A huge data leak from a Panama-based law firm has exposed billions in secret, offshore transactions involving multiple political leaders around the world and approximately 350 Canadians with offshore tax haven investments.

Previous leaks of offshore activities have led the Canada Revenue Agency (CRA) to engage in multiple tax audits targeting wealthy Canadians, such as clients of the LGT Bank, the Swiss HSBC Bank, and recently clients of one international accounting firm, just to name a few. This time should be no different. CRA was already instructed to get the leaked data in Panama Papers.

Many OECD-participating countries have engaged in a fight against tax evasion, treaty shopping and base erosion and profit-shifting (BEPS). Combined with the upcoming exchanges of financial information between countries starting in 2017 and 2018, Canada’s “new” offshore tax compliance section since 2013 and the offshore tax informant program (OTIP) rewarding whistleblowers, wealthy Canadians and businesses engaged in aggressive tax planning are more likely than ever to be audited.

In addition, the 2016 Federal budget proposed a plan to “improve tax compliance, prevent underground economic activity, tax evasion and aggressive tax planning,” requiring an investment of $444.4 million over five years to be used by the CRA for:

  • hiring additional auditors and specialists
  • developing robust business intelligence infrastructure
  • increasing audit activities
  • improving the quality of investigative work that targets criminal tax evaders

The expected additional revenue from such measures is $2.6 billion.

To most Canadians, these measures may sound perfectly legitimate. But many taxpayers in the province of Québec will hear a familiar tune that evokes unpleasant memories.

In its 2010/2011 budget, Québec announced its intention to hire 1,100 new auditors over three years as part of a similar initiative. The province hired “only” 936 new auditors, an increase of 37% in the number of auditors (from 2,531 to 3,467).

It quickly became obvious that many of the new auditors were insufficiently trained. As a result, the relationship between Québec taxpayers and Revenue Québec greatly suffered. Some taxpayers faced bankruptcy after receiving unjustified or inflated assessments.

This ultimately led Québec’s Ombudsman to criticize Revenue Québec’s measures, in its 2014/2015 report (PDF), as:

  • Not respecting taxpayers and their rights
  • Assuming that taxpayers were guilty by association, while some of them were actually victims of fraud perpetrated by third parties
  • Not giving taxpayers a chance to present their arguments and not upholding principles of natural justice and fairness.

Revenue Québec recently acknowledged these problems and committed to change its approach.

The election of a strong Liberal government following promises to increase the top marginal taxation rate seems to indicate that wealthy Canadians do not have the favor of the public. Several provinces now have combined top marginal taxation rates dangerously close to triggering the potential negative effects of the Laffer curve.

In this context, and in light of Québec’s recent negative experience with the massive hiring of auditors, the CRA will have to be very careful not to engage in witch hunt generalizing Canada’s elite. Most of them do pay their fair share.