A huge data leak from a Panama-based law firm has exposed billions in secret, offshore transactions involving multiple political leaders around the world and approximately 350 Canadians with offshore tax haven investments.
Previous leaks of offshore activities have led the Canada Revenue Agency (CRA) to engage in multiple tax audits targeting wealthy Canadians, such as clients of the LGT Bank, the Swiss HSBC Bank, and recently clients of one international accounting firm, just to name a few. This time should be no different. CRA was already instructed to get the leaked data in Panama Papers.
Many OECD-participating countries have engaged in a fight against tax evasion, treaty shopping and base erosion and profit-shifting (BEPS). Combined with the upcoming exchanges of financial information between countries starting in 2017 and 2018, Canada’s “new” offshore tax compliance section since 2013 and the offshore tax informant program (OTIP) rewarding whistleblowers, wealthy Canadians and businesses engaged in aggressive tax planning are more likely than ever to be audited.
In addition, the 2016 Federal budget proposed a plan to “improve tax compliance, prevent underground economic activity, tax evasion and aggressive tax planning,” requiring an investment of $444.4 million over five years to be used by the CRA for:
- hiring additional auditors and specialists
- developing robust business intelligence infrastructure
- increasing audit activities
- improving the quality of investigative work that targets criminal tax evaders
The expected additional revenue from such measures is $2.6 billion.
To most Canadians, these measures may sound perfectly legitimate. But many taxpayers in the province of Québec will hear a familiar tune that evokes unpleasant memories.
In the 2015 Canadian Federal Budget, the Minister of Finance announced a program aimed at easing the administrative burden associated with Canadian withholding on remuneration paid to non-resident employees who performed duties in Canada.
Section 102 of the Income Tax Regulations (“Reg. 102″) requires every employer (whether a resident or non-resident of Canada) that pays remuneration to a non-resident employee, with respect to employment duties performed in Canada, to withhold Canadian taxes and other payroll remittances on that remuneration.
Before these Budget 2015 changes, there was no de-minimus exception and, while a tax treaty may ultimately provide an exemption from tax and payroll remittances, it does not exempt the employer from the initial withholding requirement. In fact, the only way an employer could be exempted from their withholding obligations was to apply, in advance, for a Reg. 102 waiver for each individual non-resident employee that was to perform duties in Canada. In order to obtain this Reg. 102 waiver an application had to be sent to the Canada Revenue Agency (CRA) at least 30 days before the start of the employment services or the first payment. Since employee travel is often arranged on short notice, this requirement created an issue for multinational companies doing business in Canada.
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).