With the Canada Revenue Agency and U.S. and other global tax authorities putting the squeeze on offshore tax evaders, a flood of money could now be ready to wash back onshore, some observers suggest, primarily in the form of tax revenue for the CRA but also in the form of repatriated assets.

“The amount of money offshore is massive,” says David Sohmer, a partner specializing in international tax law with Montreal-based law firm Spiegel Sohmer Inc.

In fact, no one can be sure how much money is sitting in unde-clared offshore accounts globally, but indications are that it’s in the trillions of dollars. With most countries running big deficits and domestic tax revenue difficult to raise, governments everywhere appear keen to capture more of the taxes owed to them from their citizens’ offshore income — most of which has long slipped through their fingers.

The CRA has received around 2,000 voluntary disclosures relating to unreported income from foreign sources and foreign assets as of Sept. 23, less than halfway through the current fiscal tax year. Of those, the agency has already processed 929, representing almost $40 million in unreported income. In all of the previous fiscal year, the CRA processed 1,858 disclosures for a total of $100 million in unreported income.

As well, the Canadian tax authority has received 61 voluntary disclosures from Canadian clients of Switzerland-based UBS AG, which paid a US$780-million fine in February to the U.S. government after an investigation into UBS’s alleged role in helping U.S. residents evade taxes. Through early October, 20 of those disclosures to the CRA were processed, yielding $7.6 million in taxes and interest owing.

Although these amounts are relatively tiny, most observers believe the disclosures will keep on coming, as individuals with money parked offshore make the decision to get onside with the CRA. Although there’s nothing illegal in itself about a Canadian having an account or investments offshore, Canadian tax law says that a Canadian tax resident is subject to taxes on his or her worldwide income.

“We have definitely seen an increase in voluntary disclosures,” says Robert Kepes, a partner with Toronto-based law firm Morris & Morris LLP who represents clients in tax dispute cases with the CRA. “We’ve had an increase in phone calls about making a voluntary disclosure, and an increase in meetings with prospective clients.”

Meanwhile, Sohmer believes the Canadian government could bring in much more offshore tax revenue if it introduced a partial amnesty program, similar in scope and guidelines to the one introduced in the U.S. Sohmer estimates that Canadians may have as much as $50 billion in offshore accounts in Switzerland, the Caribbean and in other tax havens. An amnesty program that could bring in even a fraction of that would represent a big windfall, not only in tax revenue but also in money returned to Canada.

“Those are big, big bucks,” Soh-mer argues, “and it would come in very, very quickly [if an amnesty program were introduced].”

As the CRA’s voluntary-disclosure program is currently set up, it’s too punitive, Sohmer believes — in particular, for Canadians who have had money in offshore accounts for many years, such as foreign-born Canadians who may have opened accounts in overseas banks before they emigrated. Penalties for those with money offshore for a decade or more could find themselves paying as much as 60% of the value of the account in cumulative interest, he argues, as opposed to around 33% in interest and penalties in the U.S.

For the CRA’s part, it defends its voluntary-disclosure program as an opportunity for Canadians “to disclose information they have not reported in previous dealings with the CRA, without penalty or prosecution.” So far, the Canadian government has not introduced a partial amnesty program.

Under the partial amnesty program offered by the U.S. Internal Revenue Service to U.S. residents who have undisclosed foreign accounts, more than 3,000 individuals have come forward. Those caught after the amnesty period, set to end on Oct. 15, would risk the full wrath of the IRS, including substantial additional penalties and the possibility of criminal prosecution. That threat is keeping U.S. tax lawyers busy helping clients disclose voluntarily. The deadline for the amnesty period has already been extended once, from Sept. 23.

Some experts say that there is little public or political appetite in Canada for such a U.S.-style amnesty program, particularly in a time of economic upheaval when ordinary Canadians are struggling.

@page_break@“Why should some people get away with not paying their taxes, when the rest of us have to?” asks Arnold Sherman, a chartered accountant in Calgary who provides international tax planning advice to his clients. “I’m all in favour of chasing after people who are cheating — they’re my competition. If they weren’t [hiding money offshore illegally], they’d be coming to me to see if there was a way to reduce their tax liability legally.”

However, many Canadians may have money offshore as part of legitimate international tax-planning strategies, Kepes says, with some of those strategies having been set up years ago. But with the increased scrutiny on offshore accounts and the proposed changes to Canadian tax law — in the form of the far-reaching “foreign investment entity” and “non-resident trust” rules — which may make some of those strategies illegal retroactively, he adds, many Canadians could be interested in repatriating their assets.

In addition, Canadians who plan to repatriate their offshore assets may find it easier to transfer their money from an offshore account to a domestic bank, Kepes says, if they decide first to make a voluntary disclosure to the CRA.

“If a customer is making a transfer of a significant amount of money, a Canadian bank would get some comfort in knowing that the client is also making a voluntary disclosure,” he points out. “If a client suddenly makes a huge transfer, all kinds of regulatory bells may go off — and [access to] the money could be put on hold.”

Over the past decade or so, many governments in the developed world, including those of Canada and the U.S., have become generally more vigilant, in terms of making sure their citizens are paying their fair share of taxes on offshore investments and accounts. They’ve tightened rules, increased reporting and filing requirements, and assessed stiffer penalties for transgressors. In Canada, the federal government has given the CRA an extra $30 million annually since 2005 specifically for going after the abusive use of tax havens by Canadians.

However, the recent targeting of offshore tax havens by the U.S., Canada and other G-20 countries began early last year, when an employee of a bank in Liechtenstein, a known tax haven, sold an electronic file containing the names of 1,400 depositors — including 100 Canadians — and their account information to Germany’s government for US$6 million.

Also last year, the U.S. began investigating banking giant UBS — an investigation that ultimately led to a substantial fine and other concessions. This past August, UBS signed a deal with the U.S. government in which the Swiss giant agreed to give up the names and account information for about 4,450 U.S. citizens suspected of tax evasion.

In September, Switzerland was removed from the Organization of Economic Co-operation and Development’s “grey list” of countries not in substantial compliance with internationally agreed tax standards after that country signed tax information-sharing agreements with a dozen countries. Other countries known to be low- or no-tax havens are also feeling the heat.

Apart from outright tax evasion, some Canadians may honestly neglect or not know that they have to declare the income they’ve generated overseas because they don’t receive a T5 or equivalent slip from a foreign government or financial institution, says Bruce Harris, a high net-worth tax services partner with PricewaterhouseCoopers LLP in Toronto: “The reality is if you earn the income, you have to report it.”

Although the crackdown on the abusive use of offshore tax havens should, in theory, have no effect on legitimate international tax planning, some observers believe that the collateral result will be increased scrutiny and more hassles.

“It tends to result in further legislation and even further filing requirements,” says Mitchell Stein, an assistant professor of managerial accounting and control at the University of Western Ontario’s Richard Ivey School of Business in London, Ont. “There’s more administering of the penalties that are already there, and less leniency.” IE