INTRODUCTION

Canada’s income tax regime requires taxpayers to determine their tax liability based on their worldwide income. Canadian taxpayers who have deposit and investment accounts in foreign financial institutions must declare all income they earn offshore. However, while some taxpayers may use tax avoidance strategies, which are legal, taxpayers who do not disclose all of their income are evading taxation and therefore behaving illegally; under Canadian tax laws, tax evasion is a criminal offence and tax evaders are potentially liable for criminal prosecution. Combating tax evasion can be challenging for tax authorities, especially if the unreported income is located in foreign jurisdictions that have bank secrecy laws or in “tax havens.” The term “tax haven” is defined as a jurisdiction with low or no taxes, a lack of transparency in the operations of its tax system, and a lack of effective exchange of tax-related information with other countries.

Tax evasion, including through the use of offshore banking, reduces Canada’s tax base and therefore the income tax revenue collected by the Canada Revenue Agency (CRA) on behalf of the Government of Canada. The CRA is responsible for administering, and ensuring compliance with, Canada’s tax laws. In recent years, the CRA has received information and lists of names of supposed Canadian taxpayers who allegedly have offshore accounts. In 2007, an informant provided the CRA with a list of 182 names of accounts at a bank in Liechtenstein (the Liechtenstein list); this was the first time a list like this had been received by the CRA. As the CRA continues to receive information about Canadian taxpayers who allegedly have offshore accounts, an increased workload in the area of offshore tax compliance is expected.

In its Fall 2013 Report, the Office of the Auditor General (OAG) released a performance audit that examined whether the CRA conducted compliance actions adequately for those named on the Liechtenstein list, and used the intelligence gained to confirm or update its detection and audit procedures for offshore banking.[1]

The House of Commons Standing Committee on Public Accounts (the Committee) held a hearing on this audit on 26 February 2014.[2] From the OAG, the Committee met with Marian McMahon, Assistant Auditor General, and Heather Miller, Director. From the CRA, the Committee met with Richard Montroy, Assistant Commissioner, Compliance Programs Branch, and Gina Jelmini, Director, Offshore Compliance Division.

FOLLOWING STANDARD PROCEDURE

The OAG examined whether the CRA had followed its procedures to identify which of the 182 supposed Canadian taxpayers on the Liechtenstein list required an audit. The CRA organized the individuals into 81 family groups and decided not to audit 35 of them because the members of the group were determined to be non-resident or deceased, or could not be located.[3] Marian McMahon, Assistant Auditor General, concluded that:

[W]e found the work [that the CRA] had conducted was sufficient, given that some names on the list were not Canadian residents and some could not be identified. Without additional information, there was little more the agency could have done. The agency followed its standard procedures in most of the audits and conducted them without undue delay.[4]

However, the OAG also remarked that, given a lack of experience with auditing lists from offshore banks prior to the case at hand, the CRA did not have an auditing framework with formal timeframe standards. In this regard, Ms. McMahon stated that:

We found that standards had not been established for the time it should take to complete files. As a result, we could not conclude on whether any delays caused by the agency were excessive. Standards for completing files on time would allow staff to gauge when their work may be taking too long or when they may need to change priorities.[5]

According to the OAG, the atypical nature of the audit and of the offshore investment structures, as well as logistical delays caused by foreign entities and taxpayers or their representatives, were contributing factors that led the work in relation to the Liechtenstein list to take about six years to complete.[6] The OAG also noted five instances where, during the audit, the CRA was not actively working on the files.[7] The OAG recommended that the CRA provide clear timelines to both staff and taxpayers during audits of offshore accounts. In response, Gina Jelmini, Director of the Offshore Compliance Division at the CRA, indicated that the timelines had already, by the date of the Committee’s hearing, been established and communicated to the Offshore Compliance Specialized Teams.[8] Additionally, according to its action plan, the CRA committed to re-examine and refine its timelines to establish benchmarks during fiscal year 2015–2016.[9]

In order to review the CRA’s re-examination of the standard timelines it established to guide the conduct of offshore audits, the Committee recommends:

RECOMMENDATION 1

That, by March 2016, the Canada Revenue Agency provide the Standing Committee on Public Accounts with a progress report outlining the results of its re-examination of timelines to establish benchmarks for the conduct of offshore audits.

During the CRA’s audit work in relation to the Liechtenstein list, some of the taxpayers’ representatives requested an agreement guaranteeing that — in exchange for full information disclosure — the taxpayer would not be referred for criminal prosecution; under the agreements, taxpayers gave up their right to appeal, and agreed to pay any amount due. The CRA signed agreements with 15 family groups.[10] Heather Miller, Director at the OAG, explained the challenge facing CRA auditors working on the Liechtenstein list and the rationale for the use of such agreements, indicating that:

The agency was dealing with a situation whereby taxpayer information [in the Liechtenstein list] was provided to them at a fairly low level. [Auditors] didn't have a great deal of detail … [since] all they had was the name or date of birth and a dollar amount for some of these people, so in some of these cases, when they entered into the agreement, it wasn't so much that if they went into the agreement they could waive prosecution, although that was the result. When they were going into the agreement with these taxpayers they couldn't possibly have been in a position to prosecute because they didn't have any information, so on obtaining the information from the taxpayers, had they not signed the agreement, they wouldn't have received the information.[11]

Of the 46 files audited, the CRA assessed federal taxes owing of $6.045 million, interest owing of $10.328 million and penalties of $8.278 million, for a total assessment of $24.651 million.[12] The OAG found that the CRA’s approach to applying penalties on a case-by-case basis was consistent with established policies.[13] According to the CRA, at the time of the OAG’s audit, $10.138 million of the total assessed amount had been collected, while three of the eight audit projects that did not involve a signed agreement with the CRA — totalling $14.513 million in taxes, interests and penalties — were under appeal.[14] According to Richard Montroy, Assistant Commissioner of the Compliance Programs Branch at the CRA, such appeals “precluded [the CRA] from collecting.”[15]

The OAG indicated that, of the eight cases where no agreement was signed between the CRA and taxpayers, two cases were referred to the CRA’s Criminal Investigations Division for possible prosecution. The OAG noted that no taxpayers on the Liechtenstein list were prosecuted.[16] However, the OAG’s audit did not examine the CRA’s Criminal Investigations Division. When asked about the lack of prosecution, Mr. Montroy explained that “[o]n the criminal investigation front in the courts, you have to prove something beyond a reasonable doubt,” and that “[i]n the few cases we saw … in [the] Liechtenstein [list,] there was not enough evidence to support the laying of charges. That’s because there was so little information on file, we were not able to pursue.”[17] However, when asked whether, in future audits in relation to offshore bank lists, the CRA intends to prosecute taxpayers who are found to have evaded taxes, Mr. Montroy replied:

I would say times have changed immensely. … The rules of the game have changed. If you are a tax evader and we can prove it, we will prosecute people to the full extent of the law. We have access to information now that we did not have six or seven years ago that will enable us to be able to prosecute if need be.[18]

In recognizing that some taxpayers rely on professional advisors to evade taxes through offshore banking, Mr. Montroy explained that the Income Tax Act enables penalties to be applied on third parties. Moreover, when asked about client confidentiality agreements as an obstacle to accessing information, he replied that “[i]f we suspect that something is not entirely aboveboard, we have several means at our disposal to collect information. … We are no longer limited to information protected by professional privilege. We have other means to obtain the information.”[19]

The OAG noted that the CRA had not analyzed, in relation to future audits of offshore accounts, the appropriateness of agreements assuring that prosecution would not occur when information is provided.[20] During the OAG’s audit, the CRA had provided assurance that the audit agreements concluded with individuals named on the Liechtenstein list would not be used in relation to individuals named on subsequent lists.[21] Ms. McMahon indicated that the OAG was concerned that, notwithstanding its assurance, the Agency was offering conditions similar to those contained in those audit agreements to taxpayers named on subsequent lists.[22] Accordingly, the OAG recommended that the CRA analyze its policy on the use of such agreements to ensure that their use reflects its project and program objectives.[23] In its action plan,[24] the CRA indicated that it had established the Offshore Compliance Division (OCD) to ensure that, through headquarter oversight, the use of audit agreements is consistent with its project and program objectives. Mr. Montroy described the OCD as:

a dedicated team that will be comprised of 70 CRA employees with expertise in the fields of data analysis and auditing. This division will work with specialized teams whose focus will be on identifying individuals who engage in international non-compliance, developing and implementing effective strategies and program activities to counter offshore non-compliance, and increasing the CRA's overall ability to pursue cases of international tax evasion and aggressive tax avoidance.[25]

When asked whether the CRA performs a cost-benefit analysis before establishing new programs and divisions, Mr. Montroy explained: “[c]ertainly in the offshore area, the rate of return [on every dollar invested] is fairly significant. We're usually talking … a rate of return of 8:1 or 10:1, easily.”[26]

In order to ensure that a formal policy for the CRA’s use of audit agreements with taxpayers in its conduct of offshore audits is established, the Committee recommends:

RECOMMENDATION 2

That, by September 2014, the Canada Revenue Agency provide the Standing Committee on Public Accounts with a progress report outlining the status of actions taken by its Offshore Compliance Division to ensure that the Agency’s use of audit agreements with taxpayers reflects its project and program objectives.

USING GATHERED INFORMATION

The CRA’s audit work in relation to the Liechtenstein list underscored the importance of access to information from offshore sources in order to identify, deter and combat tax evasion. Canada has participated in multilateral efforts, through the Organisation for Economic Co-operation and Development and the Group of Twenty, to increase transparency and the sharing of information, and to promote the use of tax information and exchange agreements (TIEAs) between countries. Since 2008, Canada has signed 18 TIEAs; Canada also has 92 tax treaties currently in force. Mr. Montroy asserted that “[i]nformation sharing and international cooperation are key,” that “[t]he CRA has significantly improved its ability to obtain tax information from other jurisdictions,” and that “Canada has one of the most extensive tax treaty networks in the world.” [27] He also indicated that, on 21 November 2013, Canada ratified the Convention on Mutual Administrative Assistance in Tax Matters.[28]

Moreover, Mr. Montroy explained to the Committee that a number of countries that — in the past — had been characterized as tax havens have decided to improve their international reputation through the signing of TIEAs.[29] He also commented that Canada has taken a strategic approach in selecting countries with which it enters into TIEAs, noting that: “we prioritized the various countries, which is why you see TIEAs with Bahamas, Bermuda, Jersey, Guernsey, the British Virgin Islands, etc. ... Those are the countries that we typically see Canadians investing in.”[30]

The OAG found that the CRA had made progress in using the intelligence gained and lessons learned from working on the Liechtenstein list to improve the effectiveness of its existing procedures and programs in detecting cases of offshore tax evasion.[31]

The CRA’s audit work in relation to the Liechtenstein list provided the CRA with knowledge about the practices and schemes used by offshore tax evaders. According to the OAG, this work will improve the Agency’s ability to detect offshore tax evaders through using taxpayer information already reported to it.[32] In commenting on lessons learned from the Liechtenstein list, Mr. Montroy stated that:

What we learned from the first list … is how people structure their affairs to get under the radar screen. … [[I]t’s what transactions do they do, what countries do they go through to hide their assets, whether they use intermediaries or tax professionals, and how they go about conducting the business to ensure that the money is kept offshore and that we have not identified it initially. So I would say the Liechtenstein list helped us immensely by seeing the psyche of people trying to avoid paying tax.[33]

Mr. Montroy concluded that “[t]his intelligence will assist the CRA in further detecting taxpayers who may have undeclared offshore income,”[34] because “we now know how certain structures are set up. To put it in layman's terms, we know now where to look.”[35]

Canada has a self-assessment tax regime, and the CRA provides taxpayers with the opportunity to correct inaccurate or incomplete information, or to provide omitted information to it, through its Voluntary Disclosures Program (VDP). Mr. Montroy informed the Committee about the effectiveness of this program in recent years, stating that:

Through the CRA's Voluntary Disclosures Program, taxpayers have an opportunity to correct their tax affairs prior to being audited by the CRA. It is the most efficient way for the CRA to address unreported income. Since 2006 the CRA has seen a dramatic increase in the use of this program, including those involving offshore accounts or assets, from 1,215 disclosures in 2006-07 to close to 4,000 in 2012-13. Total unreported income for this period was $1.77 billion, with just over $470 million in federal taxes owing.[36]

He linked the recent growth in voluntary disclosures to the increased use of TIEAs, because “taxpayers have fewer ways to hide the information.”[37] The OAG also found that the CRA has begun to analyze disclosures through its VDP to assist its audit work on offshore accounts.[38]

The CRA can issue Information Requirements Regarding Unnamed Persons to obtain information from third parties — such as financial institutions — about unidentified persons suspected of having undeclared income. According to the OAG, as a result of its work in relation to the Liechtenstein list, the CRA has issued six such information requirements, with the result that undeclared income has been identified.[39] However, Mr. Montroy explained the challenges that the CRA experiences in obtaining information about offshore accounts, noting that:

The whole area [of] information holding is very complicated. … If the information is held in a bank in another country, we cannot use the Income Tax Act, an unnamed person requirement, to force them to give us information. Clearly they're not residents of Canada. This is why the TIEAs are important. We can use the TIEAs to go to the Cayman Islands of the world, the Bermudas, the Bahamas, and get their tax administrations to get the information from the local financial institution.[40]

The lessons learned by the CRA have also informed policy and have resulted in legislative changes that were announced in the 2013 federal budget. Mr. Montroy informed the Committee that, as a result of the budget, the CRA’s OCD is mandated to oversee the implementation of new measures to combat international tax evasion. According to the update provided in the 2014 federal budget:

• legislation to streamline the process for the CRA to obtain information concerning unnamed persons from third parties, such as banks, received Royal Assent on 26 June 2013
• the CRA revised its Foreign Income Verification Statement — Form T1135 relating to offshore holdings — to require taxpayers to provide more detailed information
• legislation to extend the reassessment period by three years for taxpayers who fail to report income received Royal Assent on 12 December 2013
• the CRA announced the launch of the Offshore Tax Informant Program on 15 January 2014. The program provides assurance of anonymity to informants — or informer privilege protection — and, where the CRA assesses and collects taxes that exceed $100,000, pays a reward to informants of between 5% and 15% of the amount of the assessment
• draft legislative proposals to require banks and other financial institutions to notify the CRA of international electronic funds transfers of $10,000 or more were released on 9 January 2014 and are expected to come into effect on 1 January 2015.[41]

Mr. Montroy described the measures introduced in the 2013 federal budget as “very important, significant measures for us on the offshore front.”[42] The OAG characterized the results of the CRA’s work in relation to the Liechtenstein list as promising, although it also noted that the CRA needs to “formalize its approach to dealing with the increase in its workload resulting from these [legislative] developments.”[43]

Given that the CRA’s work in relation to the Liechtenstein list originated from information provided by an unidentified informant and that the CRA has received additional lists, the Committee believes that the CRA and the federal government need to ensure that the Offshore Tax Informant Program is designed effectively. When asked for details on the program’s design, Mr. Montroy stated that the program is based on best practices used by other countries,[44] and Ms. Jelmini described the process through which potential informants can participate in the program, stating that the CRA has:

set up a 1-800 number as well as a local number that can be dialed anywhere in the world. That's the first step, making that phone call. We explain the parameters of the program, the requirements, the eligibility criteria. Where [individuals appear] to meet the program requirements, they are given a case number, they're invited to provide us with a full submission. We make an assessment of the submission, and if they appear to meet the criteria for the program, we would enter into a contract with the individual. At that point, we would do the compliance action and follow the case through the full compliance cycle.[45]

Regarding the proposed requirement for banks and other financial institutions to notify the CRA of international electronic funds transfers of $10,000 or more, Mr. Montroy explained that although the CRA already receives information from the Financial Transactions and Reports Analysis Centre of Canada on the most egregious cases of money laundering and tax evasion, the proposed requirement would allow the CRA to “cast the net wider to look at all transactions and not just the most egregious cases.”[46]

Mr. Montroy also told the Committee that the CRA welcomed a number of other measures introduced in recent years to close tax loopholes, which will assist it in combating offshore tax evasion.[47] However, he also stressed that tax evaders are typically creative and proactive in developing new strategies and schemes to escape the CRA’s detection,[48] which can result in a slower and more expensive audit process.[49]

Since receiving the Liechtenstein list in 2007, the CRA has been given additional lists and information about possible Canadian residents who may have undeclared income in offshore accounts. Accordingly, the OAG indicated that the CRA’s workload in this area is likely to grow, and stressed the need to integrate the lessons learned from the Liechtenstein list into the CRA’s audit approach.[50]

The OAG found that the audit guide for offshore accounts used by CRA staff was prepared in 2001, and that the CRA had not conducted a complete analysis or prepared a report on its experiences with the Liechtenstein list in order to follow up on areas that could be improved.[51] The OAG also indicated that the CRA is currently developing an internal, online information reference space — or wiki-type page — to allow auditors to share information, procedures and practices among themselves, and to provide CRA officials with functional direction, policies, procedures, guidelines and training. However, the OAG deemed the progress in the development of this tool to be insufficient to assist CRA auditors in the performance of their responsibilities.[52] The OAG recommended that the CRA ensure that its objectives and audit procedures for offshore accounts reflect lessons learned, and are documented and understood by staff.[53]

When asked about current updates to the audit guide, Mr. Montroy indicated that the CRA “sent instructions in January of this year to the people who are going to be working on the offshore front, talking about a number of measures: the time it takes to do an audit, the information you are supposed to look at, basically a road map of what they should do.”[54] As well, Ms. Jelmini informed the Committee that the OCD is “in the process of developing the wiki page [that] will be used by the offshore compliance specialized teams when they're implemented fully in April [of 2014]. So we are developing it now and we're progressing well on it.”[55]

With a view to ensuring continuous improvements in the ability to combat offshore tax evasion effectively, the Committee agrees with the OAG’s recommendation on the need for the CRA to integrate, in a formal manner, the lessons learned from its audit work in relation to the Liechtenstein list into its objectives and audit procedures. The Committee therefore recommends:

RECOMMENDATION 3

That, by September 2014, the Canada Revenue Agency provide the Standing Committee on Public Accounts with a progress report outlining the status of efforts to ensure that its objectives and audit procedures for offshore accounts reflect lessons learned, that its online information reference space tool — or wiki-type page — is developed sufficiently to assist the Agency’s auditors in the performance of their responsibilities, and that the formal offshore audit policies, procedures and guidelines are communicated to staff.

CONCLUSION

Tax evasion that occurs through the use of offshore accounts is a complex and constantly evolving international issue. The Committee acknowledges the challenges faced by the CRA’s staff who worked on the Liechtenstein list, as they were auditing taxpayers named on an offshore bank list for the first time and were undertaking their work with very limited information. The Committee therefore commends the CRA for its work in relation to the Liechtenstein list, and for improving its ability to enforce compliance with Canadian tax laws through the effective detection and resolution of cases of offshore tax evasion. As the CRA continues to receive new lists of names of offshore account holders who many not be complying with tax laws, it must be prepared to take on an increasing workload.

The Committee was pleased to have received the CRA’s detailed action plan prior to the public hearing and to have been informed that the OAG found the CRA’s commitments in that action plan to be consistent with the recommendations in the OAG’s Fall 2013 Report.[56] Canadians expect the CRA to improve its ability to enforce compliance with tax laws, and to do so on an ongoing basis. Therefore, the Committee expects the CRA to integrate lessons learned into its formal objectives, policies and procedures, and to increase further the effectiveness of its audit work designed to combat offshore tax evasion.