Canada’s revenue agency met with officials at Switzerland’s largest bank, UBS, in an effort to obtain more information on Canadian clients who may not be reporting foreign investment information to the Canadian tax authorities.

The visit followed on the heels of the IRS success in forcing UBS to provide account- holder detail for thousands of U.S. clients [DASH] suspected tax evaders.

Whether successful or not, CRA’s current focus on offshore investment funds warrants a review of the Canadian tax reporting requirements and penalties for non-compliance. You might want to review these with some of your clients.

All Canadian residents are required to report their worldwide income on their tax returns. And a number of tax rules and reporting requirements are specifically aimed at offshore investments – to ensure Canada collects its fair share of tax from funds invested out of the country. These include the foreign investment entity rules that may require an annual income inclusion even where there’s no income distribution from the foreign investment; trust rules that deem certain foreign trusts to be resident and therefore taxable in Canada; and the annual foreign investment reporting requirement for individuals who own foreign investment property with an aggregate cost in excess of $100,000.

So when funds are invested offshore – and that includes funds deposited in those secret-numbered Swiss accounts – there are generally reporting requirements for Canadian residents.

What happens if you don’t report?

The penalties for non-compliance can be rather significant:

  • Where an individuals knowingly fails to file a form T1135 (reporting foreign investment assets), the penalty starts at $500 per month for 24 months ($1,000 per month if a demand has been served); after 24 months, an additional 5% of the cost amount of the foreign property is charged;
  • Where an individual knowingly fails to report foreign income in a return, the penalty can be 50% of the unpaid tax;
  • Additional criminal fines may apply in the case of tax evasion, ranging from 50% to 200% of tax evaded (or attempted to evade) and may even include a prison term of up to two years; and
  • Advisors who participate in taxpayers’ misrepresentations may also be subject to fines and penalties.

    And of course, the taxpayer is still liable for any tax due in relation to the omission or misstatement plus interest accruing from the time the tax liability arose, compounded daily.

    For people who think they may have escaped these penalties because the underreporting happened before the normal three-year reassessment period; be aware that in the case of fraud or misrepresentation, CRA may reassess at any time.

    So what are the options for those who’ve been non-compliant, or knowingly failed to report required foreign information? There is relief available under the CRA voluntary disclosure program (VDP). If the taxpayer “fesses up” before the taxman comes knocking, he may be spared the penalties and possible prosecution that could otherwise ensue.

    Under the VDP, the disclosure must be made as a written submission to the taxpayer’s local tax service and it must be completed within 90 days of the initial disclosure. If accepted, fines and penalties and future prosecution will be eliminated; however, tax and interest must still be paid, although in some cases the interest may be reduced.

    To be valid, the disclosure must be truly voluntary [DASH] initiated by the taxpayer. It cannot be a response to an audit, investigation or enforcement action already underway.

    UBS account holders should be warned: If UBS releases account details to the CRA, access to the VDP will no longer be available.

    Gena Katz, FCA, CFP, an executive director with Ernst & Young’s National Tax Practice in Toronto. Her column appears monthly in Advisor’s Edge.