Offshore Tax Crimes: It’s Coming to a Canadian Court Near You!

May 2011 | David W. Chodikoff

Private companies and high net worth individuals should be on high alert as the Canada Revenue Agency steps up its enforcement campaign. A significant collection of resources has been deployed to unearth information regarding the proper reporting of the tax affairs of corporations and individual taxpayers in Canada.

These activities are a direct by product of the global effort to crackdown on tax evasion and tax under reporting by both companies and individuals. These global pressures continue to mount on First and Second world jurisdictions where the evidence of success in the form of convictions and the resulting fines and/or incarceration are visibly lacking in countries such as Canada.

Unquestionably, the record of success in the United States should cause Canadians some real concern as it is likely that while our system of justice is less severe, enforcement authorities are no less committed than their US counterparts to ensure that justice is “served” or “done”.

While many cases are still pending, the recent record stemming from the crackdown on Americans evading tax by using primarily Swiss banks and other financial institutions has been quite impressive. For example, this crackdown in the US has led to criminal charges against no less than UBS, the largest Swiss bank, 24 former UBS clients, four former bankers and two banks. More specifically, in February 2009, UBS agreed to pay $780 million to prevent its prosecution for aiding tax evasion by American clients. The bank conceded that its bankers helped wealthy Americans evade taxes from 2002 to 2007. UBS admitted that it had set up sham offshore companies in tax havens such as the British Virgin Islands, Panama and Hong Kong. The bank also confirmed that it created misleading information forms indicating that those sham companies, not taxpayers, were the beneficial owners.

In so far as the outcome for these Americans for their misdeeds is concerned, former UBS banker and whistleblower, Bradley Birkenfeld, was sentenced in Florida to 40 months in prison for pleading guilty to helping wealthy Americans evade taxes. Federico Hernandez pleaded guilty in April 2010 in New York. He agreed that he set up sham accounts in the British Virgin Islands and Panama. In September 2010, he was sentenced to 1 year in prison, fined a total of $29,000 and ordered to pay restitution of $84,423 to the Internal Revenue Service. Jack Barouh, the former owner of a watch company plead guilty in February, 2010 for failing to disclose about 10 million in offshore assets and was sentenced in Miami in April, 2010 to 10 months in prison. He was also fined $5,000. In April 2010, Paul Zabczuk of The Woodlands, Texas, plead guilty in Fort Lauderdale to charges that, inter alia, he did not disclose his UBS account. He was sentenced in July 2010 to one year of home detention and fined $25,000.

There are many other US taxpayers who have either been indicted and their cases are pending or are waiting for the outcome of sentencing. Still, there are other U.S. citizens that have been charged and have subsequently been declared fugitives.

To date, there have been no convictions in Canada related to the crackdown on tax evasion that began in earnest with the UBS affair. However, this situation could change and the time is fast running out for Canadians to take action before the Crown comes knocking. Simply put, Canadians with overseas accounts should seriously consider dealing with those accounts by revealing their existence to the Canadian tax authorities. Failure to take action could result in all sorts of nasty surprises such as the imposition of civil penalties, the prospect of a criminal conviction and resulting hefty fine and/or some form of imprisonment.

If the Canada Revenue Agency (“CRA”) quest for information starts before a company or an individual takes action then the battle to defeat the imposition of fines and prison becomes that much harder. The easiest way out is to initiate a Voluntary Disclosure and this process should be engaged by using legal counsel so as to afford the taxpayer the protection of solicitor client privilege. The Voluntary Disclosure process is not arduous and can be managed on a very cost effective basis.

There are four basic requirements for an application for the Voluntary Disclosure Program. First, the applicant must make the voluntary disclosure. The CRA considers a disclosure to be voluntary if there is no enforcement action, or if an action exists, the applicant has no knowledge of it. Second, the disclosure must be complete. The applicant must supply the CRA with all material information related to the omission- whether, for example, the omission concerns an issue of inaccuracy, incompleteness or the failure to report income. If there are significant omissions and/or even errors in the application, it is possible that the application will not qualify as a valid disclosure. Small problems or errors are typically overlooked, provided, of course, that the Voluntary Disclosure office concludes that the application is substantially complete.

The third requisite for a complete Voluntary Disclosure application is that the applicant must be subject to at least one penalty. There are both discretionary and non-discretionary penalties. It is more than likely that a taxpayer would easily meet this condition for the Voluntary Disclosure Program. Finally, the disclosure must involve information that is at least one year past due or at the very least, if the disclosure is in respect of a matter that is less than one year past due then the disclosure must concern the correction of a previously filed return or where the information contains information that also includes prior year information.

If your company or you are in the situation as described in this article then you should seek legal advice as soon as possible. Unnecessarily paying gobs of money to the ‘tax man’ and spending any time behind bars are two lifetime experiences to avoid.

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