In December 2014, the Canada Revenue Agency (« CRA ») started issuing letters to some Canadians « strongly » suggesting that they review their « income tax filing to ensure that the relevant assets, where the total cost is $100,000 or more, have been disclosed on form T1135-Foreign Income Verification Statement and that any foreign income and gains have been properly reported ».
The letter goes on to say that if the returns do not accurately reflect the reportable assets or taxable income from sources outside of Canada, a voluntary disclosure should be initiated. It lists the consequences for not reporting such offshore assets/income as follows :
- the possibility of criminal prosecution;
- gross negligence penalties equal to 50% of the tax related to the unreported income;
- gross negligence penalties for failure to file the foreign reporting forms or for the failure to disclose all reportable assets equal to up to 5% of the cost of the undeclared assets for each year in which the failure continued.
The letter is signed by the Manager of the CRA Offshore Compliance Section ("OCS") and indicates the name of a contact person to call for questions.
So, what is this all about? Well, we have made some enquiries and can offer the following preliminary answers.
The OCS was created by the CRA in 2013, at the same time as the Offshore Tax Information Program ("OTIP"). Per the OTIP, the CRA is offering any potential informant 15% of the back taxes which could be collected by the CRA from the use of the information provided, in specific circumstances. Such information relates to, for example, foreign bank information.
The CRA OTIP was put in place to encourage potential informants (such as foreign bankers) to disclose information in their possession to help with the identification of Canadians not disclosing all of their foreign income and assets. It is Canada's version of the United States ("U.S.") Internal Revenue Service ("IRS") Whistleblower Informant Award. Such informant "reward" programs have become more popular lately, and are directly related to the multiple international leaks of banking information resulting in the audit/assessment/prosecution of those foreign account holders in recent years (HSBC, UBS, LGT, Julius Bear, ICIJ Database, etc.). In addition, the introduction of the Foreign Account Tax Compliance Act ("FATCA") in the U.S. is also a direct consequence of the country's desire to increase compliance by its citizens in reporting foreign income/assets.
After verification with the OCS, we learned that the individuals who received the letter were identified as "high risk" of non-compliance in reporting foreign assets/income by the CRA. Therefore, it is more likely these individuals be audited in the future, or that the CRA will monitor more closely their income reporting. As indicated in the CRA letter, it might not be too late for such people to initiate a voluntary disclosure to avoid any criminal prosecution and to avoid the imposition of costly penalties.