CRA’s Tricks and Traps for Tax Cheaters

The Canada Revenue Agency (CRA) has no tolerance for tax cheats and warns Canadians that it has a “robust system” in place to track down those who illegally evade taxes.

One of its weapons is the Offshore Tax Informant Program (OTIP). The CRA says the program’s tip line has resulted in signed contracts with more than 20 informants and more than $1 million in tax reassessments and penalties. The tips have resulted in audits of 218 Canadian taxpayers, some of which have been completed and some of which are still being conducted.

The CRA pays out a reward of between 5% and 15% of the money collected as a reward, but only when the money is collected. National Revenue Minister Diane Lebouthillier says some investigations into tax cheating can be complex and take years to complete. That may explain why the agency has yet to hand out a reward.

The tip line was started in January 2014 as governments around the world found themselves under pressure to curb offshore tax evasion following high-profile leaks of offshore tax records, such as the Panama Papers and banking records from Liechtenstein. That leak shed light on the extent of taxes that weren’t being paid.

Here are some of the ways the CRA hunts down big-ticker tax cheaters:

• Reviewing cross-border electronic fund transfers. Canada requires financial institutions to report international electronic fund transfers totaling $10,000 or more to the CRA. This helps identify taxpayers who may be participating in aggressive tax avoidance or attempting to conceal income and assets offshore. Regarding offshore tax havens, there are currently over 750 audits and 20 criminal investigations underway. In three jurisdictions of concern, there are over 20,000 transactions in review worth over $7 billion.
• Collaborating and sharing information with international partners. The government works with its international counterparts to coordinate strategies that will ensure that individuals and multinationals aren’t hiding assets offshore and that everyone pays their fair share. Canada has one of the largest treaty networks in the world, composed of 92 tax treaties, 22 tax information exchange agreements and the multilateral Convention on Mutual Administrative Assistance in Tax Matters. These treaties and agreements promote greater international cooperation through the exchange of information.
• Taking part in BEPS to combat avoidance by big multinationals. Actions set in the Base Erosion and Profit Shifting Action Plan (BEPS) of the Organisation for Economic Co-operation and Development (OECD) aim to tackle international tax avoidance strategies used by some multinationals to inappropriately minimize their tax obligations, including schemes that artificially shift profits offshore. The CRA also has signed the Multilateral Competent Authority Agreement (MCAA) on country-by-country reporting. The stronger international reporting obligations for large multinational enterprises under that agreement enhance the ability of nations to ensure that the global operations of these enterprises are more transparent and that they pay appropriate amounts of taxes where they make their profits.

But, of course, individual tax evaders are in the CRA’s sights too. Among other areas where the tax agency looks for cheating are:

• Social media. Some posts on Facebook or Twitter may prompt the CRA to look into a taxpayer’s financial life. Keep in mind, these posts aren’t always private. So if individuals who only report modest incomes post pictures of their new luxury cars, trips around Europe or elaborate winter homes in Florida, the CRA could see them and look into what they’ve declared as income.

  The CRA practices “risk-based compliance,” so for taxpayers identified as high risk, any relevant, publicly available information may be consulted as part of the agency’s fact-gathering. However, Privacy Commissioner Daniel Therrien and former assistant commissioner Chantal Bernier have criticized the practice and say the Treasury Board needs to draft guidelines to ensure no one’s privacy is invaded.

  Bottom line: Taxpayers should be careful about their social media privacy settings and what they post online. For example, if they a person files a tax return listing $50,000 in net income and show photos of anew yacht, an auditor may come calling.

• Dealings on Ebay. The CRA can data-mine transactions on Ebay and similar sites that may turn up some taxable income. Sales may be considered dispositions of capital property, eligible capital property, personal-use property or inventory, each of which has different tax treatment. If the sales are determined to be business income, the value is included in income when determining whether individuals have reached the threshold where they must become GST registrants.
• Small business’s sales data. For small business owners, the CRA can dive through years’ worth of credit card transactions with the aim of matching what a company says its sales were with the information the agency collects.Also, CRA agents may show up at a restaurant or other small business in disguise. They may order, say, a meal with the intention of sizing up how the business works and how many people frequent it. That can give them an idea about whether the operation seems to align with what was reported on previous tax returns.
• Bank accounts and investments. The CRA can gain access to information from all Canadian financial institutions. By going through that, it can find undeclared, taxable interest, dividend and capital gains income. The tax agency can also see if individuals exceeded contributions to their Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs).

  The over-contribution penalty on a TFSA is 1% a month on the amount of the excess. On an RRSP, generally, you have to pay a tax of 1 % a month on excess contributions that exceed your deduction limit by more than $2,000 unless you withdrew the excess amounts or contributed to a qualifying group plan.

  The CRA also hunts for disparities in retirement income. It can access information on bank account balances and income and match it with previous tax returns. If there’s a wide discrepancy, the agency is likely to start asking questions.

  Capital gains from “flipping.” Obviously, real estate flipping isn’t against the law. It’s a method of buying and selling real estate to earn income. Individuals may also use assignment clauses in real estate contracts to flip a property once (or more) before a final sale is made.

The CRA keeps a close eye on potential flipping and unreported capital gains (the difference between the purchase price and sale price). All the money made on real estate flips, including real estate commissions and capital gains must be reported to the CRA. Multiple property ownership where the taxpayer isn’t also declaring rental income is another trigger for investigation.

In another move, the CRA reportedly has started to fingerprint every person charged with tax evasion, which would restrict foreign travel for anyone accused but not necessarily convicted of a criminal tax offence. “The mobility restriction is an important deterrent, especially for people engaged in offshore tax evasion,” an internal memorandum reportedly says. If you have any doubts about the tax implications of your earnings or your investments, consult with your tax advisor to help ensure you stay in compliance with the law.