On February 4, 2016 the governments of Canada and Switzerland announced (http://www.fin.gc.ca/access/switzerland-declaration-suisse-eng.asp) that the two countries have signed a Joint Declaration expressing their intent to engage in the automatic exchange of financial information in accordance with the Common Reporting Standard (CRS) developed by the OECD.

The CRS is one of the two new pillars of the OECD’s “crackdown” on global tax evasion; the second is the base erosion and profit shifting (BEPS) program. Whereas BEPS is targeted at tax avoidance strategies by multinational corporate groups that exploit gaps in the design of the international tax system to shift profits to jurisdictions with low or no taxation, the CRS is aimed at combatting the perhaps more prototypical form of global tax evasion: the hiding of wealth and income by an individual in a foreign jurisdiction. Without the ability to exchange information with foreign governments, this type of tax evasion is often difficult for a jurisdiction to fight.

Approaches to combat the hiding of wealth and income offshore have been undertaken in a piecemeal fashion by countries through the use of bilateral agreements, such as double taxation conventions and tax information exchange agreements. The OECD was called on by the G20 countries to develop an international standard for the exchange of taxation information between countries. As of February, 2016, more than 90 jurisdictions, including Canada, have signed a multilateral agreement to automatically exchange information using the OECD-developed CRS.

The CRS is an attempt by the OECD to create a mechanism for the global sharing of wealth information. It includes a broad set of rules that will allow for the automatic and periodic transmission of financial information from countries where wealth is held to the country in which the beneficial owner is resident. Financial institutions will be required to identify accounts held by non-residents and report on the account’s contents and income to its domestic tax authorities, which information will then be shared with the tax authorities of the jurisdiction where the account holder is resident. The resident tax authorities can then verify whether the individual has accurately reported his or her income. The CRS also outlines the financial account information to be exchanged, the form in which the information will be reported, the financial institutions subject to the reporting requirements, and the different types of accounts and taxpayers covered. Income information shared will include dividends, interest, gross proceeds, royalties, salaries, and pensions received by the non-resident account holders.

While the automatic exchange of information using the CRS will narrow the ability for residents of Canada to hide wealth offshore, the degree to which it will expand the Canadian government’s ability to collect tax is uncertain. Under the CRS, information exchanged between countries is primarily limited to accounts in financial institutions held by identifiable non-residents. However, offshore wealth is often held in shell companies and trusts as a part of a larger interconnected group of entities. The ability to trace the beneficial ownership of an account to a particular non-resident may be unmanageable until domestic governments tighten their corporate and trust ownership and transparency rules. The success of the CRS depends on the effective domestic implementation of its rules in each CRS-partner jurisdiction. We have already seen states oppose requests to collect information about the owners of shell companies, and the sincerity to which some states have agreed to move to transparency is still debatable.  Perhaps most interesting, the US is not likely to implement the CRS and will instead rely on its own FATCA program which is intended principally to collect information about US residents. The extent to which US banks will reciprocally share information with FATCA partners is an open question.

The Canadian government indicated that it intends to implement the arrangement with Switzerland starting on July 1, 2017, with information sharing to begin in 2018. Draft legislative proposals will be released “in the near future.” The Canada Revenue Agency should expect to see a spike in the use of its Voluntary Disclosures Program prior to that time.