The federal government is seeking to limit the use of offshore havens to avoid the taxman.

The federal budget unveiled Monday indicates that the government intends to crack down on offshore tax avoidance through a mixture of new rules, improved co-operation with other jurisdictions, and stronger audit and enforcement efforts by Canada Revenue Agency.

The government is planning to add $15 million to CRA’s budget in 2007-2008, and a further $50 million in 2008-2009 to aid its beefed-up auditing and enforcement efforts. The focus of these resources will be in enforcing the tax system for the reporting of foreign income and cross-border transactions. “Particular emphasis will be placed on transfer pricing transactions and complex international tax avoidance cases,” it says.

Some of the government’s enforcement efforts will also be focused on verifying and collecting taxes owing on income and sales generated in Canada. “These resources will be used to find and challenge taxpayers participating in aggressive tax shelters, who fail to report all of their income, or who have made unsubstantiated GST/HST refund claims,” the budget indicates.

The rest of the initiative to ensure international tax fairness is focused on foreign-source business income, including the earnings of domestic companies’ foreign affiliates. To deal with that issue, the budget proposes a variety of measures, including: restricting the deductibility of interest paid on debt used to invest in foreign affiliates; enhancing Canada’s ability to collect tax information from other jurisdictions, through revised tax treaties and Tax Information Exchange Agreements with non-treaty countries; and modifying the exemption from Canadian tax for foreign-source active business income.

The exemption for foreign-source active business income currently is limited to income earned in countries with which Canada has a tax treaty. The government proposes to modify it to also include income earned in a non-treaty jurisdiction that has signed a TIEA with Canada.

Additionally, the Department of Finance plans to create an advisory panel of tax experts to study international taxation issues, and look for other ways to ensure fairness. The panel will be asked to provide detailed recommendations to the government for consideration in next year’s budget.