{"id":595,"date":"2013-04-08T19:16:49","date_gmt":"2013-04-08T19:16:49","guid":{"rendered":"https:\/\/thor.ca\/\/blog\/?p=595"},"modified":"2025-02-12T13:31:03","modified_gmt":"2025-02-12T21:31:03","slug":"information-leaks-financial-secrets-and-off-shore-tax-havens-a-call-for-calm","status":"publish","type":"post","link":"https:\/\/www.thor.ca\/blog\/2013\/04\/information-leaks-financial-secrets-and-off-shore-tax-havens-a-call-for-calm\/","title":{"rendered":"Information Leaks, Financial Secrets and Off-Shore Tax Havens: A Call for Calm"},"content":{"rendered":"

The following blog was joint collaboration by Greg DelBigio, David Thompson, James Murdoch,\u00a0and Steve Cook:<\/em><\/strong><\/p>\n

Last week saw tax law become the subject of international headlines.\u00a0 Media outlets excitedly announced that as a result of a \u201cleak\u201d of documents the financial secrets of the rich would finally be exposed. We have been told that the documents contain names, some names have already been mentioned and it has been suggested that salacious details will follow. Commentators of all sorts have appeared on the media to opine that this leak of information has exposed the rot in the system and the need for reform of tax laws.<\/p>\n

Discussion and debate about the reform of tax law is fairly constant and that is a good thing so that the law may continue to evolve. However, a discussion of reform or the need for reform must be based upon a clear understanding of the present state of the law. This has, so far been lost in the reporting.<\/p>\n

To begin, and because the media has gone on at length about the importance of the integrity of the law, it is worthwhile to pause and consider how the media came to be in possession of the documents in question. According to the CBC, the documents reveal \u201cthe closely guarded investment information of more than 100,000 people around the world, including hundreds of Canadians.\u201d Describing the \u201cleak\u201d as \u201cone of the largest ever\u201d, the CBC has described that the International Consortium of Investigative Journalists \u201creceived\u201d this information and CBC News has now \u201cpartnered with the ICJ\u2026to gain exclusive Canadian access to the information.\u201d<\/p>\n

One is left to guess as to whether the people who leaked the information were in lawful possession of and lawfully permitted to disclose those many documents which contain private, and likely protected information.<\/p>\n

In a statement issued April 4, 2013, CRA stated that it is \u201cworking to obtain the information referred to in the media today.\u201d Similarly, the Minister of National Revenue issued a statement which includes the following request: \u201cWe call on The International Consortium of Investigative Journalists to hand over this list to allow our Government to crack down on tax evaders.\u201d<\/p>\n

The purpose of raising this issue is that Canadian criminal law causes it to be an offence to possess property knowing that it was obtained through the commission of an offence. \u00a0<\/b>Therefore, if the data was stolen and the leak of the stolen data was unauthorized, there is an interesting and legitimate legal question as to whether it is lawful to possess that data.<\/p>\n

As we were reminded by the Supreme Court of Canada in R. v. Law, 2002 SCC 10, the fact that the data may have been stolen does not erase the privacy interests that exist in relation to the data. There may therefore be legal barriers to the manner in which CRA may be permitted to receive the data.<\/p>\n

To be clear, we do not know if the data was stolen and\u00a0\u00a0 we do not suggest that it was. However, if the data was stolen and the leak was illegal, there may be interesting legal questions as to whether an eager request is a sufficient basis in law for the data to be delivered to CRA.<\/p>\n

In any event, the International Consortium of Investigative Journalists released a statement on April 5 declining to deliver the data to tax administrations, including Canada\u2019s, saying that \u201cthe ICIJ is not an arm of law enforcement and is not an agent of the government.\u201d<\/p>\n

Parenthetically, we observe that this is not the first, and likely not the last case in which so-called leaks are likely to occur. Indeed, the recently announced government program in which individuals who supply information to CRA may be financially rewarded for that supply of information will create an incentive for there to be more leaks. Undoubtedly, as these cases unfold, courts will be required to grapple with questions such as whether the acquisition and supply of third party tax and financial information violates laws of theft, criminal breach of trust, unauthorized use of a computer, possession of property obtained by crime or bringing into Canada property obtained by crime,\u00a0 to name a few.<\/p>\n

Sensationalist media coverage is invariably based on a presumption that the discovery of offshore \u201caccounts\u201d is equivalent to a discovery of illegal activity.\u00a0 The CBC, which is the ICIJ\u2019s \u201cexclusive Canadian partner\u201d, did publish an editor\u2019s note acknowledging that \u201cholding an offshore account is not evidence of wrongdoing and may not be controversial.\u201d\u00a0 For this reason, and to their credit, the CBC is not just releasing the raw data.\u00a0 Rather, they will \u201cidentify appropriate stories, and complete them with appropriate context.\u201d<\/p>\n

Presumably, the CBC or other media outlets might identify situations where they suspect non-compliance with the law (particularly tax law) and to publish further stories.\u00a0\u00a0\u00a0 Hopefully, the media will also use the opportunity to educate Canadians on what tax laws actually require in relation to the ownership of foreign assets.\u00a0 Certainly, one might hope that the Canada Revenue Agency might try to tone down the rhetoric and instead take the opportunity to explain some of the following points:<\/p>\n

 <\/p>\n

    \n
  1. Canadians are free to own assets anywhere in the world.\u00a0 It is not illegal to hold a Swiss bank account, to establish a trust in the Cayman Islands or to incorporate a company in the British Virgin Islands.<\/li>\n
  2. Canadian residents are taxable on their worldwide income.\u00a0 Thus, the owner of a Swiss bank account must report and pay taxes on the interest earned in such account.\u00a0 Since Swiss bank accounts generally pay no greater interest than Canadian accounts (perhaps less) this is often a miniscule amount, but foreign exchange gains must also be included.\u00a0 If the foreign account is an investment or brokerage account, investment income must be included in a taxpayer\u2019s income in the same manner as if the account were Canadian.<\/li>\n
  3. Non-resident trusts are subject to different rules that, generally speaking, deem the trust to be resident in Canada (and therefore subject to Canadian tax) if a Canadian resident has contributed property to the trust and a related Canadian resident is beneficially interested in the trust.\u00a0 Incredibly, the income tax rules relating to non-resident trusts have been subject to proposed changes that were first announced by Finance Minister Paul Martin in the 1999 federal budget, but have never been enacted.\u00a0 However, these highly complex changes to the Income Tax Act are now before Parliament (Bill C-48).\u00a0 This Bill would change the income tax rules relating to non-resident trusts to further expand the circumstances in which non-resident trusts would be deemed resident in Canada, with retroactive effect to 2007.<\/li>\n
  4. A Canadian resident shareholder of a closely-held non-resident corporation (\u201ccontrolled foreign affiliate\u201d) is generally required to report and pay tax on investment income earned by the corporation as if the Canadian resident had earned it directly.<\/li>\n
  5. Canadian residents who own foreign assets, who have contributed to or received benefits from foreign trusts, or who are shareholders in foreign affiliates, are subject to special tax reporting obligations.\u00a0 For example:<\/li>\n<\/ol>\n
      \n
        \n
      • a taxpayer holding foreign property with a cost exceeding $100,000 must file form T1135 which is a \u201ccheck-the-box\u201d type form requiring disclosure of the type of property, its cost (within a range), its general geographical location and the amount of income reported from such assets.\u00a0 The federal government announced in the 2013 budget that they intend to expand the level of detail required to be disclosed on Form T1135;<\/li>\n
      • a taxpayer who transferred property to a foreign trust must disclose details of the transfer, and the trust, in Form T1141; and a taxpayer who receives a distribution or loan from a foreign trust must disclose details in Form T1142;<\/li>\n
      • a taxpayer with an interest in a foreign affiliate must disclose details on the foreign affiliates in form T1134.<\/li>\n<\/ul>\n<\/ul>\n

        \u00a0<\/b>Therefore, within Canada there are a plethora of laws governing the disclosure and taxation of foreign assets.<\/p>\n

        As with many other areas of tax, the foreign reporting tax reporting rules may be difficult to understand. However, a strict regime is in place and penalties for non-compliance are confiscatory \u2013 where failure to comply is considered to have been done \u201cknowingly or under circumstances amounting to gross negligence\u201d, a penalty equal to 5% of the cost of the foreign assets may be applied.\u00a0 Since this penalty can be applied in each year of non-compliance, and with the effect of compound interest that is levied on the penalties, it is not uncommon for the potential penalties to equal or exceed the value of the foreign assets, where non-compliance has existed over a lengthy period of time.\u00a0 In addition, if there has been intentional non-compliance with the foreign reporting tax rules, the result could be a criminal charge for tax evasion.<\/p>\n

        Until and unless the specific details of a particular case are made known, it is impossible to determine whether Canadian law has been complied with. Therefore, it is imperative to understand that the \u201csecrets\u201d of the \u201chundreds of Canadians\u201d whose private information has been leaked may not be a secret to the CRA at all.\u00a0 The CRA is not at liberty to disclose personal taxpayer information to the media, to inquisitive Senators, or anyone else.\u00a0 To its great credit, the CRA has an excellent record keeping taxpayer information in confidence, and those who would have it otherwise should be careful what they wish for.<\/p>\n

        If CRA comes into possession of some or all of the data and if it then takes steps to reassess or prosecute, the merits of the reassessment or prosecutions will be determined by the courts. The policy question of what measures should be available to Canadians to lawfully minimize the amount of tax owing is quite separate from whether any laws have been broken. One must hope that the\u00a0 chorus of protest that we\u00a0 heard\u00a0 last week will abate long enough for there to be recognition given to the fact that at least some of the people in question might have done nothing more than doing what Canadian law permits.<\/p>\n","protected":false},"excerpt":{"rendered":"

        The following blog was joint collaboration by Greg DelBigio, David Thompson, James Murdoch,\u00a0and Steve Cook:<\/em><\/strong><\/p>\n

        Last week saw tax law become the subject of international headlines.\u00a0 Media outlets excitedly announced that as a result of a \u201cleak\u201d of documents the…<\/p>\n","protected":false},"author":12,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[52],"tags":[],"class_list":["post-595","post","type-post","status-publish","format-standard","hentry","category-tax-blog-general"],"_links":{"self":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/595","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/users\/12"}],"replies":[{"embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/comments?post=595"}],"version-history":[{"count":1,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/595\/revisions"}],"predecessor-version":[{"id":2783,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/posts\/595\/revisions\/2783"}],"wp:attachment":[{"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/media?parent=595"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/categories?post=595"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.thor.ca\/blog\/wp-json\/wp\/v2\/tags?post=595"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}