CRA 'has begun identifying' data from Pandora Papers as leak reveals world of offshore tax havens

TORONTO -

The recent release of terabytes of data on offshore financial records dubbed the “Pandora Papers” has once again thrust the ultra-wealthy into the spotlight for their use of offshore tax havens and how they spend their millions.

Unlike 2016’s Panama Papers, in which Canadian companies and figures featured more prominently, the latest iteration of offshore data, which was released by the Washington-based International Consortium of Investigative Journalists (ICIJ), does not have as many Canadian entities listed so far.

Still, the Toronto Star, one of the Canadian media outlets that have a partnership with the ICIJ, reported that at least 500 Canadian citizens or residents have been identified in the Pandora Papers as of this week.

It is not illegal to have an offshore account or business in Canada, as long as everything is properly documented and reported to tax authorities.

In two emailed statements to CTVNews.ca on Thursday and Friday, the Canada Revenue Agency (CRA) says it has already “begun identifying how to integrate Pandora Papers information” with data the agency already possesses and “are working with our international partners to pool resources and share information to develop an accurate picture of what the data is telling us.”

The organization reiterated that “merely holding offshore assets does not automatically imply tax non-compliance from a Canadian tax perspective.”

“For example, in the Panama Papers, over 60 per cent of Canadian taxpayers identified were found to have complied with their tax reporting obligations,” the CRA said.

With the release of the new Pandora Papers, the CRA said that it is “committed to protecting the integrity of the Canadian tax system by combatting international tax evasion,” adding that Canada is part of more than 96 tax treaties and 24 international tax information exchange agreements, including the Joint Chiefs of Global Tax Enforcement (known as the J5).

“These partnerships will be valuable resources for the CRA as we explore the newest ICIJ leak,” the statement said.

While not illegal, the anonymity afforded in offshore firms and business dealings, alongside some countries’ lax taxation on incomes, has been well known for and used in crimes like money laundering and tax evasion.

Executive Director of Transparency International Canada, James Cohen, says the Pandora Papers “reveal how the global system of illicit financial flows works.”

“We’re seeing [people] who are using the global network for tax avoidance and tax evasion. We’re seeing stories of fraudsters setting up shell companies through the system – stories of alleged sanction busters and even people who have ran markets on the dark web,” Cohen said in a telephone interview with CTVNews.ca Thursday. “So far we haven’t seen the Canadian implications of this as a hub in the global network yet, but that was already revealed in the Panama Papers…the idea of offshoring where most people think of a tropical island or the Swiss Alps is a bit dated, we need to think of this as a global network.”

WHAT ARE OFFSHORE FIRMS USED FOR?

“Offshoring essentially means moving your money offshore to another jurisdiction,” explained director of the Domestic Policy Programme at the Macdonald-Laurier Institute Aaron Wudrick in a telephone interview with CTVNews.ca Friday. “And the main purpose of doing that is because there are tax benefits to it.”

While variations of the term “offshore accounts” are sometimes conflated with illegal practices, especially in movies or pop culture, Wudrick stressed that there are legitimate reasons to have money or assets in other jurisdictions.

“For example, if you're a person who's in a very unstable country, it's not safe for you to keep your money there so you want people in some places that have the ability to move money,” he said. “Another example is where if you are a company that legitimately does business in a number of countries, it makes sense for you to have your sort of capital spread out into different places.”

Wudrick said legal issues arise when offshoring is done only for the purpose of tax evasion or other crimes, a sentiment echoed by Toronto defence attorney Brian Heller.

“There is nothing illegal about having offshore accounts. There is nothing illegal about having offshore property. What is illegal is certain people's failure to comply with the Income Tax Act of our country,” Heller said in a telephone interview with CTVNews.ca Friday.

TAX EVASION, TAX AVOIDANCE AND CANADA’S LAW

Tax evasion and tax avoidance fall under Canada’s Income Tax Act, and while tax evasion can be construed as a fairly cut-and-dried criminal offence, tax avoidance – which is interpreted through the 1988 General Anti-Avoidance Rule (GAAR) of the Income Tax Act – relies heavily on the interpretation of the spirit of the law versus the letter.

“The definition of tax avoidance is something that is really…very amorphous type of definition that leaves a lot of discretion in the hands of the CRA,” Heller explained. “A transaction will be considered a tax avoidance transaction if it would result in a tax benefit…and the main mechanism whereby you deal with tax avoidance is GAAR, and that’s the rule that allows the CRA to deny you the tax benefit you would have otherwise.”

The CRA said in their statement that they invoke GAAR when a taxpayer attempts to circumvent or exploit the intent of Canada’s tax rules and avoid paying their fair share.

“The GAAR draws a line between legitimate tax minimization and abusive tax avoidance,” the statement said. “The GAAR’s purpose is to deny tax benefits to any taxpayer that, although complying with a literal reading of the provisions of the Income Tax Act or the Excise Tax Act (for GST/HST), is not necessarily in accordance with the object, spirit or purpose of the legislation. In such cases, the GAAR may be invoked."

But sometimes tax avoidance is perfectly legal, and even encouraged, Wudrick said.

“If you structure your affairs in a certain way to pay less tax that's OK sometimes if the reason you're structuring your affairs fits with what you're doing,” Wudrick explained. “If there's a special tax deduction set up for a certain type of business because the government wants to encourage that kind of business and you make use of that deduction, that's tax avoidance, but it's legitimate and it's expected, and indeed it's the purpose of the policy.”

Tax evasion, however, is far simpler to understand, Heller said.

“If you wilfully set out to avoid paying your tax, or wilfully set out to avoid complying with or reporting your income under the Income Tax Act, that is a crime,” he said. “We have an extensive tax evasion practice in this country. There's never any scratching of one's head as to why the CRA elects to investigate somebody for tax evasion.”

Tax evasion is prosecuted by the federal Crown, and can result in a criminal record and -- depending on the amounts of money involved – jail time.

“Tax rules impose a number of obligations to Canadians with certain investments, property or other holdings outside of Canada. Notably, they require taxpayers to disclose via T1135 Foreign Income Verification Statement,” the CRA statement said. “There are a variety of consequences for not disclosing foreign assets or income, depending on whether the non-compliance is found to be an honest mistake or a willful disregard for the rules. If it is the latter, it may result in enforcement action potentially leading to conviction for tax evasion.” 

‘CLOSE THE LOOPHOLES’ TO SOLVE THE PROBLEMS

Wudrick said while Canada likes to pride itself “as a bunch of rule followers” when it comes to our international reputation versus the country’s empirical track record, “Canada has a pretty bad reputation amongst their peers as being a real sort of soft underbelly for dirty money and for money laundering.”

Cohen agreed, saying Canada’s “lack of traditional pressure and lax laws around anti-money laundering” have resulted in the term “snow washing” being used to describe the practice of cycling dirty money here, because when it comes to offshore and shady business dealings, like money laundering through real estate, “who thinks of Canada?”

Cohen said revelations like the Panama, Paradise and Pandora Papers are why he would like to see a federal publicly-searchable registry of beneficial ownership, similar to the system currently in place in B.C., so that it is harder to hide who owns what in the country.

But a database like that would have to be scrutinized carefully, Wudrick said, to avoid privacy issues. “The ultimate question of these things is ‘what's the solution?’” he said. “I think the solution is you've got to get rid of these loopholes…essentially a complicated tax system is a buffet for very wealthy people with a lot of resources to exploit loopholes.”

And for those who may say they didn’t know their money was being used in offshore firms and accounts after being named in the Pandora Papers, ignorance may be bliss, but it’s not a very good defence in a courtroom.

“I can tell you that if a Canadian resident taxpayer does not know that their tax adviser has taken steps to put the money offshore and doesn’t know that there's any type of reporting obligation, then there is no wilfulness to his or her conduct and he or she would not be guilty,” Heller said. “But there's a concept in Canadian criminal law that just because you block your eyes, ears and mouth, it doesn't mean you necessarily get to walk away from any liability. If you had a suspicion of something amiss and you chose not to pursue it in circumstances where a reasonable person would have pursued an enquiry in that regard, then you are [engaging in] willful blindness – ignorance of the law is no excuse.”

Edited by CTVNews.ca producer Sonja Puzic