From The Article: 14,700 Disclosed Offshore Accounts
By: Lynnley Browning

Link to NY Times Article

Fear and Voluntary Disclosures – Could it happen in Canada?

The AP on November 17th 2009 reported that 14,700 people had taken advantage of the recent “amnesty” by the US to report their offshore undisclosed accounts. Effectively the US, which is far harsher than Canada on tax cheats, had just seen the end of a “tax amnesty” programme in which those who had evaded US tax offshore could get a “discount” of a fine of a maximum of effectively 20% of the assets offshore (the actual fines without the discount could be much higher) and a deep discount if the money had been inherited and never touched (5% of the assets). Given that UBS was going to start telling the US government (officially they were telling their own government who would then tell the US) the names of their US clients this was sufficient to cause lots of UBS clients, and US clients of other offshore banks, to pay up and come clean.

As a Canadian tax lawyer, the question you ask yourself is whether the Canada Revenue Agency (CRA) will ever be in a similar position to compel foreign banks to roll over on their Canadian clients. I think that overall the answer has to be “probably not, but they might get lucky”. To understand why I think this, you have to understand where all of this came from.

First of all, UBS made a colossal error. Not just did they deal with US clients and sell them securities (a securities law violation that is probably way worse for the bank than the tax issues) they also had a branch not a subsidiary, but an actual branch of their main corporate entity – as operating businesses on US soil in both Florida and New York. This means that the US has direct jurisdiction over UBS. Since they where in the US, the US had the “John Doe” ( i.e. “We don’t know who, but we know someone is up to no good, so tell us who!”) subpoena power over the bank. If UBS did not respond to the subpoena, the US government could get a criminal conviction against the entity, which is corporate death. As a result, the assets of UBS in the US could escheat to the US government.

So there was no way UBS could give up on all of its US assets. Yes, I think this may include accounts at its US branches, because an account is just a loan from you the consumer to the bank, so the money belongs to the bank. (If I am wrong here, please let me know. I am not a US banking lawyer, this is just what I understood, and I am willing to be corrected on this.) In any event, the issue was that the US Justice department, had grounds to issue the John Doe’s after they caught a couple of people who where UBS clients. So they had the bank red handed.

Effectively the US Justice department treated UBS the same way they do drug conspiracies (or the way they do in the movies at least); they catch one “low level” guy, in this case, the client, and offer him a choice, testify against someone further up the chain, or he will go to prison for a long time. So the clients testify against their relationship manager and the relationship manager then testified (rather spectacularly in this case) against the bank.

Once the US had grounds to indict the bank, they could indict senior managers of the bank for having participated in the conspiracy. Once that happens, they could get a so-called “Red Notice” issued against the bank executives by InterPol, which would mean that they would be arrested the second they got off a plane at any airport in the world outside of Switzerland. If the bank executives can’t leave Switzerland, they can’t do business. Which is why the bank executives were willing to break years of tradition and roll over on their US clients. They had no choice.

Welcome to the brave new world! Effectively for offshore banks with US clients, the banks can’t trust their clients not to roll over on them, and the US clients can’t trust the banks. So the Swiss banks and many other offshore banks are busy “firing” all of their US clients (“Thanks for your business. Here is a cheque for all the money you had deposited/invested with us. Bye!”)

Could this happen in Canada? Well, first of all, to my knowledge at least, none of the offshore banks have offices here in Canada, and if they do have any operations at all, they are separate legal entities (Schedule II or III banks) and not legally the same legal entity as their parent. So there the CRA does not have the “hook” of jurisdiction that the US had. However it is always possible that the CRA could get lucky.

In particular, if any of the offshore banks are dumb enough to let the local operation have access to their databases. The recent eBay case in the Federal Courts says point blank, if a Canadian can access it, it is in Canada and subject to the CRA’s audit power. That means that the Canadians have to hand over any data requested by the CRA or face jail time, even if the data does not belong to them and they have no right to disclose the data/information under the laws and rules of the country where the server is located, or the laws and rules of the country where the owner of the data resides. It is a bad decision, but it is the law. So it is possible that the CRA/Justice could put a Canadian employee in a squeeze.

The government could also catch someone cheating on their taxes in some other way, or a client of one of these banks could find themselves in trouble with the law in Canada for something totally unrelated to their tax situation. If facing enough jail time, I have no doubt that a Canadian client of an offshore bank could try to make a deal with the Canadian Department of Justice to save their own skins.

So the answer is: 1) if they get very, and I mean very, lucky, and the tax cheat is very scared of going to jail (I would be scared, so this is not a macho thing); and 2) the Canadian Justice Department was acting like hardball prosecutors, rather than cogs in a big bureaucratic machine and just going through the motions then yes, it is possible that the CRA and Justice Canada could get someone to roll over on their banker. So it is at possible that Canada could see the same series of dominoes falling.

Do I think it will happen.? Yes, I think it will eventually. The US is getting a lot of information, and many families have connections across the border. If the US shares information that deals with Canadians then the government could get a leg up in this process and move faster than anticipated.

Overall, I think the moral of the story is that the “good old days” of stuffing money in Swiss and other offshore accounts are rapidly drawing to a close. If you are a resident of Canada, and you have an offshore account that you have not been reporting you should make a voluntary disclosure to the CRA, ASAP. Canada’s rules on voluntary disclosures are, in a lot of ways, much more easy-going than the US rules, as all penalties can be avoided. Inquires with regard to such issues can be handled discretely and professionally. Lawyers have privilege, accountants do not. But that is a topic for another blog.