Two recently published reports urge the federal government to take aggressive new measures toward combatting offshore tax avoidance and tax evasion as Ottawa continues to survey stakeholders as part of its extensive pre-budget consultation process.
The Offshore Compliance Advisory Committee (OCAC), an independent group the government appointed earlier this year, issued a report on Dec. 8 on improving the voluntary disclosure program (VDP) with the intention of making it more “effective and fair.” The VDP allows non-compliant taxpayers to come clean proactively to the Canada Revenue Agency (CRA) in exchange for full or partial leniency in terms of criminal prosecution, penalties and interest on taxes owing.
The OCAC report contained 11 recommendations that, if adopted, would tighten the rules governing the VDP significantly, including providing less generous relief in certain cases, allowing less accommodation for those who don’t provide complete information and requiring greater disclosure, in general.
The OCAC report follows the House of Commons Standing Committee on Finance’s report published in late October on combatting tax avoidance and tax evasion, which made 14 recommendations. These include everything from strengthening the CRA’s whistleblower program to improving co-ordination between the CRA and the Department of Justice in the investigation and prosecution of cases.
The federal government has been making the fight against tax evasion and avoidance a policy priority for several years. In this year’s budget, the Liberals provided the CRA with an additional $444 million over the next five years to fight offshore tax evasion.
“We will continue with our efforts to crack down on tax cheats,” said Diane Lebouthillier, minister of national revenue, in a statement from the CRA welcoming the OCAC’s VDP report. “My message is clear: the trap is closing.”
Increasing global concern about tax non-compliance, particularly in light of high-profile events such as the release of the so-called Panama Papers in April, is driving much of the push toward tax transparency and information sharing, says Mitchell Stein, assistant professor of managerial accounting and control at the Ivey Business School at Western University in London, Ont.
“Canada, like many countries around the world, is attempting to take greater action to obtain the necessary information to figure out where people have money and property in various jurisdictions,” he says. “And countries themselves are looking for money [in the form of tax revenue] too.”
The OCAC, in making its recommendations for changes to the VDP, said the program should aim to strike “a balance between fairness, on the one hand, and revenue generation, on the other hand.” A too-lenient program, the committee’s report suggested, would “raise fairness concerns for taxpayers who are complying with their tax obligation.”
One recommendation is that relief from interest and penalties associated with the VDP should be reduced in certain cases, including cases involving large dollar amounts of tax avoided in which there were multiple years of non-compliance or for which a “sophisticated” taxpayer sought out expert tax advice or used complex offshore structures.
Another recommendation is for the CRA to take a harder line on taxpayers who fail to provide full disclosure, including denying them the full benefits of the program: “Where no legitimate reason exists for a taxpayer’s failure to provide full and complete information, the CRA should insist on receiving the necessary and relevant information, using its power, where appropriate, to compel the taxpayer to provide or develop the information.”
Other recommendations include tightening the rules for taxpayers who wish to access the VDP more than once and requiring taxpayers to disclose the identity of advisors who may have assisted with non-compliance.
The minister of National Revenue and the CRA will consider the OCAC’s recommendations in a review of the VDP and will communicate their changes to the program in late 2017, according to the CRA’s statement.
A tax insight bulletin that Pricewaterhouse Coopers LLP (PwC) published on the OCAC’s report suggests that the recommendations would alter the VDP significantly if they were to be adopted in full.
“If you are contemplating a voluntary disclosure, you may want to act soon,” the PwC bulletin states. “We expect that the VDP’s value to taxpayers who are inadvertently, or intentionally, non-compliant would be reduced, and that this would decrease the number of disclosures.”
Meanwhile, the Standing Committee on Finance’s report addressed the issue of tax evasion and avoidance more broadly, addressing both the offshore variety and tax non-compliance as a general issue.
On the fight against offshore tax evasion, the committee recommended the government review its network of tax treaties and tax information exchange agreements with foreign countries to make sure they’re not inadvertently allowing tax non-compliance, “particularly with respect to the secrecy associated with certain jurisdictions and their banking practices.” That review should be completed by Aug. 31, 2017, the committee recommends.
Another recommendation involves strengthening protections for whistleblowers under the Informant Leads Program and the Offshore Tax Informant Program (OTIP), as well as making sure these programs are “properly incentivized” and all credible information obtained through them is investigated. The OTIP, which the Conservatives introduced in 2013, provides informants with an opportunity to receive a 5%-15% share of any additional revenue the CRA collects as a result of their information.
Aaron Wudrick, federal director of the Regina-based Canadian Taxpayers Federation in Ottawa, suggests that providing additional protection for informants is positive, but express reservations about offering financial incentives for information.
“I would like to think that the reason people would blow the whistle is because it’s the right thing to do,” he says, “not because they stand to gain financially from it.”
The committee also recommends that the minister of National Revenue report the progress of audits related to the Panama Papers by June 1, 2017.
The committee’s recommendations on broader tax non-compliance included a suggestion that the government accelerate its current review of the Income Tax Act with a view to simplifying the tax regime and reducing complexity.
Ottawa eliminated several boutique tax credits, such as the children’s fitness tax credit, in the 2016 federal budget in favour of an enhanced Canada Child Benefit program.
“We are engaged in a tax review, as you know,” said Prime Minister Justin Trudeau at a news conference on Monday, referring to the ongoing pre-budget consultations. “We’re attempting to clean up and simplify a number of things around the tax code.”
The committee suggested the review be completed by June 30, 2017.
“They’re putting a timeline on the review, and I think that’s important,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s wealth strategies group in Toronto.
The committee also recommended the CRA continue its recent efforts to determine the so-called tax gap between what the government is collecting in tax revenue vs what it would be collecting if there were complete tax compliance.
Although the tax gap is a difficult figure either to define or calculate, it is nonetheless worth the effort, suggests Amin Mawani, associate professor of accounting at the Schulich School of Business at York University in Toronto.
“It’s a crude number, and it’s based on many assumptions,” he says, “but, if measured consistently over time, we’ll at least see whether the [tax gap] is widening or not.”
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