Canada, Voluntary Disclosures & UBS – the Good News, the Bad News and the Truth

According to various press agencies, on December 2, 2009 the Canadian Minister of National Revenue, Mr. Jean-Pierre Blackburn announced that over 7000 Canadians have made voluntary disclosures so far in 2009, at a pace about 40% ahead of any previous year. That number reportedly included approximately 88 clients of UBS. UBS. The CRA as also reportedly have been having negotiations with UBS regarding the disclosure of other names of Canadians with off-shore accounts and unreported income. The Minister has been stating that unless UBS coughs up the names, the Canadian government will sue to get the names.

First of all, I am glad to hear that disclosures have been going at such a stiff pace, as it looks like people are finally coming to understand that the era of “Really, come on, who is going to find out?” is over. Dead. Gone. There are no short-cuts, there is no easy way out, and you have to declare your world-wide income if you are a tax resident of Canada.

There are of course a few things that can be done to make sure that you: 1) are not a tax resident of Canada; 2) do not have any taxable income to report. So you can deal with Canadian tax creatively and above all, legally and in complete compliance with the Canadian Income Tax Act and all related legislation, and pay little or no Canadian tax. It can be done, and it can be done by playing within the rules. The CRA is free to challenge any position taken by a taxpayer, but there are structures that are very effective and that are not “tax shelters” but legal and legitimate means of reducing taxation in Canada.

However, as an advisor, what I have constantly run into are people who do not want to pay me and the other professionals involved, very reasonable fees (i.e. minimal amounts relative to the amount of tax saved) to advise them how to go about ordering their affairs properly so that they can pay less Canadian tax. No, instead, these people look at me like I am an idiot, because in their minds I am what they think of as an “Quadruple Idiot”. The Quadruple Idiot concept works as follows in their minds: “1) Only idiots pay tax or report their true income; 2) only double idiot would pay someone to tell them how to pay tax or set up structures or report income; 3) only a triple idiot would let themselves be convinced that they need any advice; 4) and you are a Quadruple Idiot if you think you can talk me into paying for advice on how to pay far less tax legally, when all I have to do is just put the money offshore and not tell anyone. Really, come on, who is going to find out?”

So part of me is very much delighted, both personally and professionally, to see the CRA go after people who have put their money in offshore accounts and not reported the income. Maybe if a few more people get caught, potential clients will stop looking at me like a Quadruple Idiot, and come to realize that I am in fact trying to save them a lot of time, energy, hassle, and prevent them from doing time in jail.

Conversely, as a professional advisor, I think that the Minister is spouting off a little too loudly. He is doing it on purpose, as he is of course hoping that people will panic, and come in for a voluntary disclosure because they will become afraid that they will be discovered. Which is laudable and a practical way of achieving his objectives. However, as a tax lawyer, I seriously question whether or not he has any really hooks on UBS or the other offshore banks at the moment.

First of all, you have to understand that there is a big difference between UBS in the US and in Canada. Please see my previous blog, “Fear & Disclosure” for a description of why I think it is possible and eventual that Canada will get access to the UBS and other private bank names. But for the time being, I do not think they will be able to get the same access that the Americans had.

The only issue is whether the voluntary disclosure of some clients will be sufficient evidence of collusion in tax evasion in Canada on the part of an offshore bank, and whether Justice could use that information at all effectively. The problem for the CRA is that if a Canadian taxpayer makes a voluntary disclosure, then they will not be subject to penalties or quasi-criminal penalties under the Income Tax Act. While Justice could also bring criminal fraud charges, I think there is a double jeopardy and overlapping “complete code” issue to using one set of rules to deal with a problem that is supposedly covered by another set of rules. On a constitutional basis, I think the issue would be that there are protections against self-incrimination in Canada, so it may be that it would be that the CRA/Justice have no leverage against any of the clients. Why would you testify against someone unless it would be to avoid jail-time oneself?

Not that I am discounting the possibility. I would like to open up a discussion with people about the issue is it possible for Justice to bring criminal sanctions against someone who has made a voluntary disclosure for tax purposes? Maybe, but I think there are issues. What I do know is that the information provided to the CRA under the voluntary disclosure cannot be provided to Justice for any other purposes than the enforcement of the Income Tax Act. So I think this precludes the use of criminal sanctions against the taxpayer who makes a voluntary disclosure. Not because Justice could not bring the charges, but because the CRA’s could not give them the information for that purpose due to the confidentiality of information restrictions placed on them under the Act.

As a result, I think it is also virtually impossible for the CRA to turn over information gained from a voluntary disclosure to Justice for the purposes of a criminal prosecution of a bank or any third party. It is not an enforecement action in the name of the Income Tax Act, so I think it is ultra vires for the CRA.

Also, I think there is a fundamental issue with the prosecution of a foreign entity under the Canadian Income Tax Act or under the Criminal Code of Canada. The use of criminal sanctions to address a tax problem goes to the heart of the so called “Revenue Rule” that foreign governments are under no obligation to enforce Canada’s tax laws, and vice versa. That rule is taking a beating lately, but I still think it poses a problem in this case.

I do not think that Switzerland would necessarily be so willing to play ball in such circumstances, as it would be an infringement of their sovereignty. Remember, in the UBS case, UBS did not really turn the names over to the US government. UBS wanted to turn the names over to save its own skin, and so it begged the Swiss government to allow it gave the names to the Swiss government to turn over to the US. They saved face, and stayed within the form of the rule of bank secrecy in Switzerland. I do not see the Swiss government playing ball as an intermediary where their sovereignty is being attacked.

Overall, while I personally think it is good that the CRA is going after tax cheats (Ha! We will see who is the Quadruple Idiot in the end!). On a professional level, as a tax lawyer, I do not think that the CRA’s hand is really as good as it seems to be implying that it is. The best evidence that I am right is the fact that they are talking about it. If they really had the banks cold, the CRA would just shut up and pounce.