As banking secrecy is eroded in formerly tight-lipped jurisdictions like Switzerland, there is no time like the present to come forward under the Canadian voluntary disclosure (“VD”) program to declare previously unreported foreign income and avoid significant fines, penalties, interest and even potential criminal prosecution. Canada recently announced that it may take steps similar to those being taken in the United States to extract confidential foreign-based information on non-complaint taxpayers.

The United States has been pursuing non-compliant taxpayers, including aggressive action against Swiss banking giant UBS AG for helping American citizens hide assets from the Internal Revenue Service (“IRS”). In August, 2009, the IRS and Swiss authorities struck a deal to disclose the identities of almost 4,500 American customers of UBS by the end of August, 2010. To be ready to receive and process this information, the IRS hired auditors and shifted internal responsibilities to enable personnel experienced in complex international audits to work on the so-called “global high wealth industry”. Thousands of Americans have already made VDs under a temporary program offered by the IRS, disclosing previously unreported funds held in offshore accounts, particularly accounts held in Switzerland.

Recently, Canada’s Minister of National Revenue (“Minister”) publicly revealed that VDs filed under the Canada Revenue Agency’s (“CRA”) VD program have increased 50% compared to 2008 and are being filed in “record numbers”. Less than 2% of the VDs filed with the CRA in 2009 concerned Canadians with UBS accounts. However, the Minister confirmed that Canadian authorities are in discussions with UBS to get information on Canadians with UBS accounts. The Minister further stated that if UBS is not forthcoming with the requested taxpayer information, Canadian authorities intend to use the courts to compel UBS to produce it. Given the IRS’ success in compelling previously well-guarded information, there is a significant risk that the CRA may receive confidential information and commence aggressive enforcement action against non-compliant Canadians with Swiss accounts.

The CRA’s hot pursuit of taxpayers with funds hidden offshore is not a new initiative. The Minister recently stated that the CRA has also collected millions of dollars in unpaid taxes from taxpayers who had secret accounts in Liechtenstein, pursuant to the CRA’s “Project Jade”. Project Jade was an investigation commenced when German tax authorities shared private taxpayer information with the CRA. That information was part of a larger pool of data the German authorities received from a rogue employee of LGT Group, an “asset management” entity in Lichtenstein. According to the Minister, more than three dozen Project Jade audits remain open and are expected to yield another $17 million in unpaid taxes. Further, the CRA identified a number of non-compliant taxpayers under Project Jade as clients of RBC Dominion Securities Inc. (“RBC”) and as a result the CRA is now seeking further confidential taxpayer information from RBC in relation to Liechtenstein accounts created between 1999 and 2008.

Canadians who have unreported foreign-source income and foreign-based “secret” accounts need to understand that a key criterion for a valid VD is “voluntariness”. If the CRA commences an audit or enforcement action against a taxpayer before the taxpayer commences a VD, any subsequently filed VD will be rejected. Therefore, taxpayers with concerns about any foreign-based income or accounts need to consider preparing and filing VDs before it is too late. For further information on the CRA’s VD program, please see our other articles on VDs:

e-Commerce Alert and a Safe Haven from CRA Fines, Penalties and Prosecution Concealing or Confessing, The Voluntary Disclosures Program Failure to Complete Voluntary Disclosure on Timely Basis Fatal: McCracken v. The Queen