According to recent media reports based on the Panama Papers, some see Canada as a tax haven. It may seem unlikely when you are reviewing how much tax you paid to the government in 2016 but evidently, our reputation and economy is a good venue for hiding wealth.
Apparently, it helps that Canada has tax agreements or tax information exchange agreements with 115 countries -- the most in the world. It means that the treaties in place can be leveraged to ensure little to no tax is paid in Canada or the originating country. And our corporate registration systems allow the actual owners to remain anonymous.
But before you start investigating offshore accounts and corporate registration, the Canada Revenue Agency is working to crack down on tax evasion and avoidance. According to the CRA, Canada has one of the highest voluntary compliance rates in the world. More than 29 million personal tax returns were filed last year so the system does work.
But there are exceptions. People are always looking for ways to lower their tax bills and some choose to use less-than-legal methods to do it. Tax avoidance and evasion is illegal in Canada and you can face penalties, interest and/or criminal prosecution depending on how aggressive the scheme being used.
Individual taxpayers are not the only ones facing more scrutiny.
There are a limited number of legal tax shelters -- like RRSPs and TFSAs -- in Canada. But that does not mean people aren't always trying to come up with new ones. For example, there were several companies that sold a tax program based on the charitable donation credit. They marketed that a donation was worth more than the actual dollar amount and charities issued tax receipts for more than actual amount given. This kind of tax gymnastics meant the taxpayers taking advantage enjoyed a bigger refund when they claimed the inflated amount.
Initially, people did receive a refund based on this kind of "donation" before the CRA started to conduct reviews. The result was charities that participated lost their registrations and taxpayers who made the inflated claim were stuck with a big tax bill. You can only claim the actual donation amount. There is no multiplication factor allowed. Rather than waiting for these schemes to show up on tax returns, the CRA is working to identify and stop them by going after the promoters directly.
Individual taxpayers are not the only ones facing more scrutiny. Multinational companies are also being targeted. Canada signed the Multilateral Competent Authority Agreement (MCAA) which will require stronger international reporting obligations for large multinational companies. Some companies leverage international tax laws to reduce their tax bills. The goal is to have global operations be more transparent so companies pay the appropriate amount of tax in the countries where they generate profit.
The CRA will also review high-value money transfers crossing borders of more than $10,000. It will note specific offshore locations and certain financial institutions used. With increased funding in last year's budget, the CRA has more resources to examine potential tax avoidance across jurisdictions. Transferring $10,000 or more via Electronic Funds Transfer (ETF) is not a crime but if you are sending it to a known tax haven, you can expect the CRA to have a look at it. You can always transfer funds via ETF but just make sure you are tax compliant.
A new Offshore Compliance Advisory Committee (OCAC) is also advising the CRA on new ways to address offshore tax evasion and tax avoidance. The committee is comprised of experts and has already delivered a report about the Voluntary Disclosure Program (VDP).
The report identified several areas of improvement for the VDP including a recommendation that taxpayers disclose the advisors who helped prepare the VDP application, eliminating the option for taxpayers to object to their VDP decision and less generous relief in certain circumstances.
The VDP allows Canadians to voluntarily correct or report an unreported tax situation. If you want to use the program, you cannot wait until the CRA contacts you about the problem. You must be proactive in filing any changes or corrections to past or unfiled returns.
And if you are not willing to confess your tax sins, your neighbour might be. The Offshore Tax Informant Program (OTIP) encourages Canadians to offer information anonymously if they think someone is avoiding their fair share of taxes.
Unfortunately, there will always be people who try and game the system. By introducing more programs to catch the tax avoiders, the CRA is working to make it fair for other taxpayers who are paying their share. Being tax compliant should be part of your financial plan.
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