Michael Ford (post until Oct. 31/19)

Expect audit letters following CRA review of funds transfers

As part of its crackdown on unreported offshore income and assets, the Canada Revenue Agency (CRA) is set to ramp up its focus on electronic funds transfers to certain jurisdictions — and as a result, a number of Canadian taxpayers should expect to receive an audit letter in the coming year, Toronto tax litigation lawyer David J. Rotfleisch tells AdvocateDaily.com.

As the Globe and Mail reports, the CRA has implemented a new strategy, where it will review all electronic funds transfers (EFT) of more than $10,000 from Canada to the Isle of Man and the island of Guernsey. The move is aimed at cracking down on tax evasion, and the agency aims to review EFTs to two other undisclosed jurisdictions by the end of March 2017, the Globe reports. In 2017-18, the CRA has plans to review some 100,000 EFTs in four undisclosed jurisdictions. 

As the article notes, the CRA has identified and started auditing 166 individuals as a result of this strategy and has sent more than 1,000 letters to taxpayers with “dealings on these islands” to remind them of their obligations to report offshore income.

Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, says there is nothing wrong with putting money offshore, if reported. However, he adds, there is a concerted international effort to stop offshore tax evasion, so it is becoming more difficult and the chances of being caught are greater.

“The CRA has announced that it’s increasing the number of international EFT tax audits that it will be conducting. Since January 2015, banks have been required to report all international EFTs over $10,000," he says.

"In addition to foreign banks reporting account holders to various tax authorities, CRA has the offshore tax informant program (OTIP) which is a for-reward snitch program designed to ferret out unreported offshore income," he adds.

As such, Rotfleisch says he is not surprised by the news of the EFT review, as the Isle of Man was implicated in a KPMG offshore structure that was the subject of a CRA court application a few years ago.

Rotfleisch explains that because of the volume of all international transactions over $10,000 — which is the size for reporting to CRA — it is likely that a 100 per cent review will never be possible.

However, he adds, "data mining and select audits, such as given jurisdictions or large transactions, say over $1 million, is very possible and will probably happen.”

As a result of the CRA’s target of 100,000 EFT reviews, Rotfleisch says many Canadian taxpayers can expect to receive an EFT tax audit letter in 2017.

“The EFT tax audit letter will ask for details of the transfers including source and purpose of the transfer. You should not respond to any CRA tax audit letters without obtaining proper privileged Canadian tax lawyer representation,” he explains.

“Once the audit has been started, it's too late to do anything but retain a tax lawyer and deal with the auditor. Prior to an audit, a voluntary disclosure can be submitted.

“If you have unreported offshore assets or income you should consider a CRA voluntary disclosure before you receive a tax audit letter. This will allow you to avoid tax penalties and prosecution for tax evasion,” says Rotfleisch.

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