Potential Pitfalls of the CRA Offshore Tax Informant Program
February 6, 2014
The Canada Revenue Agency has launched a new program aimed at targeting international tax evasion and aggressive tax avoidance by Canadian citizens. The Offshore Tax Informant Program (“OTIP”) is a hotline that will allow persons to provide information related to major international tax non-compliance to the CRA. If the tip leads to the collection of taxes owing, the informant will receive a reward of 5 – 15% of the tax collected.
OTIP follows the lead of several other member countries of the OECD who have taken a stance on international tax evasion. For instance, the U.S. has provided financial incentives for tax evasion tips since the 19th century and offers more substantial awards (15-30%) for information. The Whistleblower Office of the U.S. Internal Revenue Agency, gave a landmark $104 million award to Swiss Banker Brad Birkenfeld in 2012 for providing information that lead to a finding that his former employer, UBS, was enabling tax evasion by US citizens.
Prior to the creation of OTIP, the CRA was forced to turn away award-seeking informants with tips related to significant evasion cases, including those springing from the massive leak of global financial data in 2013. However, Canada now seems keen to emulate the approach of our neighbors to the south with the creation of OTIP. In this new, more aggressive investigatory climate, taxpayers, informants and the CRA alike must proceed with caution.
The addition of a financial incentive to provide information to the CRA is a significant game changer. Currently, most CRA informants have a revenge-motive: aggrieved spouses, or former employees or business partners are frequent tipsters. Now, the added element of a financial reward has the potential of increasing the amount of unreliable information received by the CRA. Just as information from jailhouse informants that is given at the promise of a reduced sentence poses an increased risk of a wrongful conviction, so too may potential OTIP informants be enticed by the promise of a financial reward, reporting misleading information. To adequately assess the high volume of information that will undoubtedly be provided through OTIP, we hope the CRA will have the foresight to invest significant time and resources into administrative systems for vetting the information received. We also hope that individuals, institutions and corporations who believe someone around them has motive to inform the CRA will obtain the advice of counsel and consider making a Voluntary Disclosure to avoid facing criminal charges.
For lawyers defending persons facing administrative and criminal proceedings arising from OTIP investigations, the CRA program also raises several constitutional issues. For instance, defence counsel, when assessing documents and information provided by the informant to the CRA through OTIP, will need to assess whether the informant conducted a search on behalf of, at the direction of, or with encouragement from the CRA. That is because if, at any stage, the informant became an agent of the CRA, it may be argued that the searches and seizures were illegal.
OTIP also raises concerns for potential informants. The process of filing a claim and receiving a financial reward is not immediate by any means. If the IRS Whistleblower Office offers any indication, the time that elapses between the initial collection of information to when a financial award is finally offered will be lengthy: on average, it takes 7.5 years from when a claim is first filed with the Whistleblower Office to when the IRS completes its administrative or judicial action and collects the tax it is owed. Even if the IRS rejects the claim, it can take 6 months for the informant to receive a letter to this effect.
Additional issues for prospective OTIP informants include the confidentiality of tax related information, a lack of opportunity for judicial review, and other legal consequences. The strict federal tax legislation governing OTIP submissions and investigations are such that if an informant receives an award, the informant will not know what the percentage of the award they have received is, relative to the total amount collected by the CRA. Furthermore, OTIP does not provide for administrative review of the decision to reject information provided by informants or when a decision is made by an OTIP analyst not to proceed with an investigation. As a result, spurned informants may be forced into litigation if they wish to challenge the CRA’s statutory decision-making authority but in the process expose themselves to scrutiny. Finally, it is unclear what immunity or protection will be afforded to the informant as a result of providing the information, in the event the informant is also implicated. For all of these reasons, potential OTIP informers should consult, if not retain, counsel prior to making a submission through OTIP.