Voluntary Tax Disclosure



Adrienne Woodyard and David Nathanson for The Lawyers Weekly

March 19, 2010

The events of summer 2009 may go down in history as the beginning of the end of offshore tax havens. Many were shocked when the U.S. Internal Revenue Service managed to compel Swiss banking giant UBS to disclose the names of more than 4,400 account holders residing in the U.S., plenty of whom had never disclosed the existence of their accounts to the IRS.

It was, without a doubt, the U.S. government's vast legal, economic and political power (and the size of UBS's operations in the U.S.) that enabled it to bend UBS and the Swiss government to its will.

Canada simply does not have that kind of power. The Canada Revenue Agency (CRA) has made its own demands of UBS, but has not been successful in obtaining information about Canadian offshore account-holders.

However, these events have led to renewed interest in the CRA's Voluntary Disclosures Program (VDP) as a means of enabling Canadian taxpayers who have stashed money offshore to come clean. Significant numbers of Canadian taxpayers were frightened enough by the IRS' actions to make voluntary disclosures under the VDP, lured by the prospect of avoiding fines and penalties equal to 50 to 250 per cent of the tax evaded, and the risk of up to five years imprisonment.

The VDP has been described as a perpetual tax amnesty, because it has no expiration date, and enables taxpayers who participate to avoid civil penalties and criminal prosecution, regardless of the subject matter being disclosed. But there are still many problems and uncertainties that plague the VDP, and some Canadian taxpayers may feel they have good reason to steer clear of it until these are resolved.

For one thing, the VDP is a tax "amnesty" only in the sense that it gives protection from penalties and prosecution. The taxes owing still must be paid, and interest is compounded daily on all outstanding balances. A four per cent discount off the prescribed arrears interest rate may be granted in some circumstances, but this practice has been criticized by the Auditor General and may not be applied in all cases, or for all taxation years.

Another troublesome aspect of the VDP is that a disclosure, to be accepted, must provide full and accurate information for all applicable taxation years. On first glance, there appears nothing offensive about this; indeed, it seems difficult to imagine how the CRA could maintain the integrity of the VDP if it did not demand the disclosure of all material facts.

But in practice, it means that there is no limit on the number of years the CRA will look back at in the taxpayer's affairs.

Some offshore accounts have existed for two or three decades or more. By the time the tax and interest owing across the entire life of the account is calculated, and fluctuating currency exchange rates are accounted for, the resulting tax bill may be truly horrifying. Compounding this problem is the CRA's position that it has no authority to waive penalties or even interest for years predating the last 10 years, which may mean no "amnesty" at all for taxpayers whose disclosures involve taxation years prior to 2000.

Perhaps more offshore income holders would come forward to make voluntary disclosures if there were a limit on the number of years for which they could be held accountable, and if the VDP did not preclude relief beyond the 10-year mark. There may be many aging Canadian taxpayers who would prefer to clean up their affairs now, rather than leave their heirs with tax problems, and would do so if the CRA were prepared to offer more relief.

The difficulty with this pragmatic approach, of course, is that it conflicts with policy concerns. Tax evaders who come forward because of promised lenient treatment would enjoy a significant advantage over compliant taxpayers. The discrepancy would be more pronounced the longer the tax evasion has persisted, and the greater the amounts of tax involved.

In light of the uncertainties surrounding the VDP, taxpayers seeking to make a voluntary disclosure should confer with a competent lawyer or accountant to determine whether they wish to come forward, or have the possibility of penalties and prosecution hanging over their heads indefinitely. The risk is significant, despite the CRA's relative lack of success in obtaining information from UBS.

The CRA has substantial information-gathering powers at its disposal under the Income Tax Act, which it does not hesitate to exercise in the domestic sphere. It recently used these powers to seek information about Canadian clients who set up secret offshore accounts in Liechtenstein. Rather than try to cajole information out of a foreign bank, the CRA went to RBC Dominion Securities, which, it alleges, administered the accounts out of its office in Switzerland. The CRA estimates that it will collect about $20 million in unpaid taxes from Canadian account-holders once its investigation, which has been going on for nearly three years, is concluded.

David Nathanson and Adrienne Woodyard are partners at Lerners LLP in Toronto. Their practices focus on tax litigation and dispute resolution and tax planning.
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