International Aggressive Tax Avoidance and Tax Evasion
Canada’s 2013 federal budget (Budget 2013) released on March 21, 2013 introduces a number of measures to strengthen the ability of the Canada Revenue Agency (CRA) to address international aggressive tax avoidance and to combat international tax evasion so as to maintain and protect Canada’s tax base. These measures reflect the trend in other countries such as the United Kingdom, where the March 20, 2013 budget announced significant new measures on tax avoidance and tax evasion (including "name and shame") to increase tax compliance. These measures arrive at a time of increased social activism, media attention and political interest in one’s "fair share" of taxes being paid internationally. Further, revising deficits and falling tax revenues may be a reason for the recent focus by tax administrations on tax abuse. The Forum on Tax Administration (FTA), which actively shares information among G20, OECD and non-OECD countries, has identified compliance with tax laws as a key challenge facing tax administrations in the 21st century.
Coincidentally, on April 4, 2013 the International Consortium of Investigative Journalists (ICIJ) released information gathered from an investigation into the world of offshore money, which investigation revealed a global tax evasion web of named individuals and groups, including 450 Canadians.
The CRA quickly responded to the media coverage of the ICIJ release and urged Canadians to provide information on suspected cases of tax avoidance or evasion through the existing Informant Leads Program and to take the opportunity, if necessary, to correct their own tax affairs through the use of the Voluntary Disclosure Program. In an announcement April 9, 2013, supported by a written request, the CRA called upon the ICIJ as well as to the Canadian Broadcasting Corporation (CBC) to provide the CRA with the information. Since the ICIJ has publicly stated that it will not provide any government agencies with access to the files that form the basis of its reporting, the CRA will need the Budget 2013 measures discussed below to address international tax non-compliance.
Budget 2013 announced the CRA’s intention to launch Stop International Tax Evasion Program (SITEP), a "whistleblower" program under which the CRA will pay rewards to individuals who provide information that identifies major international tax non-compliance. As noted above, currently the CRA accepts information under the Informant Leads Program, including information provided anonymously, but does not pay for the information.
Under SITEP, the CRA will enter a contract with an individual where information provided relating to major international tax non-compliance leads to the assessment and collection of additional taxes in excess of C$100,000. A payment for a percentage of the federal taxes collected will be made to the individual, subject to certain conditions, including:
- all appeal rights associated with the assessed tax have expired
- the federal tax has been collected
- the information is not related to tax evasion for which the individual has been convicted
Anonymous submissions will not be accepted, although the identity of the individual who enters into
a contract with the CRA will not be revealed without consent, to the extent possible under the law. The payments will range from 5% to 15% of the federal tax collected, based on the quality and extent of information provided. No payment will be made in respect of penalties, interest or provincial/territorial taxes. Payments will be included in taxable income in the year received and if the individual is a non-resident of Canada, will be subject to withholding tax.
This initiative follows the lead of other tax administrations, including those of the United States, the United Kingdom and Germany, who have been successful in detecting international tax non-compliance by paying for information. The CRA will provide further details regarding SITEP in the coming months.
International Electronic Funds Transfers
Currently, certain financial intermediaries must report international electronic funds transfers (EFTs) of C$10,000 or more to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The financial intermediaries include banks, credit unions, caisses populaires, trust and loan companies, money service businesses and casinos. The EFT reports must be made within five working days after the day of transfer and contain detailed information.
Budget 2013 proposes that starting in 2015, financial intermediaries will be required to report international EFTs to the CRA in addition to FINTRAC. The CRA will develop a streamlined approach for the electronic submission of the report in consultation with the financial intermediaries.
The information will be used in the administration of the federal Income Tax Act (ITA), Excise Tax Act (ETA) and the Excise Act, 2001 (EA).
Information requirements regarding unnamed persons
Currently, the ITA, the ETA and the EA contain rules allowing the CRA to require third parties to provide information or documents for the purposes of verifying tax compliance by unnamed persons, subject to obtaining prior judicial authorization on ex parte application (i.e., without the CRA being legally required to notify the third party of the application). Budget 2013 proposes to eliminate the ex parte aspect of these applications and to require the CRA to give notice to the third party when it seeks judicial authorization. As a result, the third party will need to make submissions at the hearing of the application, rather than seeking a subsequent review of the original ex parte order. This new measure will apply on Royal Assent to the enacting legislation.
The stated rationale for this change is to speed up the audit process and allow the CRA faster access to information on unnamed individuals for the purposes of civil actions. It also addresses the lack of success of the CRA in such cases as Lordco Parts Ltd.1 and RBC Life Insurance Co.,2 where the Federal Court of Appeal imposed strict limitations on the Crown in ex parte requests.
Foreign reporting requirements
A Canadian-resident individual, corporation or trust that owns, and certain partnerships that own, at any time in a taxation year, specified foreign property (including foreign deposits and shares of foreign corporations) with an aggregate cost in excess of C$100,000 must file a Foreign Income Verification Statement (Form T1135) with the CRA. The purpose of this requirement is to enable the CRA to determine whether the taxpayer’s foreign income has been reported correctly. The form is required to be filed even if the taxpayer has no tax payable during the year.
Effective for 2013 and subsequent taxation years, Budget 2013 proposes to extend the normal reassessment period for a taxation year of a taxpayer by three years if the taxpayer has failed to report income from a specified foreign property on the taxpayer’s annual income tax return, and the taxpayer has not filed Form T1135 on time, has not identified a specified foreign property on Form T1135 or has improperly identified a specified foreign property on Form T1135. Budget 2013 also proposes to revise Form T1135 to be used in the 2013 and subsequent taxation years so that it requires taxpayers to include the name of the institution holding funds on the taxpayer’s behalf outside of Canada, the country to which the property relates and the foreign income generated from the property. Budget 2013 indicates that starting in 2013, the CRA will remind taxpayers on their Notices of Assessment of the obligation to file Form T1135 if they have indicated on their income tax returns that they have specified foreign property in the taxation year with a total cost of more than C$100,000. Finally, the filing instructions on Form T1135 will be clarified, and CRA will develop a system that will allow Form T1135 to be filed electronically.
Canada continues to actively negotiate and conclude or amend tax treaties and tax information exchange agreements (TIEAs) to support international trade and investment and to combat international tax evasion and avoidance. In some circumstances, the benefits conferred under Canada’s tax treaties are effectively enjoyed by residents of third countries that are not a party to the particular treaty, through the use of intermediaries or other means. This practice is referred to as "treaty shopping".
To date, challenges to treaty shopping generally have been unsuccessful in Canadian courts, whether based on the general anti-avoidance rule (GAAR) (see MIL Investments Inc.,3 discussed in Tax Update August 2009) or the "beneficial owner" of income approach (see Velcro Canada Inc.4 and Prévost Car Inc,5 discussed in Tax Update April 2012). The limitation on benefits provisions of the Canada-U.S. tax treaty as well as the anti-treaty shopping provision in each of the dividend, interest and royalty articles in other recent tax treaties such as the treaties with Hong Kong, New Zealand and Poland, are examples of other tools to challenge treaty shopping.
In Budget 2013, the government acknowledged its lack of success in court cases and announced its intention to consult on possible measures to protect the integrity of Canada’s tax treaties while preserving a business tax environment that remains conducive to foreign investment. A consultation paper will be publicly released to provide an opportunity to comment on possible measures.
1 2013 FCA 49.
2 2013 FCA 50.
3 2006 TCC 460.
4 2012 TCC 57 (TCC).
5 2008 TCC 231, aff’d 2009 FCA 57.