2013 Issue No. 22 13 May 2013 Tax Alert Canada CRA announces measures to counter international tax evasion and aggressive tax avoidance Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your Ernst & Young advisor. 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 the 21 March 2013 federal budget (see our Tax Alert 2013 Issue No. 10, Federal budget 2013). 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 low-tax jurisdictions throughout the world. In this Tax Alert, we summarize and provide some commentary on 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.
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 2015. 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 CRA announces measures to counter international tax evasion and aggressive tax avoidance 2
24 April 2012, culminating in the release of this report on 1 May 2013. 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. 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) The report also contained a Supplementary Opinion of the New Democratic Party of Canada (NDP) and a Supplementary Opinion of the Liberal Party of Canada. The Standing Committee on Finance consists of a chair, two vice chairs and 10 members, all of whom are Members of Parliament. Of these 13 members, eight are from the Conservative Party, four from the NDP and one from the Liberal Party. Lines of inquiry and questions to witnesses during the hearings often tended to be politically partisan in nature. Accordingly, to the same degree that the report s recommendations support the current government s direction and efforts to combat international tax evasion, these two opinions tend to be quite critical. The NDP opinion states that the recommendations of the report fail to adequately confront these very serious problems and, for this reason, New Democratic members CRA announces measures to counter international tax evasion and aggressive tax avoidance 3
of the Finance Committee have been compelled to submit this supplementary report. The Liberal opinion states that although we agree with many of the findings and recommendations contained in the majority report, the Liberal Party believes that stronger action is needed. The NDP opinion contains eight recommendations, including the following: That the federal government measure tax losses and determine the resulting tax gap, as is currently done in the US, the UK and Australia That the CRA require all Canadian corporations and their subsidiaries to disclose all taxes paid in other jurisdictions on a country-by-country basis That the auditor general regularly evaluate the success of the CRA in prosecuting and settling cases of tax evasion That the federal government increase efforts to work multilaterally towards a system of automatic tax information exchange That the Finance Committee undertake a study of transfer pricing by multinational corporations The Liberal Party opinion does not contain recommendations, although it concludes that without adequate CRA resources, a detailed estimate of Canada s tax gap, and a commitment to an effective international strategy, the Liberal Party believes it will be difficult for Canada to reduce its own tax gap or to play a leadership role in reducing the international use of tax havens. 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 Information on Canadians with offshore assets I have reached out to the Government of the United Kingdom and secured a commitment that information relevant to Canada stemming from this data will be shared. My officials have also made formal requests to the American and Australian tax administrations for the information in their possession. I would like to thank HM Revenue and Customs, the US Internal Revenue Service and the Australian Taxation Office for their close collaboration. 9 May 2013 statement from the Honourable Gail Shea, Minister of National Revenue 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. CRA announces measures to counter international tax evasion and aggressive tax avoidance 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. Activities we re watching The international community, including the OECD, the G20 and their central bank governors, are working together to ensure that all taxpayers pay their fair share. Strategic initiatives that we are monitoring include the following: Progress reported by the Global Forum on Transparency and Exchange of Information for Tax Purposes, including the upcoming ratings of jurisdictions compliance with the Global Forum s standards on exchange of information on request Efforts by the OECD to strengthen automatic exchange of information Developments to address tax base erosion and profit shifting (BEPS) Tax transparency: seizing the initiative Our thought-provoking paper, Tax transparency: seizing the initiative, outlines the questions that boards should ask in order to prepare for the possibility of substantive tax transparency reporting. In addition, check out our new video in which John Dixon, Ernst & Young s head of Tax UK&I, and Chris Sanger, Ernst & Young s Global head of Tax Policy, discuss the issues organizations should consider in preparation for the possibility of substantive tax transparency reporting. Learn more Toronto George Guedikian +1 416 943 3878 george.b.guedikian@ca.ey.com John Oatway +1 416 943 2709 john.oatway@ca.ey.com Ottawa Fred O Riordan +1 613 598 4808 fred.r.oriordan@ca.ey.com Quebec and Atlantic Canada Albert Anelli +1 514 874 4403 albert.anelli@ca.ey.com Prairies Warren Pashkowich +1 403 206 5168 warren.w.pashkowich@ca.ey.com Vancouver Greg Noble +1 604 891 8221 greg.noble@ca.ey.com New York Canadian Tax Desk Andrea Lepitzki +1 212 773 5415 andrea.lepitzki@ey.com Couzin Taylor LLP Daniel Sandler +1 416 943 4434 daniel.sandler@ca.ey.com For up-to-date information on the federal, provincial and territorial budgets, visit ey.com/ca/budget. And follow on Twitter @EYCanada. CRA announces measures to counter international tax evasion and aggressive tax avoidance 5
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