Strategy

Taxman eyes fiscal dwarves

A new way of going after wealthy tax avoiders borrows from the Aussies.

Canada Revenue Agency is keeping quiet about its initiative. (Boris Roessler/AFP/Getty Images)

Humorist Will Rogers once claimed income taxes made more liars out of Americans than golf. The Canada Revenue Agency has commenced a cloak-and-dagger initiative to find out whether Canada’s ultra-rich have become similarly corrupted. Vaguely dubbed the “Related Party Initiative,” it targets Canadians with assets worth more than $50 million—or whose assortment of private companies, offshore trusts and charitable foundations number more than 30. Unless you’re cavorting in a pile of cash while reading this, you aren’t likely among the targets; according to the OECD, there are only approximately 550 Canadians worth that much.

Historically, CRA paid most attention to corporations, which afforded the greatest revenue opportunities. It scrutinized HNWIs (high-net-worth individuals) with known links to tax havens, but otherwise “the tradition has always been to treat them like other taxpayers,” says Osgoode Hall Law School professor Neil Brooks, “and simply audit them on an individual basis.” This approach left CRA with little understanding of the HNWIs accumulated wealth, or how it was arranged. Meanwhile, a growing coterie of accounting, law and tax specialists helped make the affairs of the hyper-affluent ever more complicated. “I think tax administrators suspect one reason there are so many entities is so that it doesn’t look as if they’re as wealthy as in fact they are,” Brooks says. “They call it fiscal dwarfism.”

The Australian Tax Office pioneered a new, holistic approach: in 1996 it established its High Wealth Individuals Taskforce. During its first decade, the task force collected an additional A$2.1 billion in revenue and disallowed an additional A$1.8 billion in losses. In 2004, the Aussies briefed CRA on its progress. “This is what put us on that track,” says Fred O’Riordan, national adviser at Ernst & Young, who held a variety of senior positions at CRA while the program was being developed. By mid-2007, CRA had already audited a dozen HNWIs—and evidently scared up some additional revenue. “We’ve had very good success with that project,” O’Riordan told a parliamentary committee that year. “We’ll probably be converting it into a permanent program.”

And so they did. Recently, reports surfaced that unnamed wealthy Canadians received letters from CRA, along with lengthy new forms and questionnaires demanding information about related entities, such as detailed financial statements, organizational charts and minutes from directors’ meetings. CRA demanded a response within 30 days.

The U.S., Japan, Britain and Germany have all introduced task forces targeting HNWIs. Brooks says these help preserve confidence in the tax system by demonstrating that even a modern-day Croesus must pay taxes. Surprisingly, the OECD reports that such programs have been well-received: the rich and their advisers often prefer having a single, specialized contact point with the tax authority. Australia and the United States have trumpeted their HNWI programs: “We believe that being open and accountable about our compliance activities encourages voluntary compliance,” explained the Australian Tax Office in a brochure detailing its program.

Alas, CRA rejects such transparency. It declined to make anyone available to answer basic questions about the Related Party Initiative. One veteran tax lawyer interviewed had never heard of the initiative and wanted to learn more. Fiscal dwarves beware: the taxman is sneaking up on you.