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					                                                                                                            Page 1 of 2                                   Vol. 27, No. 3                                        March 2011

      CRA poised to relax offshore penalties
      By Donalee Moulton

      The Canada Revenue Agency is expected to make a 180 degree turn in an upcoming announcement on
      offshore accounts. It is anticipated that the announcement will welcome Canadians who want to bring
      their offshore investments back into the country but have been deterred by high penalties. That is in
      stark contrast to the agency’s previous stance.

      “It is certainly a change in how the CRA previously dealt with offshore accounts,” said Adrienne
      Woodyard, a tax lawyer with Davis LLP in Toronto. It appears to her that the change will “formalize the
      rather ad hoc approach that previously governed how the CRA dealt with offshore accounts.

      “Prior to this policy, if you made a voluntary disclosure about an offshore account that was established
      more than 10 years ago, you couldn’t be sure what your tax liability would be because of the differences
      among CRA offices in terms of how they processed the disclosures.”

      That uncertainty is compounded by the tax law itself. “There are a number of problems with the current
      policy,” said David Sohmer, a founding partner and tax lawyer with Spiegel Sohmer in Montreal.

      One of the issues, he noted, is the rules for the voluntary disclosure program as spelled out in the Income
      Tax Act. That “allows the minister to waive interest and penalties for a period of 10 years prior to the
      year in which relief is requested. If someone says that they have had a Swiss account for 30 years, the
      minister has no authority to waive interest or penalties for the first 20 years. The result is confiscatory.”

      “Some CRA officials would informally disregard income generated more than 10 years ago, so you
      might not pay any tax or interest or penalty for those years,” said Woodyard, who has represented clients
      in the Tax Court of Canada. “Other CRA officials would ‘telescope’ the income earned after the 10-year
      mark into the 10th year, so you would pay tax on all of the income, but you would be given interest and
      penalty relief on the whole amount. And other CRA officials might not offer any relief at all after the 10-
      year mark, so you would pay partial penalty and interest. It was a wholly unpredictable process.”

      Decisions are made on a case-by-case basis, Ottawa-based CRA spokesperson Caitlin Workman said in an
      interview with The Bottom Line. “We’ll look at whatever is warranted to make the decision,” she said,
      “and will make a decision based on what is most feasible and practical.”

      Another issue that has caused some consternation has to do with waiver of interest on taxes that should
      have been remitted. There are two key policies that deal with this: the aptly named waiver of interest
      policy and the voluntary disclosure policy, which includes information on waiving interest.

      “The waiver of interest where there has been a voluntary disclosure does not meet the CRA published
      criteria for interest waivers,” said Sohmer.

      The waiver of interest policy is clear. It states that interest can only be waived for up to 10 years,
      Workman noted. The voluntary disclosure policy, however, states in one spot that the time limit is three
      years for waiving interest and, later in the policy, that it is 10 years, Workman acknowledged.

      The document the CRA’s auditors rely on, she said, is the waiver of interest policy.

      There is certainly increasing demand for action in the wake of the media spotlight on global tax evasion.
      “The minister of national revenue was under some pressure to demonstrate that the government
      was making efforts to prevent it and effectively enforce Canada’s tax laws,” said Woodyard. “It could
      either try to throw a huge amount of money at the problem — not a popular or even a viable option in                                                              2/24/2011
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      this economic climate — or it could create a bigger carrot to encourage people to come forward

      Efforts south of the Canadian border also increased both awareness of the situation and demand for
      resolution. The U.S. Internal Revenue Service managed to force UBS AG, an international bank
      headquartered in Switzerland, to release the names of more than 4,400 account holders living in the

      The resulting chill was felt in Canada. The financial impact was not. “The CRA … knows that it does not
      have the leverage that the IRS has, and this has been reflected in the relatively small amount of offshore
      money that has been disclosed,” said Sohmer. He estimates that there may be as much as $100 billion
      sitting in Canadian offshore accounts.

      In 2009-2010, the CRA received 2,964 disclosures related to overseas income and assets, which enabled
      the agency to locate $ 594.6 million in previously unreported income.

      As of August, the number of disclosures this year is 2,728. “We’re at the very early stages of processing
      of these disclosures … but we have thus far identified $38.3 million in previously unreported income,” said

      “We have increased the number of field auditors assigned to do both regular international audit work and
      targeted projects involving offshore jurisdictions,” said Workman. “We have strengthened existing
      specialized audit groups to focus on aggressive international tax schemes, and enhanced our ability to
      target entities and individuals who are promoting or participating in abusive tax schemes.”

      For the fiscal year 2007-2008, the extra tax identified as a result of this increased audit coverage was
      $475 million, close to three times the $174 million for 2005-2006. Another $738 million in extra tax was
      identified the next fiscal year thanks to the new auditors.

      Offshore money can be very hard to locate. “There is a huge amount of money sitting offshore that the
      CRA would almost certainly never find on its own,” said Woodyard. “Its resources are limited. And despite
      the media hype about UBS and other banks, these cases were not a particularly rich source of
      disclosures. The number of offshore accounts actually detected as a result of these initiatives was
      quite low.”

      Indeed, as of September 2009, only 61 voluntary disclosures had been received from Canadian clients of
      UBS AG. Propelling those numbers upward will require greater incentive for account holders to come
      forward. That reality is driving the CRA to move from the stick of getting caught to the carrot of voluntary

      “The result is that there will be a much larger amount of money collected by the CRA than the Canadian
      government otherwise would have received, and of course, the income generated by these accounts in
      the future will now be brought into Canada’s tax net,” said Woodyard.

      “Accountants will play a very significant role in the process,” said Woodyard. “Even if they do not
      participate in the initial disclosure, which in many cases is handled by lawyers, their expertise will be
      needed to calculate the tax payable and prepare T1 adjustment requests, schedules three and four, and
      any other filings that may be necessary to report the previously undisclosed income.

      “The CRA generally insists that all filings be brought up to date before a disclosure is considered
      complete,” she added. “The calculation of capital gains can be a rather involved process if the taxpayer
      actively traded in the offshore account, and of course, currency conversion issues must be addressed, so
      it is reasonable to expect that many taxpayers will need professional help.”

      “Aggressive international tax planning is an issue for tax administrations around the world,” said
      Workman. “However, the current global movement towards fiscal transparency, which includes a constant
      increase in the amount of information tax administrations share with each other, means that the world is
      getting smaller.

      “It’s only a matter of time,” she stressed, “before the CRA will identify Canadians that hide funds
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