A recently introduced international tax audit campaign has led to billions of dollars of additional tax receipts for the Canada Revenue Agency (CRA). Several high-profile wins have already led to additional resource allocations to the crackdown on offshore tax evasion. Companies and individuals with Canadian interests should review their tax compliance position, particularly with respect to international transactions and other offshore issues.
Clayton & McKervey anticipates that CRA will increase scrutiny of international transactions, which includes transfer pricing, offshore funds transfers, and aggressive tax schemes given the high return on investment in auditing resources. The government of Canada has allotted nearly C$1 billion for the CRA in budgets for 2016 and 2017.
Canada Revenue Authority “Cracking Down” Statistics
| CAD | 2014/2015 | 2015/2016 | 2016/2017 |
| Additional tax collected | C$11.7 billion | C$12.7 billion | C$12.5 billion |
| Offshore audits completed | 98 | 185 | 223 |
| Electronic fund transfers analyzed | N/A | 3,095 | 38,194 |
One important development is that financial institutions are now required to report international electronic funds transfers (EFT) of C$10,000 or more directly to the CRA. The CRA, in turn, use the EFT information to identify taxpayers suspected of participating in aggressive tax avoidance. Taxpayers are also required to report certain assets with a cost greater than C$100,000 on Form T1135, the Foreign Income Verification Statement.
The CRA also announced they would be selecting four jurisdictions and/or financial institutions for special scrutiny during fiscal year 2017-2018. Details on the jurisdictions and financial institutions were not released.
Why is this important?
The CRA has become significantly more aggressive in their enforcement of international issues in an attempt to ensure that every taxpayer in Canada pays the correct amount of income tax. This campaign is consistent with global trends calling for increased scrutiny of cross-border transactions.
Despite CRA statements saying they are targeting high-risk taxpayers, Clayton & McKervey encourages companies and individuals with any international transactions involving Canada should be prepared for questions from auditors.
What can happen if I wait until an audit starts?
In our experience with the CRA we find that auditors do their homework, conducting a thorough review of previous years’ tax returns and annual reports prior to a first audit meeting. This means that taxpayers with Canadian interests should be ready to explain the rationale for cross-border transactions well before an audit is underway.
In addition, punitive fines and penalties may be assessed in situations where, for example, a taxpayer does not prepare transfer pricing documentation or file forms on a timely basis.
What to do next?
Companies and individuals with operations in Canada should consider consulting with their tax advisors to assess compliance with all necessary tax forms and transfer pricing documentation, where appropriate. While companies and individuals may not believe they engage in aggressive tax strategies, international transactions are clearly a higher priority for the CRA.
For additional information:
Cracking down on tax evasion and aggressive tax avoidance and getting results
Tax cheating. There are consequences.
Cracking down on offshore tax evasion and aggressive tax avoidance
