Foreign Reporting – Are you High Risk?

(Originally published at this link)

In early December, the Canada Revenue Agency (“CRA”)’s Offshore Compliance Section sent letters to certain taxpayers, urging them to review their tax filings in order to ensure that foreign assets with a cost amount greater than $100,000, and the income and capital gains earned therefrom, have been properly reported in both their tax returns and on Form T1135 – Foreign Income Verification Statement.

The letter sets out the penalties that can be imposed for filing omissions of this type. These include:

gross negligence penalties equal to 50% of the tax due on the unreported income;
gross negligence penalties for failure to file or for failure to disclose all reportable assets on the foreign reporting forms, up to 5% of the cost of the undeclared assets for each year of the filing omission; and
the possibility of criminal prosecution.

The letter encourages taxpayers to make use of the voluntary disclosure program to correct their tax situation if they determine that they have not properly reported their foreign assets. The federal voluntary disclosure program offers taxpayers an opportunity to address previous tax filing omissions without the threat of prosecution or penalties provided certain conditions are met. A similar voluntary disclosure program is offered by Revenu Québec.

We have made inquiries with the Offshore Compliance Section (“OCS”) in respect of the letter. We were told that the letter is intended to educate and inform the recipients of their tax filing obligations in respect of foreign assets. We were also informed that the letter is not an audit letter and therefore, the receipt of the letter will not preclude the recipient from filing a voluntary disclosure.

Following our discussions with the OCS and other tax practitioners, it would appear that the recipients of these letters have been flagged as “high risk” by virtue of information received by the OCS. This information may have come by matching data contained on statements that brokers are required to send to CRA against the more detailed information contained in the new T1135 forms, which were filed for the first time in 2014. It is also possible that the taxpayers’ information was provided through the Offshore Tax Informant Program (“OTIP”).

The OCS and the OTIP were both introduced as part of the 2013 Economic Action Plan. The OTIP provides informants with awards of between 5% and 15% of federal income tax collected in respect of the international tax non-compliance (not including interest and penalties), if the information provided contributes to the collection of a minimum of $100,000 of federal income tax.

If you have received a letter from the CRA’s OCS, or if you would like more information regarding the voluntary disclosure process, we encourage you to contact us to discuss the matter further.