Even if you have taken precautions to avoid detection
If you've been stashing your money away in an offshore bank account and have failed to either disclose the existence of that account or report any foreign income earned on the account to the tax man, your ability to fly underneath the Canada Revenue Agency's radar seems to be eroding by the day.
With the recent news that the names of 450 Canadians who have offshore bank accounts appear amongst the 130,000 named persons from 170 countries contained on that 260 gigabyte hard drive leaked to the media, it's getting harder to escape, even if you think you've taken the necessary precautions to avoid detection.
While only one Canadian name on the list (Regina lawyer Tony Merchant) has been released so far, it's clear that the CRA wants all the names. As Minister of National Revenue Gail Shea said in a statement yesterday, "Anyone with information on tax cheats has an obligation to bring it forward. The release of this information is good news for the hardworking Canadians who pay their fair share. This is bad news for the tax evaders in this country."
Add this development to the announcement two weeks ago in the federal budget when the government launched a number of measures to combat international tax evasion, including the new "Stop International Tax Evasion Program," which will enable the CRA to pay incentive rewards equal to a percentage of the tax collected to individuals who report information of "major international tax non-compliance."
To aid in tracing the flow of funds internationally, the budget also announced that the government will require various financial intermediaries, including banks, to report their client's international electronic funds transfers of $10,000 or more to the CRA.
While it's certainly not illegal to move money offshore or to open up a foreign bank account outside Canada, or even in a tax haven such as the Cook Islands, the tax rules are very strict when it comes to reporting those assets and income generated from them.
For starters, the general principle is that as a Canadian resident, you are required to report your worldwide income from all sources on your Canadian return. As a result, tax havens are generally of little use as a tax-avoidance shelter to the average Canadian because any income and gains earned in such havens has to be reported on your Canadian return.
In addition, the mere existence of offshore funds must also be disclosed on various forms, the most common one of which is the T1135 or the "Foreign Income Verification Statement." That form must be filed annually if the total cost of all your foreign investments was over $100,000 at any time during the year. Note that foreign property does not include foreign personal-use property such as vacation properties that don't generate rental income.
On the current T1135 form, you are asked to specifically state the types of foreign investments you own and the cost of those investments, along with geographical locations. You are then asked to identify the total income you reported on your tax return from the identified foreign investments.
Budget 2013 announced revisions to the form which will require taxpayers to provide more detailed information regarding each foreign investment, including: the name of the specific foreign institution or other entity holding funds outside of Canada, the specific country to which the property relates and the foreign income generated from the property.
And to ensure that you "remember" to actually file that form, beginning with the 2013 tax year, the CRA will remind you, on your Notice of Assessment, of your obligation to file Form T1135 if you have checked the "Yes" box on your tax return, indicating that you own foreign property with a total cost of more than $100,000.
Additional foreign reporting forms are also required for Canadians who own foreign corporations or trusts (Form T1134), have transferred or loaned money to an offshore trust (Form T1141) or have received a distribution or loan from an offshore trust (Form T1142).