What happens to the offshore tax havens?
13/04/09. H. Michael Rosenberg and Daniel Goldbloom, National Post
After last week’s massive leak of global data pertaining to offshore bank accounts, politicians, the public and the media are demanding payback — and even prosecutions — for the many wealthy Canadians now known to keep their money in tax havens around the world.
But what — if anything — will actually happen to those on the leaked list? For the Canadians whose private finances are now public knowledge, a lengthy legal ordeal has only just begun.
It is not a crime to open bank accounts in sunny climates. To the Canada Revenue Agency, however, foreign holdings may be taken as evidence that further investigation is required.
In most areas of life, law-enforcement agents are not permitted to peruse private documents on the off-chance that they will reveal wrongdoing. Yet the Income Tax Act is crafted to permit such fishing expeditions.
Without any reason for suspicion of wrongdoing, the CRA may inspect the books of any taxpayer (a term that includes those who could pay taxes, even if they do not), commandeer the assistance of any person holding such records, and require the production of any document that might prove helpful.
Thus, Canadians whose foreign accounts have been disclosed may soon receive letters from the euphemistically named Aggressive Tax Planning Division of the CRA. These letters will demand answers to a financial questionnaire, failing which the CRA may obtain a court order compelling a response. Refusal to answer the CRA’s questions can result in fines and up to 12 months in prison.
If the CRA hits a wall with the taxpayer, it can demand information from accountants, banks and business associates. Piece by piece, the CRA determines whether taxes are owed, and if so, whether the taxpayer has deliberately avoided paying these taxes.
This is an important distinction. Tax evasion requires deliberate criminal conduct. Tax avoidance, on the other hand, involves legitimate efforts to reduce taxes. Improper tax avoidance may lead to penalties on back taxes. Tax evasion, however, is a criminal offence, and it carries a maximum penalty of a fine of 200% of the taxes sought to be evaded and five years’ imprisonment. These penalties apply equally to taxpayers and any person who assisted them.
So what will come of the revelations that wealthy Canadians hold offshore accounts?
Tax prosecutions are expensive. The CRA likely will determine that many of these accounts are not tax-evasion vehicles; or, at least, that it would be very difficult to prove their illegitimacy. These taxpayers will be off the hook.
Even in those cases where the CRA rouses itself to prosecution, there is many a slip twixt the cup and the lip. The breadth of the CRA’s demands for information can be challenged. People under investigation also will benefit from the protections against unreasonable search and seizure contained in the Charter of Rights and Freedoms.
Ultimately, the Income Tax Act is so complicated that many may simply say that they reasonably relied on professional advisers.
Prosecutions for offshore tax evasion have been relatively rare in Canada. This may now be changing — though investigations and prosecutions can take years. Some offshore account-holders will make voluntary disclosure to the CRA to correct past filings. There may be some settlements and some plea bargains. Ultimately, however, those expecting large-scale convictions may well be disappointed.
H. Michael Rosenberg is a lawyer and an adjunct professor of law at the University of Toronto. Daniel Goldbloom is a student-at-law. Both practice at McCarthy Tétrault LLP.
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