were more predictable, and if there were a reasonable limit on the look-back period.
Some will argue that it is unfair to law-abiding taxpayers to give tax evaders a partial free pass. But Canada must be pragmatic: Its investigatory resources are limited, and its efforts to uncover offshore tax evasion on its own have not been a roaring success. An increase in voluntary disclosures could only benefit the treasury, as offshore accounts would generate taxable income for many years to come.
By refusing to provide reasonable limits on the sanctions that are applied, and by leaving key decisions subject to the whims of its employees, the CRA is undermining its own efforts. If the agency is serious about eliminating offshore tax evasion, it must adopt rules that encourage delinquent taxpayers to come in from the cold - and tell them exactly what consequences await if they do.