It is easy to see that it’s much more difficult for Canadian tax authorities to track and measure income which is paid in a foreign jurisdiction than income which arises within our borders. And, of course, technological changes have made it possible to move money around the globe in seconds.
Canada’s tax system operates, to an extent, as an honour system in which Canadians complete an annual income tax return disclosing income from all sources, computing tax payable on that income, and remitting any tax amounts due. A few years ago, changes were made to the general income tax return to highlight the fact that income arising outside Canada was subject to Canadian income tax. Those changes require everyone who files an income tax return to specifically disclose whether he or she holds foreign property having a cost of more than $100,000 and, where the answer is yes, to complete a specific tax form (Form T1135, “Foreign Income Verification Statement”) providing details of those holdings.
Notwithstanding these changes, the loss of revenue resulting from offshore investments held by Canadians and the non-reporting or under-reporting of income from those investments has become of increasing concern to the tax authorities. The problem has also come to public attention as the result of recent media reports highlighting the cases of a few high profile individuals.
A number of measures to address international tax non-compliance were introduced as part of the 2013 federal budget, including new reporting requirements for financial institutions with respect to large international electronic funds transfers, revisions to Form T1135 to require more detailed information, and extensions of the reassessment period where a taxpayer has failed to properly file a Form T1135, or has failed to properly account for foreign source income or property on his or her income tax return.
The federal government has apparently decided that existing measures to combat losses to the tax system resulting from offshore investments are no longer sufficient and has launched the Offshore Tax Informant Program (OTIP). The OTIP will, for the first time, provide “financial awards” to individuals who provide information related to instances of major international tax non-compliance that leads to the collection of taxes owing.
Two important points about the new program are worth noting. First, the CRA is looking for instances of significant international non-compliance, and the program is targeted at situations in which the amount of tax owing exceeds $100,000. Second, the CRA’s goal is not just to learn about situations of international tax non-compliance but to actually collect taxes owed. Consequently, the OTIP will be administered based on the following criteria:
The CRA is also not interested in providing financial awards to those who participate in offshore tax evasion schemes. Therefore, no payment will be made to an individual who has been convicted of tax evasion related to the information provided.
The mechanics of the program are relatively straightforward. An eligible individual (who does not need to be a Canadian or live in Canada) can contact the program. That initial contact can be done by telephone by calling1-855-345-9042 (North American toll-free number) or 613-960-4265. Collect calls will be accepted, and the call can be on a no-names basis.
Once the initial contact is made and information provided, an OTIP officer will make a recommendation about whether to proceed. If a decision is made to go forward, the informant individual and the CRA will enter into a contract, and the CRA will act on the information provided and seek to collect the tax owing. That process can, of course, take several years, and no financial award will be provided to the informant until $100,000 of federal tax has been collected and all of the appeal rights of the taxpayer from whom it was collected have expired.
Where a financial award is provided to the informant, that award can range from 5% to 15% of the tax collected, depending on the quality and value of the information provided, as well as the degree of cooperation which the CRA receives from the informant. Award levels are set at 5%, 7.5%, 10%, 12.5%, or 15% of the tax collected.
Finally, just in case there was any doubt on the matter, the CRA specifies, in its fact sheet on the OTIP (available on the CRA website at http://www.cra-arc.gc.ca/gncy/cmplnc/otip-pdife/menu-eng.html), that any award payment made under the OTIP will be treated as taxable income to the recipient in the year that it is received.