Two important features of the 2013 Budget, released last week, are the closing of tax “loopholes” used for “aggressive” tax planning and renewed focus upon measures to investigate and prosecute tax evasion.
In the words of the government:
“To help keep taxes low and enhance the integrity of the tax system, Economic Action Plan 2013 proposes a number of measures to close tax loopholes, address aggressive tax planning, clarify tax rules, reduce international aggressive tax avoidance and tax evasion, and improve tax fairness.”
The government has proposed five important measures in this regard.
- Charitable Donations
The government has expressed concern about ongoing contributions in what it characterizes as “questionable” charitable tax shelters. To enhance the government’s ability to collect taxes, interest and penalties, the Budget proposes the CRA be permitted to take collection action against a taxpayer who has been assessed as a result of a charitable donation though the taxpayer has filed an objection. CRA would be permitted to collect against 50% of the tax, interest and penalties. This breaks from the general rule that collection is prohibited when a taxpayer has objected to an assessment.
- Mandatory Reporting of International Electronic Transfer of Funds
To give CRA “the tools to discourage taxpayers who might seek to move funds outside of Canada in an attempt to conceal for tax purposes those funds or the income they produce” the Budget proposes a requirement for specified institutions to report to CRA international electronic fund transfers (ETFs) of $10,000 or more. This would be similar and in addition to reporting requirements that presently exist under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. According to the Budget, the report would be required to include information about the person initiating the transaction, the person or entity receiving the funds, about the transaction and on any financial intermediaries “facilitating the transaction.” This reporting requirement will commence in 2015.
- Requirements for Information in Relation to Unnamed Persons
Under the current rules, if CRA wishes to compel the disclosure of third party information it must first obtain prior judicial authorization. CRA is permitted to apply for this authorization on an ex parte basis. The third party may then challenge the issuance of the authorization. In an attempt to reduce the delay associated with this process, the Budget proposes a procedure whereby third parties will be permitted to make submissions at the time that the judicial authorization is first being applied for. By permitting representations to be made in advance, the need for subsequent review would be eliminated.
- The Enhanced “Snitch” Program
Informants are an important source of information to CRA. To provide increased incentive to persons to provide this information in relation to tax evasion with cross-border dimensions, the Budget has announced the “Stop International Tax Evasion Program”. Under this Program, CRA will enter into a “contract” whereby CRA will pay to persons who provide information up to 15% of federal tax collected for assessments or reassessments that exceed $100,000 in federal tax. This money will be paid for information in relation to “non-compliant activity [that] involves foreign property or property located or transferred outside Canada, or transactions conducted partially or entirely outside Canada.”
- New Criminal Offences and Penalties for Possession, Manufacturing or Use of Zapper Software
Zapper software may be used to evade taxes by modifying or deleting sales transactions in point of sale software programs. Currently, it is not illegal to manufacture, design or possess this type of program. The Budget proposes the creation of both regulatory and criminal offences for the use, possession, development, manufacturing or sale of these programs. Regulatory infractions would attract a maximum fine of $50,000 and the criminal offence would attract a maximum penalty of a fine of $1,000,000 and jail that is not more than 5 years.
Budget 2013 proposes significant measures to address aggressive tax planning and tax evasion. We will continue to monitor and provide information upon these measures as the government rolls them out.