The United States came down hard on Swiss banks after receiving, from various whistleblowers, Swiss bank data evidencing U.S. citizens had hidden fortunes in Swiss accounts. Swiss banks were fined billions for assisting U.S. citizens in evading taxes and now want to avoid repetition of this scenario when the exchange of information begins in 2018 with other countries.
The automatic exchange of information between Canada and Switzerland will begin in 2018[i]. Swiss banks have therefore put in place various measures to protect themselves and show, in a near future, that they did all they could to encourage Canadian clients to disclose offshore assets.
Most large Swiss banks have already requested from their Canadian clients evidence that their Swiss accounts are reported in Canada or that a voluntary disclosure has been initiated. This is generally done by having a tax professional confirm to the bank that a disclosure of the account has been filed for the client with the Canada Revenue Agency (CRA).
For clients who have not filed this evidence by Dec. 31, 2015, a large number of Swiss banks have confirmed that they will liquidate Canadian-held accounts in early 2016, and mail a cheque to the Canadian client’s last known address.
These cheques, when deposited in Canadian accounts, should trigger a tax audit. Indeed, the CRA now receives information from financial institutions on offshore transfers exceeding Cnd$10,000, and it has already begun auditing offshore transactions. In some cases, the CRA audit began within weeks after the transfer occurred.
When the CRA initiates an audit, this automatically prevents the audited person from using the voluntary disclosure program, as one of the conditions for its acceptance is that the disclosure be voluntary.
Without the benefit of the disclosure, Canadians hiding offshore assets will be assessed:
- tax on unreported income
- gross negligence penalties
- failure to file the Form T1135 (Foreign Income Verification Statement) penalties
- prescribed interest
Depending on the income generated in the account, the total tax liability often exceeds the balance remaining in the offshore account. In addition, without the benefit of the voluntary disclosure, Canadians have no protection against tax evasion charges.
For these reasons, Canadians with Swiss bank accounts have until December 31, 2015 to file a voluntary disclosure. After that, as soon as the offshore funds are deposited in Canada, CRA will have to assess everything.
The voluntary disclosure program offers protection against criminal prosecution, the imposition of penalties, interest relief and, in a large number of cases, limits the tax liability on the unreported income generated in the offshore account to the last 10 years.
For Québec residents, an additional voluntary disclosure must be filed and the process is a bit different, but fairly simple. Depending upon a number of factors, the cost of disclosing for Canadians outside of Québec, in total tax liability, is generally between 10-20% of the balance in the account. For Québec residents, total tax liability is generally between 30-40%.
The voluntary disclosure program is the most efficient way to regularize one’s unreported offshore accounts. It has never been as simple and cheap to file one, if done properly.
[i] As well as with all other signatory countries. Precursor countries have agreed to start exchanging in 2017.
Nicolas Simard is a Partner with Fasken's Tax group based in Montreal and may be reached at 514-397-5288 or at nsimard@fasken.com.
Nicolas Simard est associé du groupe de fiscalité de Fasken à Montréal et peut être joint au 514-397-5288 ou à nsimard@fasken.com.