Offshoring Canadian Taxes
The Canada Revenue Agency (CRA) is committed to protecting Canada's tax base and ensuring public confidence in the fairness and integrity of the tax system.
International tax evasion and aggressive tax avoidance using offshore accounts are world-wide concerns. Whether it is complex corporate structures, using offshore jurisdictions of concern, or profit-shifting schemes that are used to evade or avoid tax, the CRA, acting on behalf of the Government of Canada is committed to identifying and addressing non-compliance. The CRA pursues these goals through education, research, international collaboration, audits, legal action and other compliance actions.
Tax evasion vs. tax avoidance
There is a distinction between tax evasion and tax avoidance. The CRA defines the two terms as follows:
- Aggressive Tax avoidance or aggressive tax planning occurs in situations where a person reduces, defers or avoids tax, or increases the amounts of a refund or other amounts through a transaction or series of transactions that comply with the letter of the law but contravene the spirit and intent of the law.
- Tax evasion involves deliberately ignoring a specific part of the law to evade taxes. For example, those participating in tax evasion conceal income or assets, claim expenses that are non-deductible, or overstate their expenses. They might also attempt to evade taxes by wilfully refusing to comply with legislated reporting requirements.
Tax evasion is a criminal matter for which the CRA has a high conviction rate
In terms of tax evasion cases, the CRA’s Criminal Investigations Program investigates suspected cases of tax evasion, fraud, and other serious violations of tax laws and recommends cases to the Public Prosecution Service of Canada (PPSC) for criminal prosecution. For the 2013-2014 fiscal year, the PPSC conviction rate for these offences was 98%, a 2% increase from the previous year.
For the period April 1, 2006 to March 31, 2014, the CRA convicted 1,508 taxpayers. This involved approximately $223 million in federal tax evaded and court sentences totalling $118 million in court fines and 4,692 months of jail time. Of these total conviction results, for those with links to monies or assets held offshore, the CRA convicted 62 taxpayers for tax evasion involving $20 million in federal taxes evaded, court fines of approximately $12 million, and 701 months of jail time.
The CRA publicizes recent court convictions (up to one year) to maintain confidence in the integrity of the self-assessment tax system and to deter non-compliance with the law. For more information on these convictions, go to Criminal investigations actions, charges, and convictions.
Well resourced to get the job done
The Government of Canada is investing $30 million over five years for the CRA to implement a number of the new measures announced in Economic Action Plan 2013 to combat international tax evasion and aggressive tax avoidance. This includes new resources of $15 million through EAP 2013 to implement the Electronic Funds Transfer reporting and an additional $15 million in refocused CRA funds that will be dedicated to offshore compliance activities. We are successfully moving forward in putting the new measures in place. These measures included enhanced foreign reporting requirements and a streamlined process for the CRA to obtain information from third parties through the courts.
The Government has also closed loopholes that are estimated to save close to $1 billion that might otherwise have been lost to the Crown over the next five years.
To implement a number of these new measures, the CRA has established the Offshore Compliance Division (OCD), which is a dedicated team of 70 CRA employees with expertise in the fields of data analysis and auditing.
The CRA has the tools to detect, correct, and deter non-compliance of taxpayers using aggressive tax plans and is using them effectively to get the job done.
A number of the tools that were recently implemented include:
- Requiring certain financial intermediaries including banks to report international electronic funds transfers of $10,000 or more to the CRA;
- The launch of the Offshore Tax Informant Program (OTIP), which allows the CRA to pay individuals with credible and specific information about major international tax non-compliance a percentage of the additional federal tax collected as a result of the information provided; and
- The streamlining of the judicial process for the CRA to obtain information concerning unnamed persons from third parties such as banks.
More expert staff than ever are hard at work on the issue
The CRA has the right people in place to combat aggressive tax planning. There have been no cuts to auditors. In fact, the overall number of auditors has increased from 5,297 to 6,037 between April 1, 2006 and April 1, 2014.
Offshore Tax Informant Program (OTIP)
The OTIP allows the CRA to offer financial awards to individuals who provide credible and specific information related to major international tax non-compliance that leads to the collection of additional federal taxes. For more information about this program, go to Offshore Tax Informant Program.
Breaking the law, or actions that conflict with the object or spirit of the law, can have serious consequences
The CRA has a comprehensive strategy in place to combat international non-compliance - Our combined measures, such as analysis and risk assessment; legislative, regulatory and policy changes; outreach, education and communication; credible and targeted enforcement and strategic partnering, and the application of the General Anti Avoidance Rule (GAAR) are effectively detecting and correcting non-compliance. The CRA is seeing results.
The General Anti Avoidance Rule (GAAR) for example draws a line between legitimate tax minimization and abusive tax avoidance. The GAAR’s purpose is to deny tax benefits to any taxpayer that although comply with the literal reading of the provisions of the Income Tax Act (ITA) and the Excise Tax Act (ETA), are not necessarily in accordance with the object, spirit or purpose of the ITA and the ETA. In such cases, the GAAR may be invoked by the Minister.
The GAAR targets aggressive tax avoidance where the transaction is planned to circumvent the application of the taxing provisions. GAAR’s application is to ensure the consistent application of the ITA and ETA. As of March 2014, 1203 cases have been referred to GAAR committee since its inception in 1988.
The CRA has strongly engaged in international activities, but the global context in which tax administrations operate has been changing at an unprecedented pace (globalization, economic downturn, etc.). To take advantage of emerging opportunities and to address the realities of the current global environment, the CRA is reinforcing strategic partnerships with key countries and organizations and leveraging new networks of influence with developing and emerging economies.
For years, as a member of the Organisation for Economic Co-operation and Development (OECD), Canada has worked with international partners to promote and influence the development and application of international tax standards to strengthen bilateral economic relationships, reduce tax barriers, create enhanced opportunities for Canadian businesses, and increase transparency.
However, in an increasingly interconnected world, there are growing concerns that tax laws have not kept pace with global corporations, the increasing fluidity of capital, and the digital economy, leaving gaps that can be exploited by companies to avoid taxation in their home countries by shifting activities abroad to low or no-tax jurisdictions. To respond to these concerns, in 2013 the OECD and the G20 launched the Base Erosion and Profit Shifting - commonly known as the BEPS Project.
The BEPS Project aims to address aggressive international tax avoidance strategies used by multinational enterprises to inappropriately minimize their taxes.
The 2013 Action Plan on BEPS identified 15 specific actions that are being developed to equip governments with the domestic and international instruments needed to address this challenge. On September 16, 2014, the first seven deliverables from the Action Plan were released. For details of those recommendations and future deliverables, go to BEPS 2014 Deliverables (OECD website).
Canada, like most other developed countries, has adopted transfer-pricing legislation to ensure that it receives its proper share of the tax base of multinational enterprises.
Transfer pricing is how multinationals transact commerce across international borders in their normal business. Because of the high impact of such transactions on Canada’s tax base, compliance action in this area is necessary. The CRA encourages taxpayers to seek an Advance Pricing Arrangement (APA) for greater certainty when setting values on transfer pricing.
An APA is an arrangement between a taxpayer and the CRA. With an APA, a taxpayer receives the CRA's confirmation of the appropriate transfer pricing methodology (TPM) to apply to specific cross-border, non-arm's length transactions for specified tax years. Many APAs are bilateral in nature, requiring Canada to enter into negotiations with other countries to eliminate the possibility of double taxation on a single transaction.
International information exchanges and treaties
Canada currently has one of the largest treaty networks in the world, with 92 tax treaties and 22 tax information exchange agreements (TIEAs) in force as of January 30, 2015, and is a Party to the multilateral Convention of Mutual Administrative Assistance in Tax Matters. This is paramount to combatting international tax avoidance and evasion, and providing the means to identify non-compliance and abuse. Led largely by the OECD, international efforts in the early 2000s to increase tax transparency resulted in new international standards for EOI through the creation of the Global Forum on Transparency of Exchange of Information for Tax Purposes. The international standard for EOI is implemented through bilateral and multilateral agreements or treaties.
This network is due in large part, to mechanisms put in place through Budget 2007 to encourage other jurisdictions to establish TIEAs with Canada. TIEAs are an important tool that allows Canada to obtain, from jurisdictions with which we do not have tax treaties, information necessary to enforce our laws and to see that all Canadians, including those with operations and investments abroad, pay their fair share of taxes. Since the signing of the first TIEA in 2009, the Government has made significant progress in negotiating TIEAs with non-tax treaty jurisdictions to combat tax evasion through the use of offshore jurisdictions.
Through the work of the OECD’s Forum on Tax Administration (FTA), tax Commissioners continue to enhance collaboration and coordinated action to address international (cross-border) tax compliance concerns.
At the October 2014 FTA plenary meeting, FTA Commissioners endorsed a strategy that sets out how, collectively, they will systematically manage issues requiring bilateral and multilateral cooperation. The FTA Large Business Network (LBN) was instrumental in the development of this work, including the expansion of the former nine-country Joint International Tax Shelter Information Centre (JITSIC) under the FTA umbrella. The JITSIC Network establishes a platform for increased exchange of information, co-operative cross-border collaboration and coordinated case work.
As a member of the FTA, founding member of JITSIC and a continuing member of the recently expanded JITSIC Network, the CRA works closely and actively with other tax administrations to coordinate tax compliance activities across the spectrum of international tax risks.
The FTA Commissioners are taking a significant step forward in global tax co-operation. They have agreed on a strategy for systematic and enhanced co-operation between tax administrations, based on existing legal instruments, which will allow tax administrations to quickly understand and deal with global tax risks whenever and wherever they arise. Along with the strategy, they have created a new international platform called the JITSIC Network to focus specifically on cross border tax avoidance. This new network integrates the existing cooperation amongst some of us into the larger FTA framework.
These multilateral efforts are consistent with the Government’s ongoing commitment to protect the Canadian revenue base and ensure tax fairness.
Voluntary Disclosures Program (VDP)
Voluntary compliance is an important element of Canada’s self-assessment system of taxation.
The VDP encourages taxpayers to come forward to correct their tax information before the CRA initiates compliance action. Taxpayers wanting to use the VDP may avoid being penalized or prosecuted. For more details on the VDP, go to Voluntary Disclosures Program.
A firm commitment, going forward
In recent years, the Government of Canada has taken strong action to combat international tax evasion and aggressive tax avoidance. By protecting the tax base, these measures help to keep Canadian tax rates low and competitive, thereby improving incentives to work, save and invest in Canada.
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