On November 5, 2017, another leak of offshore tax haven information, dubbed the “Paradise Papers”, was disclosed by the International Consortium of Investigative Journalists (ICIJ). As a result of the leak of confidential records comprising the Paradise Papers, a number of the world’s elite have been identified as having offshore accounts and connections including, Queen Elizabeth II, Stephen Bronfman, (Prime Minister Justin Trudeau’s chief fundraiser), Wilbur Ross (U.S. President Donald Trump’s Commerce Secretary), Russian oligarchs and former Canadian Prime Ministers Brian Mulroney, Paul Martin, and Jean Chretien.
Last year, the ICIJ released the Panama Papers, for which they won the Pulitzer Prize. The Panama Papers was a leak of more than 11.5 million records and for many, was the first indication of the extent and scope of offshore tax sheltering activity. In a previous blog, we identified some aspects of the Canadian connection to the Panama Papers.
The Paradise Papers reveal the names of more than 3,000 Canadian companies, trusts, foundations and individuals who use offshore accounts in tax haven jurisdictions. In the 2017 Federal Budget, the Canada Revenue Agency (CRA) was allocated an additional billion dollars in funding to assist with its tax compliance and enforcement activities. The release of the Paradise Papers will only add to the 990 ongoing CRA audits and 42 criminal investigations that are underway and will likely result in an intensification of CRA’s enforcement efforts.
Offshore activities in and of themselves are not illegal. When assets are held offshore, whether in bank or investment accounts, partnerships, trusts or corporations, and income from those assets is not declared in Canada or is underreported, this can constitute tax evasion.
The consequences of tax evasion can include the following:
- Assessed penalties and interest on unpaid amounts
- Interest on the penalties incurred
- Administrative penalty of 50% of the income tax avoided
- Criminal penalties (an additional penalty of up to 200% of the taxes evaded and possible jail time)
- Third party civil penalties can also apply to any persons, including tax advisers and tax promoters, found to have intentionally engaged in or counselled tax evasion
The CRA has a number of measures to crack down on international tax evasion and avoidance, including domestic and international partnerships with entities such as the Organisation for Economic Co-operation and Development and the Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC), a collaboration of 37 tax administrations which exchange information for the purpose of developing more effective and efficient ways to deal with tax avoidance.
As a consequence of the CRA’s enforcement activities, approximately $25 billion in tax revenue representing unpaid taxes, interest, and penalties have been recovered to date. Notwithstanding the CRA’s enforcement efforts, the CBC reports that the CRA does not have a mechanism to track the billions in potentially lost tax revenues. In reply to a request submitted by Parliamentary Budget Officer Kevin Page for an estimate of uncollected tax revenue, CRA Commissioner Andrew Treusch sent a letter admitting that the CRA “does not generate information or data on the tax gap”.
What does this mean for the future of tax in Canada?
The Canadian tax system has recently been at the forefront of the news. From the proposed tax measures targeting privately held corporations released on July 18, 2017, which were the subject of intense public debate and resulted in subsequent announcements from the Minister of Finance, to the ethics controversy surrounding the Minister of Finance’s conflict of interest in his failure to divest himself of his personally held assets, to the release of the Panama Papers and the Paradise Papers, there appears to be the perception that the tax system is designed to benefit the most wealthy members of society. Given the Liberal Government’s stated plan to grow and strengthen the middle class, and given the tone of the discourse surrounding the proposed tax changes released earlier this year, the Paradise Papers will likely only strengthen the resolve of the Minister of Finance to increase scrutiny on the tax system with the aim of closing loopholes and tightening tax compliance measures. The full effect of these measures will likely not be known until the Federal Government releases its Budget in the spring.
It is a well-established principle of tax law that taxpayers are entitled to arrange their affairs to minimize tax. There are many valid and legal strategies which can be implemented by Canadian taxpayers through effective tax planning. If you have a tax or estate planning question, please contact a tax lawyer to arrange a consultation.