April 5, 2013
Backgrounder: Canada-Liechtenstein Tax Information Exchange Agreement
The Canada-Liechtenstein Tax Information Exchange Agreement (TIEA) will apply in relation to taxation years beginning after the entry into force of the TIEA. This does not mean, however, that Canadians who invested funds in Liechtenstein prior to the entry into force of the TIEA can keep such funds in Liechtenstein without tax consequences in Canada, as has been incorrectly stated in a recent media report. Irrespective of the application of the TIEA, Canadians have an obligation to pay Canadian taxes owing in relation to income on property in Liechtenstein or other foreign countries. The TIEA will allow the Canada Revenue Agency (CRA) to request information in respect of income earned by Canadians in the future in Liechtenstein, irrespective of when the funds were invested in Liechtenstein.
The existing income tax rules generally impose income tax on the worldwide income of Canadian residents and include reporting requirements regarding foreign property. These rules continue to apply and to be enforced by the CRA in its ongoing administration of the tax system.
The CRA uses a variety of existing tools to identify and combat international tax evasion and aggressive tax avoidance. These tools include obtaining information directly from taxpayers during audits, as well as from third parties such as financial institutions in certain circumstances. Economic Action Plan 2013 announced enhancements to existing audit and enforcement tools, including the Stop International Tax Evasion Program and electronic funds transfer reporting.
Effective date of TIEAs
Most TIEAs negotiated worldwide apply prospectively except, in some cases, for requests for information in relation to criminal investigations.
Canada’s TIEAs follow this norm: all provide only prospective application in relation to tax information exchange with respect to non-criminal matters.
Provisions of the Canada-Liechtenstein TIEA
The Canada-Liechtenstein TIEA was signed on January 31, 2013 and is not in force. It will enter into force 30 days after each country has notified the other in writing that their respective requirements for the entry into force of the TIEA have been fulfilled.
Once this TIEA comes into force, it will allow the CRA to request information that is relevant to the Canadian tax affairs of taxpayers. If the requested information is not in the possession of the Liechtenstein taxation authorities, those authorities will have an obligation under the TIEA to request the information from any organization (such as a bank) in Liechtenstein believed to be in possession of the requested information, so that it can be provided to the CRA.
Specifically, the CRA will be able to request information regarding the ownership of companies, partnerships, and other persons, including ownership information on all such persons in an ownership chain; in the case of trusts, information on settlors, trustees and beneficiaries; and, in the case of foundations, information on founders, members of the foundation council and beneficiaries.
The Canada-Liechtenstein TIEA will allow the CRA to request information in respect of taxation years beginning after the calendar year in which the TIEA enters into force. Thus, requests could be made in respect of assets held and income earned in Liechtenstein in years following the entry into force of the TIEA, irrespective of when assets were invested in Liechtenstein.
Tools to combat international tax avoidance
The CRA conducts audits of taxpayers on a daily basis including in relation to taxpayers suspected of tax evasion. The CRA’s approach is multi-faceted and includes the ability to obtain information regarding taxpayers from third parties in certain circumstances.
Economic Action Plan 2013 proposes a number of measures to enhance the CRA’s information-gathering tools, including electronic funds transfer reporting and the ability to pay individuals for information under the Stop International Tax Evasion Program. When operational, these measures will not be limited to information regarding current and future taxation years, but will also apply in relation to tax owing for past taxation years.