Tax man’s new teeth

Budget gives CRA more freedom. Will it take advantage?

So maybe you’re one of those folks with money squirreled away in some offshore tax haven, a secret stash of “rainy day” funds quietly appreciating beyond the grasp of the Canada Revenue Agency.

Once upon a time no one cared about such things, but now the government is threatening to get tough: The new budget unveiled on Thursday includes legislation whereby the CRA would reward members of the public who unmask tax cheats. That’s never happened before.

Under the proposal, whistleblowers would be entitled to receive as much as 15% of additional taxes assessed as a result of the information.

“This has really interesting implications for a whole bunch of different people,” said David Chodikoff, a lawyer at Miller Thomson in Toronto specializing in tax litigation. “It’s a lot of money to be offering.”

So, Mr. T. Dodger, you’re going to have to be careful whom you trust.

With governments globally under pressure from soaring debt, there is growing focus on ways to increase tax revenue. With this latest move Canada is following the lead of the U.S., Britain, Germany, France and others that have employed the strategy with huge success.

Last year, for instance, the U.S. Internal Revenue Service handed whistleblower Bradley Birkenfeld a record US$104-million reward for information leading to the collection of US$780-million in penalties from UBS AG for helping Americans evade taxes. The IRS has collected further billions of dollars in unpaid taxes from thousands of individual account holders.

Key details of the Canadian plan are still unknown, such as how much compensation whistleblowers can actually expect to receive given that it’s unlikely CRA will dole out the maximum 15% in each case. As well, what kind of information will lead to new tax assessments.

Consider that since receiving data on more than 2,000 Canadian holders of offshore accounts at banks in Switzerland and Liechtenstein over the past few years, CRA has yet to announce a conviction.

Observers say CRA prefers to rely on its voluntary disclosure program that allows tax payers to reveal hidden income without penalty instead of taking them to court, despite the U.S. success with the legal approach.

Despite the lack of details on the reward scheme, observers welcomed the move.

“It’s a good step,” said Dennis Howlett, executive director of the group Canadians for Tax Fairness.

For years the CRA has refused to reward whistleblowers or even to pay for information on Canadian tax evaders when it’s provided by other tax authorities. It appears those days are over, he said.

But Mr. Howlett cautioned that the bigger picture is hardly encouraging. The budget also includes a plan to chop $60-million from the CRA’s administrative costs, a potentially major hit to the organizations ability to do its job.

“Our main disappointment [with the budget] is that the CRA will not be given additional resources , in fact they’ ll be taking this hit,” he said. “We know they are already seriously understaffed, they don’t have enough staff to open and look at the tax information they get from [for-

They don’t have enough staff to open and look at the tax information they get

eign tax authorities they have information sharing agreements with.]”

Indeed, they don’t even have sufficient resources to deal with some of the foreign bank data files they’ve received, Mr. Howlett said.

“It’s a big problem. They get these disks, a lot in different formats that are hard to translate into a usable form.”

So given the CRA’s resource squeeze and the government’s apparently lenient attitude on the matter, people with hidden offshore accounts probably don’t need to hit the panic button just yet.

But there’s plenty of reason to suggest that things will soon get a lot more difficult. Given Canada’s ballooning debt, the government will have little choice but to take the matter more seriously.

Jim Flaherty has vowed to eliminate the $26-billion deficit in two years, a tenuous move given the economic headwinds.

The U.S. loses an estimated US$100-billion a year due to savings stashed in tax haven bank accounts, but the Canadian government has yet to even attempt to guess at the amount it loses.