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Friday
Mar032017

Caylor and Sorensen: Report a Canadian tax evader and make money?

Maybe. Canada has had a tax whistleblower program for four years, the Offshore Tax Informant Program (OTIP).

The OTIP pays individuals who qualify for the program and provide information to CRA regarding international non-compliance by Canadian taxpayers.

The program began as part of the Economic Action Plan 2013, through which the Government of Canada committed to investing CDN$30 million ($22.8 million) over five years to combat international tax evasion and aggressive tax avoidance.

At the close of 2016, the OTIP had received some 3,000 calls, reviewed over 300 written submissions, and entered into over a dozen contracts with informants. We suspect that as the OTIP becomes better known and begins making sizable reward payments, the popularity and effectiveness of the program will grow even more.

Who is Eligible? Both the informant and the information provided must meet certain eligibility requirements to fall within the scope of the OTIP.

The informant must be an individual, and must not belong to a class of ineligible persons. Ineligible persons include, most notably, individuals convicted of tax evasion in connection with the situation of non-compliance being reported, employees of CRA, and other government employees who acquired the relevant information in the course of their employment duties. In addition, taxpayers cannot provide information concerning their own non-compliance.

The information provided must pertain to international non-compliance; information about purely domestic tax evasion does not qualify under the OTIP. Further, the potential federal tax that CRA could collect, excluding interest and penalties, must be greater than CDN$100,000 ($76,000).

As a guide, CRA provides the following examples of non-compliant activity that would be eligible for reporting under the OTIP:

  • undeclared Canadian taxable income that has been transferred outside of Canada;
  • undeclared foreign taxable income
  • undeclared foreign property
  • tax avoidance schemes that involve offshore transactions, and
  • undeclared trusts held offshore in respect of which income has not been declared.

What is the Reward? CRA may enter into a contract with an eligible informant. If the information provided contributes to the collection of more than CDN$100,000 of federal tax owing, the informant may be entitled to a reward equal to between 5 percent and 15 percent of the federal tax collected (excluding interest and penalties) in connection with the international tax non-compliance.

In determining the amount of the award, CRA will consider the quality of the information, the relevance of the information, the cooperation of the informant, the value of the information to CRA, the timeliness of the information, the informant’s role in the non-compliance and whether assets were identified that helped CRA collect taxes.

Even if an informant provides eligible information, the award may nonetheless be denied if CRA already received the information from another source, or if the amount of federal tax collected falls below the threshold of CDN$100,000, either because the non-compliant taxpayer appeals successfully or because some or all of the tax proves uncollectible.

Other international whistleblower programs. In designing the OTIP, CRA was able to draw on similar programs that other countries have developed as part of the global effort to combat tax non-compliance. The United States Internal Revenue Service, for instance, operates the Whistleblower Office, which rewards informants who come forward regarding major cases of tax evasion.

Despite the common goal of both programs, the OTIP is far from matching the scale of its U.S. counterpart, in terms of both the size of the reward and the number of cases successfully closed.

In the U.S., the threshold for the grant of an award is $2 million of collected proceeds, including interest and penalties, whereas the Canadian threshold is CDN$100,000 of collected federal tax, exclusive of interest and penalties. If a case is successfully closed, the IRS awards between 15 percent and 30 percent, while CRA awards only 5 percent to 15 percent.

While the IRS program has paid over $400 million in rewards since its inception in 2007, the OTIP has not yet led to any payments. This may be due to the relative youth of the OTIP, as it can take several years for the non-compliant taxpayer’s appeals to be exhausted and for CRA to collect the taxes owing.

When CRA begins to make payments under the OTIP, we should not expect them to rival the U.S. rewards. The IRS program draws from a much larger pool of potential tax avoidance, as it applies to both domestic and international non-compliance. The OTIP, by contrast, applies only to international activity.

Both the OTIP and the IRS program differ from the system in the United Kingdom. While HM Revenue and Customs (HMRC) accepts tips from informants concerning all tax non-compliance, the process is less regimented. There is no set range of awards, but HMRC may make discretionary payments to informants.

Participating in the OTIP. The OTIP represents a new approach to international tax enforcement in Canada, and offers potentially significant rewards.  Informants who wish to submit information to the OTIP should contact legal counsel experienced in such matters to ensure that confidentiality is maintained to the greatest extent possible and that the chances of a successful reward from CRA are maximized.

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Lincoln Caylor is a partner at Bennett Jones in Toronto. He practices commercial litigation and is internationally recognized for leading asset tracing investigations and pursuing asset recovery litigation and enforcement actions in prominent, high-value international financial frauds and other economic crimes. He's the only Toronto member of ICC FraudNet, a worldwide network of selected lawyers specialized in asset tracing and recovery.

Martin Sorensen’s practice at Bennett Jones (Toronto) focuses on tax planning and tax litigation. He acts in matters related to corporate and international tax planning, debt financing transactions and foreign entities conducting business in Canada. He also teaches corporate taxation at the Queen’s University Faculty of Law.