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Voluntary disclosure in offshore case 'business as usual' for CRA

Although reports that the Canada Revenue Agency (CRA) entered into secret deals with several KPMG clients over an offshore tax “sham” last year may have shocked many Canadians, this resolution was business as usual for the agency and followed its policy for voluntary disclosure, Canadian tax lawyer David J. Rotfleisch writes in Canadian Accountant.

“In my tax practice I deal with voluntary disclosure files on a daily basis and I have submitted well over a thousand such files over the years. The deal offered to KPMG’s clients is the deal I would have expected had I acted for them,” writes Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation.

In the matter, the CRA discovered that some Canadians had participated in an Isle of Man structure designed to “indefinitely continue a tax holiday then available to new immigrants,” says Rotfleisch.

“It alleged the structure — set up and marketed by KPMG — was a tax scheme, a transaction entered into for the sake of avoiding tax through a misappearance of the facts,” he adds.

“However — and this is key — at the time the deal was negotiated, the CRA did not have the names of those Canadians. It went to court to force KPMG to reveal the names,” writes Rotfleisch.

The CRA, he explains, can only deny a voluntary disclosure application if an enforcement action has been undertaken against the taxpayer at the time that the application is submitted. The CRA did not have any enforcement actions against those taxpayers when it made the offer of tax amnesty, he adds.

By its own rules, the CRA had to accept the voluntary disclosure applications and agreed not to prosecute or charge penalties to those KPMG clients who accepted the offer. The clients agreed to pay their back taxes and interest on their offshore investments, writes Rotfleisch.

The KPMG Isle of Man situation, says Rotfleisch, is similar to a 2008 matter in which the CRA asked eBay Canada to disclose the names of “powersellers” — those who consistently sold a significant volume of items. The CRA wanted to audit these individuals in order to ensure they had reported their eBay income, he says.

“Ebay fought this requirement in court and eventually lost. However, in the interim, we at Rotfleisch & Samulovitch did voluntary disclosures for many powersellers and they were accepted,” he writes.

As the CRA did not have the names of the offshore participants, Rotfleish says it was proper for KPMG to negotiate a voluntary disclosure on a no-names basis and for the CRA to have accepted this.

“In fact, had they not done so, I would have expected KPMG to go to court to try to force them to do so,” he adds.

The deal, he explains, also required KPMG’s clients “to accept that the offshore structure did not work and that all income had to be taxed personally to the individuals. This is a clear and easy win for CRA.”

As such, Rotfleisch says the amnesty was far from a “sweetheart deal,” but was instead in full compliance with CRA guidelines and “probably a good deal for the rest of us taxpayers.”

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