Offshore Audits: What You Need to Know
In recent years, the Canada Revenue Agency (CRA) has ramped up its focus on offshore tax compliance, leading to a significant increase in offshore audits. These audits are designed to ensure that Canadians with offshore assets and income are reporting them accurately and paying the appropriate taxes. If you have assets or income outside of Canada, it’s crucial to understand the risks and processes involved in offshore audits.
Why Offshore Audits are on the Rise
CRA’s interest in offshore audits stems from a broader global initiative to crack down on tax evasion. Programs like the Common Reporting Standard (CRS) have enabled the automatic exchange of financial account information between tax authorities, making it easier for CRA to detect undeclared foreign income and assets. With access to this data, CRA can identify discrepancies between the information they receive from foreign tax authorities and what Canadians report on their tax returns.
Additionally, international agreements and information-sharing partnerships have allowed CRA to pursue more aggressive enforcement strategies. This has led to an uptick in audits targeting individuals and businesses with offshore holdings, particularly those with ties to tax havens like the Cayman Islands, Bermuda, and Switzerland.
How Offshore Audits Work
An offshore audit follows the same basic procedures as a domestic audit, but with a focus on international financial transactions, foreign assets, and cross-border income flows. The process typically involves the following steps:
- Initial Contact: If selected for an offshore audit, CRA will notify you by mail, outlining the scope of the audit and requesting documentation.
- Documentation Requests: CRA will request various documents related to your offshore holdings, including bank statements, investment account summaries, property records, and foreign tax filings. They may also ask for records of any income earned abroad, as well as details on any offshore corporations, trusts, or partnerships in which you are involved.
- Analysis of Financial Data: CRA will analyze the information you provide to verify whether your offshore income and assets have been accurately reported. They will compare this data against the information obtained through the CRS and other international sources.
- Interview: In most cases, CRA will request an interview to clarify aspects of your offshore holdings and gather additional information.
- Proposal Letter: After reviewing the documentation and conducting the interview, CRA will issue a proposal letter if they find discrepancies between your reported income or assets and what they have reviewed.
- Response: The Taxpayer is given the opportunity to respond to the proposal letter.
- Reassessment: If CRA has found unreported income or assets they will issue a reassessment for any tax years at issue. This will lead to additional taxes, interest, and penalties. In cases of serious intentional tax evasion, they may even pursue criminal charges.
Common Offshore Audit Triggers
Certain activities or circumstances are more likely to attract CRA’s attention in an offshore audit. These include:
- Unreported Foreign Income: Failure to declare foreign income, such as rental income from overseas properties or interest earned on offshore bank accounts, is a common audit trigger.
- Foreign Property Over $100,000: Canadian taxpayers who own foreign property valued at over $100,000 are required to file a T1135 form (Foreign Income Verification Statement). Failing to file or providing inaccurate information on this form can lead to an audit.
- Transactions with Offshore Tax Havens: Financial dealings with countries that have low or no income tax rates, commonly referred to as tax havens, are more likely to attract scrutiny from CRA.
- Unexplained Wealth: If CRA detects that you are living a lifestyle that does not align with your reported income, they may suspect that you are hiding offshore income or assets.
How to Protect Yourself in an Offshore Audit
If you are selected for an offshore audit, the best way to protect yourself is to seek legal advice early on. Offshore audits can be complex, involving multiple jurisdictions and layers of tax law. Engaging a tax lawyer with experience in offshore audits can help you navigate the process and avoid costly mistakes.
Conclusion
Offshore audits are becoming increasingly common as CRA continues to target international tax evasion. If you are facing an offshore audit or are concerned about your offshore holdings, consulting with an experienced tax lawyer can provide peace of mind and help you navigate the process successfully.
IIf you need assistance, contact us for free consultation. We will review your facts and outline the steps necessary to resolve your tax matter.
Jeff Kirshen, BA, JD(US), JD(CDN)
Partner & Tax Lawyer
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.