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Co-authored with Steven Sitcoff

We have been contacted by a number of people in the last week who have received a letter (all dated December 4, 2014) from the Offshore Compliance Division of the Canada Revenue Agency (CRA). In brief, the letter states the following:

(1) A reminder as to the criteria for filing a T1135 form if the recipient holds or previously held assets outside of Canada (in essence, the T1135 Foreign Income Verification Statement is used to report situations where the total cost of foreign assets held in a particular year—other than personal-use property but including foreign portfolio securities held in a Canadian brokerage account—is more than $100,000);

(2) The recipient should make a voluntary disclosure if they have filed returns that do not accurately reflect their reportable offshore assets or foreign income; and

(3) The civil penalties applicable and potential for criminal prosecution if the recipient does not make a voluntary disclosure and the CRA conducts an audit which identifies unreported offshore income or undisclosed assets.

We have spoken with the CRA about the context behind this letter and were told the following:

(1) It is part of an “educational program” sent to a sample of taxpayers;

(2) The sample was selected by the CRA based on statistical analysis and other information which suggested persons who could have foreign assets, but it is not based on any specific information received by the CRA per se;

(3) The letter does not signal that any audit or enforcement action is to be initiated against recipients of the letter; and

(4) The mere receipt of this letter will not serve to disqualify an otherwise valid voluntary disclosure (CRA policy is to refuse the making of a voluntary disclosure where an audit, investigation or other enforcement action that is related to the disclosure was initiated against the taxpayer or a related person).

Notwithstanding the assurances noted above, the specific criteria used to select the recipients of this letter remain unknown and it is difficult to know whether such persons are at serious risk of audit. However, we believe that those who received letters may have been selected by reference to some of the sources identified in the 2013 Auditor General’s Report to Parliament. In particular, the CRA may have been receiving sufficient information from the following potential sources to identify holders of offshore accounts: information provided by some foreign banks operating in Canada in response to “unnamed person requirements” issued by the CRA; reports from Canadian banks to FINTRAC (the federal anti-money laundering agency) as regards foreign transfers to Canada; credit card processors with regard to the use of cash cards linked to the offshore accounts; and, reports from banks situated in OECD countries.

Given that the Auditor General concluded that the CRA “is not fully prepared to handle the increased amount of information it is receiving”, the CRA’s Offshore Compliance Division appears to have decided that the letter is the most efficient use of its current resources.  In deciding how to respond to the letter, recipients should bear in mind that the CRA is in the process of implementing an action plan which, no doubt, provides for an increased emphasis on deterrence once the letter campaign has succeeded in picking off the low-hanging fruit.

David H. Sohmer is a tax lawyer and one of the founders of Spiegel Sohmer.

Steven Sitcoff is a tax lawyer at Spiegel Sohmer who works on a variety of corporate and personal tax planning matters, as well as handling disputes with tax authorities. He has extensive experience in making voluntary disclosures to the federal and provincial tax authorities regarding offshore accounts.