When it comes to aggressive tax planning, the Canada Revenue Agency is continuing its fight against abusive tax schemes as well as increasing its audit and enforcement activities to deter the abusive use of international tax havens.

“For years, there has been a requirement to report foreign holdings, for both personal and corporate clients,” says Jason Safar, partner in the tax services practice with PricewaterhouseCoopers LLP in Mississauga, Ont. “But on the personal side, there hasn’t been a very active enforcement of it. [However,] over the past year, I have noticed that the CRA is starting to look for those foreign reporting forms and assessing penalties if they are not provided.”

The T1135 (a foreign income verification form) is required to be filled out by your clients if the total dollar value of all specified foreign property — either owned or in which a beneficial interest is held — is more than $100,000 at any time in the year. These forms, to be submitted with the clients’ tax returns, state the amount and type of foreign investment held.

“Just recently, we are starting to see the CRA requesting additional information from these clients and even from some who have submitted the form initially,” says Teresa Gombita, executive director and industry leader with the private-client services group at Toronto-based Ernst & Young LLP. “These requests are coming from the aggressive tax planning group, so it is definitely something the [CRA is] starting to take a closer look at.”

Following up on T1135s is just one of the CRA’s initiatives that has been beefed up since 2005, when the federal government announced it would provide the CRA with $30 million annually to increase audit and enforcement activities that detect and deter aggressive tax planning through international transactions.

“The CRA is firmly committed to preserving the integrity of Canada’s tax base and is actively pursuing cases involving the abusive use of tax havens,” says CRA spokesman Philippe Brideau. “These auditors and tax avoidance officers continue to focus on aggressive international tax planning to ensure Canadians are complying with their obligations under the Income Tax Act.”

Approximately 80% of the federal funding was put toward an increase in the CRA’s audit coverage for cases involving aggressive international tax planning. In recent years, the CRA has increased the number of field auditors to work on both regular international audits and on targeted projects involving offshore jurisdictions. Last year, the CRA was able to identify slightly more than $1 billion of taxes outstanding, compared with the $174 million that was recovered in fiscal 2005.

In addition, the CRA has identified and addressed 22 financial structures, commonly referred to as “foreign tax credit generators,” that had sought to avoid more than $1 billion in taxes. The CRA also has had 626 bilateral exchanges with other countries as a result of its work with the Joint International Tax Shelter Information Centre, a Washington, D.C.-based organization consisting of tax administrators from Britain, Australia, the U.S. and Canada.@page_break@“With this investment,” says Brideau, “the agency has taken measures to strengthen both its intelligence and technical capabilities in relation to abusive use of low-tax or no-tax jurisdictions.”

Along with foreign reporting, the CRA continues to keep a close eye on these ongoing issues:

> RRSP/RRIF Schemes. The CRA is continuing to investigate questionable RRSP/RRIF tax-free withdrawal schemes that claim to allow investors to withdraw funds from their RRSPs or RRIFs without paying taxes.

To date, the CRA has reassessed the tax returns of more than 5,500 such investors, resulting in additional taxable income of approximately $275 million.

The CRA continues to be diligent in sending out tax alerts and press releases on this topic, reminding investors to continue to be cautious about using these schemes.

“These type of tax-free withdrawal schemes are not as pressing an issue for clients as they have been in the past,” says Gombita. “The government has sent out numerous press releases on these schemes, and I think those alerts have really started to pay off for the public.”

> Charitable Donations. Al-though tax shelters related to charitable donations have been gaining attention in the media recently, they are nothing new for the CRA; over the years, the agency has continued to audit taxpayers who have participated in such schemes.

In total, the CRA has reassessed more than 120,000 taxpayers that have participated in such vehicles and denied credits for approximately $4.5 billion dollars in donations.

Says Brideau: “The CRA continues to make a concentrated effort to educate taxpayers about tax-shelter donation arrangements.”

Charitable donations continue to be a focus of the CRA’s Project Trident, a nationwide enforcement and awareness initiative that targets identity theft, charities-related fraud and tax-preparer fraud. Project Trident, which launched last year, has 73 ongoing investigations and has resulted in more than $2.7 million in fines and 508 months in mandatory jail time.

> Leveraged Insurance Products. The federal government is starting to take a closer look at certain leveraged insurance products, commonly known as “10/8” products. (See story on page B17.)

“These types of insurance products are something the CRA is starting to get curious about,” says Safar. “I think it is something that is still in a bit of an investigative stage, but there have already been many discussions around these products at various conferences — and it involves questions with the CRA.”

> Credits For Dependents. The CRA continues to look at equivalent-to-spouse tax credits to ensure that the divorced or separated parent with whom the dependent child resides on a full-time basis is indeed the parent making the claim.

“This is a situation that we continue to see the CRA checking to make sure the parents are not deducting it twice,” says Safar. “Divorced parents can get confused about who is entitled to the benefit, especially with joint-custody cases. So, [clients] do need to include this in their tax planning discussions.”

IE