Canada Revenue Agency announces measures to counter international tax evasion and aggressive tax avoidance

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1 14 May 2013 Global Tax Alert Canada Revenue Agency announces measures to counter international tax evasion and aggressive tax avoidance Background On 8 May 2013, National Revenue Minister Gail Shea announced a number of measures aimed at addressing international tax evasion and avoidance. Most of these measures were included in Canada s 21 March 2013 federal budget. 1 A new measure is the creation of a Canada Revenue Agency (CRA) unit to target international tax evasion and avoidance. In related developments, on 1 May 2013, the Standing Committee on Finance submitted a report to the House of Commons, Tax Evasion and the Use of Tax Havens, and on 9 May 2013 the tax administrations of the US, the UK and Australia announced a plan to share tax information involving trusts and companies holding assets on behalf of taxpayers in various lowtax jurisdictions throughout the world. This Tax Alert summarizes these developments. Dedicated implementation team Minister Shea announced the establishment of a dedicated team at the CRA to accelerate the implementation of the international tax evasion and aggressive tax avoidance measures announced in the 2013 federal budget. It will ensure that the full force of the agency s international compliance and auditing resources are brought to bear on individuals or businesses seeking to hide money or assets offshore.

2 A backgrounder to the minister s announcement indicates that the team will be headed by a senior manager with in-depth knowledge of the tax system who will report directly to the CRA commissioner. The backgrounder goes on to state that the new team will draw from a variety of disciplines within the CRA, and will support resources across the Agency currently dedicated to international tax evasion and aggressive tax avoidance. The team s mandate will be to work exclusively and full time to provide direction and oversight to advance all Budget 2013 measures, so that these tools and the information they produce are quickly placed in the hands of researchers and auditors. The size, composition and duration of the team s mandate were not specified beyond that. Measures announced in 2013 federal budget The minister s announcement also references a number of measures that were contained in the federal budget, including the following: Launching a new Stop International Tax Evasion Program that will pay an individual who provides the CRA with information concerning major international tax non-compliance a percentage of federal tax collected as a result of the information provided. The individual would receive 15% of any assessment that results in $100,000 or over in federal tax, but only after the tax has been collected. Requiring financial institutions and others who currently report information on international electronic funds transfers greater than $10,000 to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to also report those transactions to the CRA, identifying the person conducting the transaction, the receiver of the funds and the financial intermediaries facilitating the transaction. Streamlining the judicial process that gives the CRA authorization to obtain information about unnamed persons from third parties such as banks. This measure will facilitate faster access to information on unnamed individuals for the purposes of civil actions. Introducing additional requirements for Canadian taxpayers with foreign income or properties to report more detailed information (on Form T1135, Foreign Income Verification Statement) and extending the amount of time the CRA has to reassess those who have not properly reported this income. The 21 March 2013 federal budget documents indicated that the CRA would announce further details of the Stop International Tax Evasion Program in the coming months, but no new details were contained in the Minister s 8 May 2013 announcement. The budget stated that the measure to streamline the judicial review process would apply on Royal Assent of the enacting legislation, the measure requiring additional foreign income reporting and extending the time for reassessment would apply to 2013 and subsequent taxation years and the reporting requirement for electronic funds transfers would begin in Once again, the announcement did not provide any additional details concerning these three latter measures. Finance Committee report: Tax Evasion and the Use of Tax Havens The House of Commons Standing Committee on Finance has held somewhat intermittent hearings on the subject of tax evasion and tax havens over several years. It adopted a motion on 4 October 2010 to examine the use of offshore accounts by Canadians to evade taxation and the CRA s efforts to recover unpaid tax, but it did not conclude those hearings or issue a report before the end of that session of Parliament. It resumed its study on tax evasion in the current session of Parliament pursuant to a motion adopted on 24 April 2012, culminating in the release of this report on 1 May In all, the Committee held a total of 14 meetings on the subject between 13 December 2010 and 21 March 2013, hearing testimony from a variety of witnesses including individuals, businesses, business associations, NGOs, academics and officials from the CRA, Department of Finance, FINTRAC and the RCMP. 2 Global Tax Alert

3 The Committee s report contains a total of 11 recommendations, nine of which are directed at the federal government and two at the CRA. Those directed at the government are, for the most part, only very general in nature, ranging from that the federal government in an effort to promote transparency and better prevent international tax evasion, continue to pursue tax information exchange agreements with appropriate countries (recommendation 1) to that the federal government continue to maintain taxpayer morale by ensuring clear messaging of ongoing efforts directed to ensuring fairness and transparency in Canada s tax system (recommendation 7). Several other recommendations simply encourage federal government support for multilateral initiatives currently underway to curb international tax noncompliance, including the following: That the federal government continue to support the efforts of the Group of Twenty finance ministers and central bank governors to develop measures to address base erosion and profit shifting, to take necessary collective actions and to examine the Organisation for Economic Cooperation and Development s forthcoming comprehensive action plan. (recommendation 5) That the federal government continue to encourage all jurisdictions to sign the multilateral Convention on Mutual Administrative Assistance in Tax Measures and to support the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes. (recommendation 6) Two other recommendations simply state support for two of the measures that were already contained in the 2013 federal budget, including the Stop International Tax Evasion Program (recommendation 3) and the reporting requirement for electronic funds transfers (recommendation 4). The following are the two recommendations directed at the CRA: That the Canada Revenue Agency commit to applying the General Anti-Avoidance Rule in the Income Tax Act to aggressive international tax planning. (recommendation 9) That the Canada Revenue Agency extend the period of time during which the names of individuals, corporations and trusts convicted of either tax evasion or a failure to file income tax returns are listed on the Canada Revenue Agency s website. The period, which is currently six months, should be increased to one year. (recommendation 11) Tax Information Sharing by the US, UK and Australia Rounding out this recent series of related developments, on 9 May 2013 the tax administrations of the US, the UK and Australia announced a plan to share tax information involving a multitude of trusts and companies holding assets on behalf of residents in various jurisdictions. The US Internal Revenue Service (IRS), Her Majesty s Revenue & Customs (HMRC) and the Australian Tax Office (ATO) have each reportedly acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions, including Singapore, the British Virgin Islands, the Cayman Islands and the Cook Islands. The data contains the identities of the individual owners of these entities as well as the advisors who assisted in establishing the entity structure. Speculation is that this data overlaps or is the same as the data obtained by the International Consortium of Investigative Journalists (including the Canadian Broadcasting Corporation in Canada), which Minister Shea stated she had directed the CRA to obtain with all means available in her 8 May 2013 announcement. Statements by the three tax administrations indicate they have been working together to analyze the data for some time and have uncovered information that may be relevant to tax administrations of other jurisdictions. They report that they have developed a plan for sharing the data, as well as their preliminary analysis, if requested by other tax administrations. Global Tax Alert 3

4 Following the release, Minister Shea issued a statement stating that she had secured a commitment from the Government of the UK to share with the CRA information stemming from this data that is relevant to Canada. Given that prior international tax compliance joint initiatives involving these three countries have included Canada, such as the establishment of the Joint International Tax Shelter Information Centre (JITSIC) in 2004, and the sharing of information regarding banking arrangements in Liechtenstein under Project Jade in 2007, it is intriguing that Canada was not included in this most recent joint initiative. Endnote 1. See Ernst & Young Global Tax Alert, Canada issues 2013 Federal Budget, dated 25 March Global Tax Alert

5 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto George Guedikian John Oatway Ernst & Young LLP (Canada), Ottawa Fred O Riordan fred.r.oriordan@ca.ey.com Ernst & Young LLP (Canada), Quebec and Atlantic Canada Albert Anelli albert.anelli@ca.ey.com Ernst & Young LLP (Canada), Prairies Warren Pashkowich warren.w.pashkowich@ca.ey.com Ernst & Young LLP (Canada), Vancouver Greg Noble greg.noble@ca.ey.com Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit Ernst & Young LLP (Canada) is a member firm serving clients in Canada. Couzin Taylor LLP, Toronto Daniel Sandler daniel.sandler@ca.ey.com Ernst & Young LLP, New York, Canadian Tax Desk Andrea Lepitzki andrea.lepitzki@ey.com EYGM Limited. All Rights Reserved. EYG no. CM3435 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. 5 Global Tax Alert