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  • Robert Kepes

Panama Papers Cause For Concern

The Panama Papers could represent a new chapter for your financial planning. While the whole episode gets into freedom of the press, privacy laws, and constitutional rights, the bottom line is that those with assets or investments abroad and who set up entities to try and minimize their tax burden, should be concerned.

The story broke in April when the International Consortium of Investigative Journalists (ICIJ), a global network of journalists, issued a press release about a “giant leak of offshore financial records.” Millions of documents from Mossack Fonseca, a Panamanian law firm, were said to provide information about offshore tax avoidance and tax evasion by the rich through shell entities and intermediaries. The ICIJ then provided access to a searchable database with details about offshore entities and people. A number of Canadian names immediately became available to anyone who wanted to search for them – 625 names in all.

Enter the Canada Revenue Agency (CRA). It filed a motion in the Federal Court of Canada for authorization to issue a requirement on the Royal Bank of Canada (RBC) to provide any information or document related to the offshore accounts of its customers. The only evidence filed in support of the motion was an affidavit by a CRA official that relied on media reports about RBC using law firm Mossack Fonseca to set up 370 offshore entities. In effect, there was no hard and fast evidence at all, only media reports. But it didn’t matter.

RBC decided not to fight the matter in court and consented, allowing the CRA to begin audit proceedings of these people. More recently, a second Canadian bank – Citibank, N.A. – also received a court order and like RBC did not challenge it.

Coming After You

In other words, if your name is on a list of RBC clients with possible ties to the Panama Papers, the CRA is coming after you. However, your name could be on that database even if you did nothing wrong. There are many legal reasons to use offshore means and vehicles. The problem with the Panama Papers is that by merely being included on a list of names may carry the perception of being ‘tainted.’

Our law firm Morris Kepes Winters is one of Canada’s top tax boutiques. We have many clients who have offshore financial interests, and when the Panama Papers story broke we got calls from people who wanted to know about their potential exposure. Our firm’s criminal counsel Joseph Markson was recently interviewed in the Toronto Star (July 27) about the new environment. “In the present climate, following the Panama Papers and international efforts to end tax haven secrecy, resistance becomes futile,” he told The Star.

There is nothing illegal about having a foreign bank account or a numbered company in a tax haven. But Canadian tax law says Canadians with foreign investments must report all income earned outside Canada on their tax returns. Separate forms are required to report foreign assets, companies, and trusts.

After the Panama Papers leak, the CRA issued a press release. “The Canada Revenue Agency is committed to combating the abusive use of offshore jurisdictions and protecting the integrity of the Canadian tax system,” adding that it was currently pursuing audits related to tax evasion, “including some Canadian clients associated with law firm Mossack Fonseca.”

The CRA has tools at its disposal to crack down on those who avoid paying tax and there has been a surge in voluntary disclosures in recent years, especially since international banking and taxation agencies started working more closely together to share information. But the Panama Papers presented a new wrinkle.

Said the CRA: “The Minister of National Revenue has instructed CRA officials to obtain the data leaked through the Panama Papers in order to cross-reference this information with the data already obtained through the agency’s existing investigation tools.” It went on to say: “The CRA will be communicating with its treaty partners to obtain any further information that may not currently be in its possession.”

Keep in mind that government and regulators in Canada have been boosting their resources to help identify fraud and recover unpaid taxes. The last federal budget enhanced CRA funding by $444 million over five years to investigate offshore tax cheats and combat tax fraud. The agency expects to recover some $2.6 billion in taxes through this effort. Also, back in 2010 Ottawa joined an initiative of the Organization of Economic Co-operation and Development to force tax havens to be more transparent. Canada started signing Tax Information Exchange Agreements with tax havens like the Cayman Islands, Jersey, the Isle of Man, and the British Virgin Islands. These are places where tax rates are close to zero.

Tax Treaties

For the record, the CRA has tax treaties with 92 countries around the world, along with 22 Tax Information Exchange Agreements.

But people who have done nothing wrong may also be among the 625 Canadians on that list, so there is reason for concern. What should you do? What is the impact and potential consequence? How can you protect your assets, not to mention your privacy?

Both the RCMP and CRA said they would try to get information pertaining to any Canadian names in that database. The long and short of it is that media reports – whether verified or not – can provide enough fuel for the feds to come after you.

Once the CRA has a name it can resort to tax treaties and Tax Information Exchange Agreements between Canada and other countries to request information and documents. So if your name is on that list, expect a letter from the Offshore Compliance Division of the CRA saying you have been selected for an audit.

This may also mean going beyond the traditional, seven-year limit. Our firm has seen a number of letters to this effect, and it’s not unusual for the audit period to go back to 2001. You have to provide records and bank statements and complete a 15-page questionnaire that asks about foreign and domestic property, or entities. You must provide information about anything you have ever had an interest in and this goes for your family members, too.

Non-compliance with a tax audit is a sensitive area. You can plead lawyer-client privilege and refuse to provide details of the legal advice. You can also refuse to provide documents if – according to sub-section 231, 5(2) of the Income Tax Act – you are legitimately unable to do so. That requires letters from banks and professional advisers saying that such records are not available, but going this route could get you in front of a judge to plead your case. Lastly, if the CRA launches a criminal investigation, then you have the right to remain silent as per the Charter of Rights and Freedoms.

Voluntary Disclosure

Another option – provided the CRA has not yet made contact with you about the matter – is to make a voluntary disclosure to the agency. A voluntary disclosure will generally alleviate penalties and possible criminal charges. But it does not negate the requirement to pay the income tax and interest on the unreported income.

Probably the best advice of all is this: seek professional advice or legal counsel from someone who has experience in this particular area. It will be worth it.

Robert Kepes is a founder of Morris Kepes Winters LLP, a Toronto-based tax law boutique.


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