What is the “automatic exchange of financial information”
In order to increase tax transparency across the globe, the Organisation for Economic Co-operation and Development (OECD) adopted the Common Reporting Standard (CRS) on July 15, 2014. The CRS initiative calls on each participating jurisdiction to obtain information from financial institutions within their country and automatically exchange that information with other jurisdictions on an annual basis. The objective is to increase tax compliance by providing key information to the participating jurisdictions allowing them to identify whether their citizens accurately report their foreign assets and income.
However, since the CRS is not constraining, 90 jurisdictions have also signed the Multilateral Competent Authority Agreement (MCAA) on automatic exchange of financial account information. The MCAA provides a mechanism to facilitate the exchange of information in accordance with the CRS. Such information to be disclosed includes the following :
- The name, address, taxpayer identification number, date and place of birth of each account holder;
- The account number;
- The name and identifying number of the financial institution;
- The account balance or value (including, in the case of a cash value insurance contract or annuity contract, the cash value or surrender value) as of the end of the relevant calendar year or the closure of the account;
- The total gross amount of interest, dividends and other income generated with respect to the assets held in the account.
Qu’est-ce que « l’échange automatique de renseignements financiers »?
Afin d’accroître la transparence fiscale à travers le monde, l’Organisation de coopération et de développement économiques (OCDE) a adopté la norme commune de déclaration (NCD) le 15 juillet 2014. L’initiative de la NCD invite les juridictions participantes à obtenir des renseignements auprès des institutions financières de leur pays et à les échanger automatiquement avec d’autres juridictions sur une base annuelle. L’objectif est d’accroître l’observation des règles fiscales en fournissant des renseignements importants aux juridictions participantes afin de leur permettre de déterminer si leurs citoyens déclarent correctement leurs actifs et leurs revenus étrangers.
Cependant, puisque la NCD n’est pas contraignante, 90 juridictions ont également signé l’Accord Multilatéral entre Autorités Compétentes (AMAC) sur l’échange automatique de renseignements financiers. L’AMAC fournit un mécanisme pour faciliter l’échange de renseignements conformément à la NCD. Les renseignements à divulguer comprennent ce qui suit :
- Le nom, l’adresse, le numéro d’identification du contribuable et la date et le lieu de naissance de chaque titulaire du compte;
- Le numéro de compte;
- Le nom et le numéro d’identification de l’institution financière;
- Le solde ou la valeur du compte (y compris, dans le cas d’un contrat d’assurance comportant une valeur de rachat ou d’un contrat de rente, la valeur de rachat) à la fin de l’année civile concernée ou à la fermeture du compte;
- Le montant total des intérêts, des dividendes et des autres revenus générés relativement aux actifs détenus dans le compte.
The Canada Revenue Agency’s (the ‘’CRA’’) voluntary disclosures program allows taxpayers who meet certain conditions to correct inaccurate or incomplete information previously submitted to the CRA, or to disclose information not previously reported on their tax form. Under the current voluntary disclosures program, those who make a valid disclosure will be responsible for paying the taxes and reduced interest owing as a result of their disclosure, the whole without penalties or fear of prosecution. However, access to the voluntary disclosures program will be limited in the near future and radical changes will be introduced.
Access to the voluntary disclosures program limited for some and radical changes for others
However, on May 29, 2017, the CRA announced by the way of its Report on Progress that a revised voluntary disclosures program policy would be introduced shortly. The changes sought will tighten the access to the voluntary disclosures program and the relief provided. This announce by the CRA is made after the recommendation from the Standing Committee on Finance to conduct a review of the voluntary disclosures program as part of the strategy to combat offshore tax evasion and aggressive tax planning.
In completing its review of the program, CRA sought input from the Offshore Compliance Advisory Committee (the ‘’OCAC’’). In December 2016, the OCAC released the ‘’Report on the Voluntary Disclosures Program’’ which sets out different recommendations to ‘’improve’’ the program. The main contemplated alterations are to, in certain circumstances :
- increase the period for which full interest must be paid;
- reduce penalties relief in certain circumstances so that the taxpayers pay more than they would pay if they had been fully compliant; and
- even deny relief from civil penalties.
Such circumstances could include, for example :
- Situations where large dollar amounts of tax were avoided;
- Active efforts to avoid detection and the use of complex offshore structures;
- Multiple years of non-compliance;
- Disclosures motivated by CRA statements regarding its intended focus of compliance, by broad-based tax compliance programs or by the reception of leaked confidential information by the CRA such as the Panama Papers data leak; and
- Other circumstances in which the CRA considers that the high degree of the taxpayer’s culpability contributed to the failure to comply.
Less certain and more expensive results
If implemented by the CRA, the recommendations of the OCAC would significantly change the current voluntary disclosures program and the result of a disclosure would be more discretionary and expensive. Therefore, taxpayers entertaining the possibility of making a voluntary disclosure may want to act soon as the CRA intends to tighten the criteria for acceptance into the voluntary disclosures program and to be less generous in its application.
For more information about filing a voluntary disclosure download “The Voluntary Disclosures Programs in Canada (And in Québec)“.
Test for reasonableness of interest amount is whether no business would have contracted to pay that amount: Alberta Court of Queen’s Bench
This summer saw the first case in which a court articulated the test for determining whether an interest amount is reasonable for purposes of paragraph 20(1)(c) of the Income Tax Act (Canada) (“ITA”). No other Canadian federal or provincial court has ruled on this question.
In ENMAX PSA Corp. v. Alberta (2016 ABQB 334), the two taxpayers were subsidiaries of ENMAX Corp., which was owned by the City of Calgary. Government-owned businesses in Alberta are usually exempt from provincial and federal tax statutes, unlike privately-owned and publicly-traded corporations. To even things out, government-owned businesses are required to make payments in lieu of tax (“PILOT”) to a “balancing pool”. PILOT payments are calculated in accordance with tax statutes. A taxpayer may deduct a “reasonable amount” of interest on borrowed money used for the purpose of earning income to the extent permitted under paragraph 20(1)(c).
The taxpayers in this case paid interest to ENMAX Corp. on funds borrowed from it and deducted the interest under paragraph 20(1)(c) in calculating their PILOT payments. Alberta’s Minister of Finance took the position that the interest rates on the loans were unreasonable and only allowed deductions for amounts computed at about half of the actual interest rates. The taxpayers appealed to the provincial court.
The issue before the Alberta Court of Queen’s Bench was whether interest paid by each taxpayer was reasonable pursuant to paragraph 20(1)(c). The Court identified three broad considerations that govern the determination of what is reasonable:
- Reasonableness must be measured with reference to the legal transaction to which the borrower was a party, not other contracts it might have made.
- The interest that would have been paid in an arm’s length transaction may be a relevant factor, but it does not define what is reasonable.
- The standard of reasonableness does not require that a taxpayer’s deduction be ascertainable as a precise, correct amount. Rather, it allows for a range of amounts to be considered reasonable.
Justice Poelman concluded that the question to ask when determining whether the interest deducted by a taxpayer is a reasonable amount is: Whether no business would have contracted to pay that amount, having only its business considerations in mind and under the form of transaction pursuant to which the obligation was incurred? Also noteworthy are his statements that the reasonableness standard in paragraph 20(1)(c) is not an arm’s length standard and that an interest rate higher than an arm’s length rate may be reasonable in the circumstances.
After extensively canvassing the evidence tendered by fact and expert witnesses, Justice Poelman found that the interest deducted by the taxpayers (and hence the interest rates) were reasonable.