This article was originally published in The Globe and Mail.

The “Panama Papers” – the unprecedented leak of 11.5 million confidential documents exposing more than 200,000 offshore entities, including several hundred established by Canadians – raises questions about how the Canada Revenue Agency should seek to enforce our tax rules against Canadians with offshore investments. While offshore holding companies can be perfectly legal and serve any number of legitimate purposes, they can also be used to hide income and avoid legitimate tax obligations. The line between legal avoidance and illegal evasion can blur.

The CRA uses two contrasting approaches to pursue tax from offshore investments: a carrot and a stick.

The “carrot” is the CRA’s voluntary disclosure program, which offers amnesty for those who come forward to correct mistakes or omissions in previous tax filings. All previously unpaid taxes must be paid, typically for up to 10 years. The CRA reduces the accrued interest and waives penalties and criminal prosecution.

For many years, this approach has been predictable, balanced, proportionate and successful in recovering unpaid tax revenue. The CRA’s most recent annual report (covering the year to March 31, 2015) revealed a spike in voluntary disclosures involving offshore investments. By all three performance measures used by the CRA – disclosures received, disclosures processed and total unreported income – it was by far the busiest year ever for the CRA. Fiscal 2016 could be even busier.

This success has been driven in large part by a letter-writing campaign by major foreign financial institutions, precipitated by impending forced account disclosure by foreign tax authorities. This effectively forced Canadians with offshore accounts to become compliant with their domestic tax reporting or face closing of their accounts. But now, after final bank warning letters have been issued, we will see a decline in voluntary disclosures involving offshore investments going forward.

When the CRA learns about an offshore account from an informant, the “stick” is brought to bear. A concerted audit project involving experienced CRA officials and headquarters will likely be established and relentlessly pursued, often over many years. These officials understand sophisticated investment structures and how to secure information to support an audit.

Having previously been frustrated in efforts to get records from recalcitrant foreign financial institutions, the CRA may launch aggressive waves of long, detailed formal requirements for information, with potential criminal sanctions imposed for non-compliance.

Once the audits are finally done, full penalties may be assessed, including penalties based on unpaid tax for unreported income compounded by penalties for not having filed the required disclosure form for foreign property. The aggregate penalties and interest assessed can approach or exceed the total amount invested offshore.

Settlements with the CRA can be difficult to achieve, with the only concession sometimes being no criminal prosecution.

The 2016 budget includes measures seeking to improve the integrity of Canada’s tax system, while increasing revenue. Over the next five years, the CRA will receive $444.4-million to address tax evasion and aggressive avoidance through hiring extra auditors and specialists, developing robust business intelligence infrastructure, increasing verification activities and improving the quality of its investigations of criminal tax evaders. The expected five-year return on investment is estimated at $2.6-billion.

This year, using amnesty under the voluntary disclosures program, the CRA is on track to identify $1-billion in income that would otherwise have been hidden – an increase of almost 400 per cent over six years. Through enforcement, the CRA is on track to complete more than 9,000 audits of aggressive tax planning this fiscal year, with an estimated $1.6-billion added to the public purse.

With enhanced intergovernmental exchange of information policies and foreign leaks bringing in troves of information, the CRA may no longer want or need to incentivize voluntary disclosures. Instead, it may be better to find its cases and then deploy enforcement action. It’s debatable which approach may generate more revenue – and it will fall to the public to determine which is more politically palatable.