Full disclosure

Offshore accounts will soon be much easier to track for Canadian authorities as a new treaty comes into effect.

Starting July 1, the Canada Revenue Agency will be receiving information on residents’ offshore accounts of any amount.

As financial institutions worldwide march toward global transparency, Canada has signed on to the Common Reporting Standard Multilateral Competent Authority Agreement, or CRS MCAA.
With more than 100 countries on board, the CRS is a disclosure mechanism between countries around the world, fostering an exchange of information on accounts held in foreign jurisdictions — and making it easier to discern which accounts are not being disclosed in the account holders’ home countries.

The CRA will in turn remit information on non-residents’ accounts held in Canada to the tax authority of the home country pertaining to the account holder if such home country is also a signatory to the CRS.

The list includes countries such as Colombia, India, Brazil, Estonia, the Cayman Islands, Switzerland, Norway and New Zealand, and there is no lower limit for account balances — accounts of any size will be reported.

“Now the CRA doesn’t have to wait for a hacker or for people to come in with a briefcase full of papers,” says Sunita Doobay, a cross-border U.S. and Canadian tax partner at Tax Chambers LLP in Toronto, referring to the Panama Papers leaked documents on offshore entities in 2015. “It can just sit back and exchange information with the world.”

Doobay calls the CRS “comprehensive” and says that, in her opinion, it will encourage the CRA to look closer at the taxpayer.

Barry Horne, partner and co-chairman of the cross-border group at McInnes Cooper LLP in Halifax, says he’s not surprised Canada signed on, noting the trend toward greater transparency started after the economic crash in 2008. The world is becoming more open, he says.

In response to the factors behind the global recession, the Organization for Economic Cooperation and Development developed a project to combat some of them. The Base Erosion and Profit Shifting project started in 2012 and is supported by the G20.

“We need greater disclosure so people can’t hide,” he says. “So people know the facts and administrators know the facts; this is why we came up with the CRS and the ability for countries to automatically exchange information. A country no longer has to ask — they’re going to get it automatically.”

The CRS will impact Canadians who have funds outside of Canada but have failed to disclose this to the CRA.

With a large part of Canadian society made up of immigrants, especially recent immigrants who still have connections to their home country, many might still have financial accounts there as some of these countries offer a more attractive deposit interest rate at the local financial institutions.

When they keep their accounts, more often than not, their existence is not disclosed to the CRA, Doobay says. These Canadians should be aware that the July deadline is not too far away and should seek help from their tax advisor, she notes.

“The Panama Papers have shown us a lot about offshore structuring, including that Canadians are very much engaged with offshore planning,” Doobay says. “The average Canadian is not aware of the CRS legislation and what it really entails.”

Doobay says that, unsurprisingly, the United States has not signed on to the CRS. It kept its current Foreign Account Tax Compliance Act in place, which looks only at accounts holding more than US$50,000, meaning the CRS is actually more encompassing.

She says that when FATCA was implemented, the IRS’s offshore account collection topped US$10 billion, and she foresees a similar effect for Canadian tax coffers in the wake of the CRS.

Robert Reymond, partner at Stikeman Elliott LLP at the London, U.K. office, says tax practitioners need to let their clients know about the CRS. There’s not enough information in the market — not just in Canada but internationally.

“It probably will come as a surprise to many Canadian residents that their banks, wherever they may be — in the U.K., in France, in Switzerland, wherever — that those banks will now report on them directly to the CRA,” he says.

If you have money outside Canada — and disclose it correctly — that’s fine; but if not, the CRA will now be able to find out.

Canadians are required to report any income earned worldwide. In the case of foreign bank accounts, income would mean any interest earned on that account, no matter what the amount. However, once a Canadian hits $100,000 or more in foreign accounts — at any time of the year, not just tax time — they need to disclose it by filing a T1135, a Foreign Income Verification Statement.

If they fail to file a T1135, there is the Voluntary Disclosures Program, which is a way to come clean about offshore accounts over $100,000 while avoiding a penalty. The failure to disclose results in a maximum penalty of $2,500 per taxation year in which the taxpayer should have filed, and negligence penalties can be imposed as well.

Reymond notes Canadian residents already have several different obligations to report foreign assets domestically, so the fact there will be reporting coming in from financial institutions outside of Canada shouldn’t change that much for practitioners — as long as everybody is doing what they’re supposed to be doing.

While Reymond says he assumes most are, if any haven’t, “they should be regularizing their affairs, which could mean through Canada’s voluntary disclosure program. And going forward, they need to plan their affairs in a fully transparent way,” he adds.

Doobay agrees that if all is being handled the right way, lawyers — as well as clients or other parties such as financial advisors — won’t be affected. But if anyone is “utilizing loopholes, they need to reassess.”

This has larger repercussions, she notes, adding that estate lawyers, family law lawyers with clients attempting to hide assets from a spouse and criminal lawyers with clients hiding assets offshore — “those guys should all know about this, too.”

Individuals need to ensure they’ve reported, which is not a new requirement, but there’s “a bit more of a spotlight on that in terms of foreign assets” in light of the CRS, Reymond says.
“From that perspective, it’s good for everyone. It’s encouraging everyone to plan properly and that’s a good thing for tax practitioners.”

Reymond adds that if a Canadian has a bank account outside of the country, it’s wise to contact the banking institution that holds the account and ensure whatever information it will be sending matches the information on their tax forms.

“It’s our responsibility to get the message out to our clients — both residents and non-residents,” says Horne. “For Canadian residents, the message is if you have offshore accounts you need to start disclosing the existence and income.”

He adds that for non-residents, it’s still a similar message — make the disclosure under any available program in their home jurisdictions. Importantly, the disclosure must be made before any auditing starts because at that point, it’s too late.

“The bottom line is stop hiding and start disclosing,” Horne says.

Doobay says she foresees an increase in voluntary disclosures.

“Tax lawyers have always advised clients about T1135 and the duty to report worldwide income, but with this transparency, they have to be on even higher alert that clients understand their duty to report and disclose,” she says.

Though the CRA might set its sights on the larger amounts, there’s still a risk in not reporting smaller accounts, Doobay warns. Just the fact that a Canadian has assets outside of Canada will put the CRA on alert in case there’s an audit.

She gives the example of a taxpayer undergoing a net worth assessment who has not claimed offshore accounts with less than $100,000. For that assessment, the CRA will still have access to those funds.

“If they’re looking at all assets, it doesn’t matter the amount — they can find your offshore account,” Doobay says. “Now they have access to this kind of information.”

Horne agrees, adding that if the CRA uncovers a large offshore account it can start asking questions and cross-referencing with the person’s tax returns.

“Canada’s going to say, you have this account in a foreign jurisdiction, you’re earning income on it and haven’t reported it?” he says. “The CRA can always audit you — there are no restrictions.”

Reymond says that, logically, the CRS should result in more audits. From a tax practitioner’s perspective, that means more audit work will likely materialize in the next few years.

“The audit process — at least the start of the audit process — will presumably be much easier for the CRA,” he says.

The information coming into the CRA is likely being processed and red flagged based on amounts in the accounts, Horne says, and overall accounts are coming under greater scrutiny.

“They’re developing programs that help identify and red flag these types of issues,” Horne says. “One of the things we tell our clients is if they’re not disclosing their accounts the risk of discovery is getting higher and they should be doing it. It’s another way of expressing to our clients that they need to do this because sooner or later the CRA is going to find out.”

Reymond says he’s heard the opinion that there will be so much information floating around it will be useless, so there’s no need to worry about the CRS. But the information that gets exchanged includes the individual’s taxpayer ID number — a resident’s Social Insurance Number in Canada — so “to me, it’s very easy for the CRA to punch that SIN number in and see what they’ve received on that individual,” he says.

“With all that information coming in from the CRS, they don’t have the government power to handle this,” Doobay says. “The CRA is overwhelmed and understaffed.”

But she notes the 2017 federal budget designated $523.9 million over the next five years to hire more auditors and develop computer systems that would prevent tax evasion and encourage compliance.

For Reymond, more interesting questions will arise in the next few years as it starts to become clearer how tax authorities are going to use the information.

He speculates they could proceed with regular audit cycles but have more information to look at that could help with the audit, or maybe it’s “as easy as if there’s a report on a particular individual showing asset levels above a certain threshold, that person gets audited immediately or put on a pile to consider.”

Over time, the CRA is going to develop systems, he says, and however the CRS plays out in practice, it’s “going to be very interesting to see how that will work.”