Global dragnet puts pressure on tax evaders as year-end deadlines loom
Tax cheats are facing a series of year-end deadlines to come clean, as an international dragnet affecting both wealthy Canadians with offshore accounts and Americans in Canada who have failed to file U.S. tax returns keeps tightening.
Lawyers say some Canadians with Swiss bank accounts have received letters demanding written confirmation from a lawyer or tax adviser by the end of 2015 declaring that the taxpayer is either complying with Canadian tax rules or is in the process of doing so. Some have been warned that their accounts could be frozen or liquidated.
And in Washington’s latest move to crack down on Americans outside its borders, U.S. citizens living in Canada who either owe at least $50,000 (U.S.) in taxes and penalties or do not have U.S. social security numbers could see their passports revoked as of Jan. 1.
Toronto lawyer Stevan Novoselac, head of the tax-dispute team at Gowling Lafleur Henderson LLP, would not identify which Swiss banks have sent letters to account holders, but he said they were coming from major Swiss financial institutions.
“The vise continues to squeeze on people around the world with unreported offshore investments,” Mr. Novoselac said in an interview. “And this certainly includes Canadians.”
The Swiss letters come in advance of a sweeping international agreement that will see former banking secrecy bastions such as Switzerland and Cayman Islands automatically hand over foreigners’ bank-account information to tax authorities around the world. So far, 77 countries have signed on and information is set to start flowing in 2017.
Because of this, and widely publicized leaks of Swiss bank information in recent years, Canada Revenue Agency is seeing an increase in the number of people taking advantage of its voluntary disclosure program, which offers to waive penalties and reduce interest owing for taxpayers who come forward to reveal undeclared offshore accounts.
Not everyone caught up in the net is a tax cheat: In some cases, those inheriting money have learned that their dead relative had also passed along hidden offshore accounts. Some are also unaware that under Canadian tax law, they must report income they earn worldwide.
But Mr. Novoselac and other tax lawyers say they believe that CRA officials will be less interested in voluntary disclosures once they have access to data on offshore bank accounts, meaning that the clock is ticking for those with undeclared money overseas.
Meanwhile, U.S. citizens now face the possibility their passports will be revoked if they owe $50,000 in U.S. tax and penalties as of Jan. 1.
The policy, passed by U.S. Congress on Dec. 3 and signed into law by President Barack Obama the next day, means that Canadian-based U.S. citizens visiting the United States who have not sorted out their tax issues could find their passports useless as they try to leave, stranding them south of the border, said Calgary lawyer Roy Berg of Moodys Gartner Tax Law.
Mr. Berg, himself a U.S. citizen, also said that racking up $50,000 in penalties is easy, with fines in the tens of thousands even for just failing to notify U.S. authorities about Canadian accounts such as tax-free savings accounts or registered education savings plans.
The new legislation will also see “inactive” tax debts that the U.S. Internal Revenue Service has been unable to collect handed over to private debt-collection agencies, he added: “So, it’s not the IRS that may be coming after you, it’s ‘Dog the Tax Bounty Hunter.’”
The passport move adds to the pressure applied by Washington’s controversial Foreign Account Tax Compliance Act (FATCA),which threatens foreign banks with withholding taxes unless they provide information on U.S. citizens’ foreign bank accounts.
In September, after a Canadian court challenge to block the move failed, the CRA handed Canadian banking information on 155,000 American citizens to Washington, meaning that time was also running out for those who wished to take advantage of the leniency the IRA offers for voluntary disclosures. A parallel legal challenge arguing that the handover violates Canada’s Charter of Rights and Freedoms is still before the courts.
Critics point out that some affected people are U.S. citizens who have lived in Canada all their lives after being born to U.S. parents and who had unknowingly fallen offside of American tax rules or who did not know they had to file a U.S. tax return.