Many people are reading with interest the many articles being written about the 'Panama Papers'. Most are not impacted and read them out of curiosity. However, for some Canadian residents, there may be cause for concern, but also, a solution.
The Problem: Canada Taxes Non-Canadian Investments
s a resident in Canada, you are subject to tax on your worldwide income. You have an obligation to report all of the income you earn each year in any jurisdiction in the world. Most people think that everyone is aware of this, but our experience is that this is not the case. While Canada taxes its residents on worldwide income, many other countries do not. As a result, immigrants to Canada from other jurisdictions don't always attain a thorough understanding of the Canadian tax system and don't necessarily think that taxation would be different in Canada than many other jurisdictions around the world that only tax domestic income.
So now that we have established that Canada taxes worldwide income, the impact of the 'Panama Papers' on some Canadian residents may become more apparent. In particular, if you are resident in Canada for tax purposes (you are resident for tax purposes if you live in Canada and file a Canadian tax return; neither citizenship nor immigration status are relevant) and you have assets (such as a bank account) located in jurisdictions outside of Canada that produce income and have not been reported in your Canadian tax return, you could be impacted. The most typical clients we encounter in this situation are clients who have immigrated to Canada from other jurisdictions such as Europe, Asia and the Middle East and have left behind bank/investment accounts with money they inherited from foreign family members or earned prior to coming to Canada.
If you are someone who has a bank or brokerage account or other income-producing asset (e.g. rental property) located outside of Canada and it has not been reported in your tax return, you face the possibility of being caught by the Canada Revenue Agency (CRA) by the disclosure of the offshore asset(s) through inter-country communication or through a leak such as the 'Panama Papers'. If the CRA becomes aware that you have unreported income, you could be subject to tax, interest, penalties and possibly (although unlikely) imprisonment.
The Solution: Take Advantage of the CRA's Voluntary Disclosure Program
While this may appear to be all doom and gloom, it is not. In fact, it offers you the opportunity to get this "secret" off your chest and to do so in a manner that in our experience, often results in relatively insignificant consequences. It will allow you to bring assets to Canada, enjoy the use of them and pass on part or all of them to your family without the fear that you are creating a big tax problem for you or your heirs.
The CRA offers a very taxpayer friendly solution to this situation in the form of the Voluntary Disclosure Program (VDP) as long as you come forward before the CRA becomes aware of the non-compliance with Canadian tax laws. There are criteria you must meet and certain information and forms that must be provided to the CRA, but if the necessary requirements are met, the consequences are very favourable. You will be granted amnesty from all penalties and the possibility of imprisonment. In addition, it may be possible to obtain some interest relief. However, you will be required to pay tax on the income earned in the last ten years. This is a simple process to comply with. The requirements are relatively easy to meet if you are working with someone who knows the system well, either an accountant (no privilege) or a lawyer (privilege). Privilege means that a lawyer is legally bound to maintain confidentiality with respect to any information provided by a client whereas an accountant can be compelled by the CRA to release client information. Privilege is consequently a very important factor, particularly for those that are considering the VDP as one of a number of possible options. The most important thing is to advise the appropriate branch of the CRA in the required manner prior to the CRA obtaining the information about your offshore assets from another source… such as the next "Panama Papers".