12 April 2016 Global Tax Alert News from Americas Tax Center Canadian Revenue Minister announces measures to combat aggressive tax avoidance and offshore tax evasion EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: http://www.ey.com/us/en/services/ Tax/Americas-Tax-Center---borderlessclient-service Executive summary Canadian National Revenue Minister Diane Lebouthillier held a news conference on 11 April 2016 to announce measures aimed at addressing international tax evasion and avoidance. Most had been previously announced in the 22 March 2016 federal budget, when the Government allocated CA$444.4 million over five years to enhance the Canada Revenue Agency s (CRA s) ability to detect, audit and prosecute tax evasion at home and abroad. 1 This Tax Alert summarizes and provides some additional commentary on the Minister s announcement. Detailed discussion Detection The Minister indicated that since January 2015, the CRA has collected information on all international funds transfers over CA$10,000 and further stated that Budget 2016 builds on this new capability by providing the agency with the ability to more fully examine potential tax evasion across an entire jurisdiction, adding that the first to be investigated will be the Isle of Man, with additional jurisdictions to follow.
2 Global Tax Alert Americas Tax Center Supplementary material released with the announcement stated that beginning this month, the CRA will be contacting approximately 350 individual taxpayers and 400 businesses that have had transactions involving the Isle of Man, and that more than 60 audits related to these taxpayers are already underway. Furthermore, in May 2016, the CRA will expand its analysis to other jurisdictions, as well as financial institutions, of concern. The reporting requirement to the CRA for international electronic funds transfers of CA$10,000 or more was announced by the previous Government as part of the 2013 budget s package of measures to combat international tax evasion and aggressive tax avoidance. Audits and investigations In order to combat tax evasion and tax avoidance, Minister Lebouthillier announced that the CRA will create a special program dedicated to stopping the organizations that create and promote these tax schemes for the wealthy. It was further stated that this will result in a 12-fold increase in the number of tax schemes examined by the CRA. This team will apply penalties and refer cases for criminal investigation, where appropriate. It is not clear how, or whether, this new program and team are different than the previous Government s announcement in 2013 of 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. Then-Revenue Minister Gail Shea stated at that time, 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. The Minister announced that the new funding will give the CRA the ability to hire more auditors and specialists. This will increase the number of examinations focused on highrisk taxpayers from 600 per year to 3,000 per year, raising additional tax revenue of CA$432 million. In addition, the new funding will help the CRA bring in 100 additional auditors to investigate high-risk multinational corporations, a strategy it says will collect an additional CA$500 million in revenue over five years. The figures of CA$432 million a year and CA$500 million over five years reconcile with the statement in Budget 2016 that the additional CA$444.4 million in funding for the CRA would have an expected aggregate revenue impact of CA$2.6 billion over five years. It is not clear whether or how a revenue impact of this magnitude can be achieved within such a short timeframe. Even if experienced domestic auditors are transferred from their current duties to international and aggressive tax audits, and new auditors are hired to replace and backfill them in doing audits with less complexity, the newly transferred international and aggressive tax auditors will require training; the additional audits will have to be selected and screened; the audits will take many months to complete before proposals are issued to taxpayers; and the assessments will be subject to possible objections and appeals by the taxpayers. Penalties and prosecution To help ensure results on the criminal prosecution side, the CRA will embed legal counsel in the investigation teams, so that cases can be quickly brought to court. The CRA says it will use the latest investigative tools and technology, paired with larger investigative teams, to detect more cases of tax evasion that result in the appropriate charges, fines and penalties. For a number of years, the CRA has made it a practice to embed Department of Justice legal counsel in some of its large business audit teams in order to make these files more court ready earlier in the dispute resolution process in the event that taxpayers choose to appeal the assessments at Tax Court. This audit practice on the civil side will now apparently be used in criminal investigation cases as well. The Minister also announced a number of additional steps that the CRA will take, including: Bolstering international collaboration to fight tax evasion Creating an independent advisory committee on offshore tax evasion and aggressive tax planning Beginning work to estimate the tax gap, so that Canadians and Parliamentarians have confidence in the fairness of the tax system
Global Tax Alert Americas Tax Center 3 The Offshore Compliance Advisory Committee (OCAC) will be composed of seven independent experts who will provide input to the Minister and the CRA on additional administrative strategies for offshore compliance that build on the Budget 2016 funding. The OCAC s first meeting will be in spring 2016, and its initial areas of focus will include: Strategies to help alleviate and discourage offshore noncompliance Administrative policies being used by other tax administrations to address this global issue Advice to the CRA in moving forward with its measurement of the tax gap Additional strategies and practices related to promoters of tax schemes Potential ways to improve the CRA s criminal investigation functions The committee will be chaired by Dr. Colin Campbell, currently Associate Professor of Law at Western University, and the Vice-Chair will be Kimberley Brooks, Associate Professor of the Schulich School of Law at Dalhousie University. A definition of the tax gap can be viewed conceptually in both gross and net terms. The gross tax gap is the difference between the estimated amount of tax that taxpayers should pay under the law and the amount they actually pay on time. The net tax gap is the difference between the gross tax gap and the amounts of tax actually recovered from enforcement activities (including verification activities such as audits). Although some tax jurisdictions, including the United States, do calculate a tax gap, and the Parliamentary Budget Office has recommended doing one for Canada, the Department of Finance and the CRA have historically resisted initiating this practice here because of the cost and obvious methodological difficulties. As a 2008 report for the Organisation for Economic Cooperation and Development s Forum on Tax Administration noted, Given the widely varying types of non-compliance behaviors that comprise the overall tax gap, it will be apparent that measuring its overall size is a difficult, costly and (some would say) inevitably quite an imprecise undertaking. Furthermore, there is a view in some quarters that producing and publicizing overall tax gap estimates may have a negative impact on taxpayers compliance in an overall sense and could lead to inappropriate behavior by revenue officials. Endnote 1. See EY Global Tax Alert, Canada issues Federal budget 2016-17, dated 24 March 2016.
4 Global Tax Alert Americas Tax Center For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto Linda Tang +1 416 943 3421 linda.y.tang@ca.ey.com Mark Kaplan +1 416 943 3507 mark.kaplan@ca.ey.com Phil Halvorson +1 416 943 3478 phil.d.halvorson@ca.ey.com Trevor O Brien +1 416 943 5435 trevor.obrien@ca.ey.com Ernst & Young LLP (Canada), Quebec and Atlantic Albert Anelli +1 514 874 4403 albert.anelli@ca.ey.com Angelo Nikolakakis +1 514 879 2862 angelo.nikolakakis@ca.ey.com Nicolas Legault +1 514 874 4404 nicolas.legault@ca.ey.com Nik Diksic +1 514 879 6537 nik.diksic@ca.ey.com Ernst & Young LLP (Canada), Ottawa Paul Mulvihill +1 613 598 4339 paul.f.mulvihill@ca.ey.com Fred O Riordan +1 613 598 4808 fred.r.oriordan@ca.ey.com Ernst & Young LLP (Canada), Prairies Karen Nixon +1 403 206 5326 karen.r.nixon@ca.ey.com Mark Coleman +1 403 206 5147 mark.coleman@ca.ey.com Ernst & Young LLP (Canada), Vancouver Eric Bretsen +1 604 899 3578 eric.r.bretsen@ca.ey.com Ernst & Young LLP, Canadian Tax Desk, New York Terry McDowell +1 212 773 6332 terry.mcdowell@ey.com Andrea Lepitzki +1 212 773 5415 andrea.lepitzki@ey.com Ernst & Young LLP (Canada), EY Law, Toronto Daniel Sandler +1 416 943 4434 daniel.sandler@ca.ey.com Ernst & Young LLP (Canada), EY Law, Calgary David Robertson +1 403 206 5474 david.d.robertson@ca.ey.com Ernst & Young LLP (Canada), EY Law, Quebec Louis Tassé +1 514 879 8070 louis.tasse@ca.ey.com
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