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Stiff penalties if offshore funds are not disclosed to tax authorities

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CALGARY - There's nothing technically illegal about squirrelling money away into offshore bank accounts — so long as it's not kept secret from Canadian tax authorities, experts say.

"Just because you don't get a T5 slip or a T3 slip... that does not mean that you don't have to report that income in Canada," said Mitchell Stein, a business professor at Western University in London, Ont.

Detailed financial information of several thousands of individuals from around the world was leaked to the non-profit Washington-based group International Consortium of Investigative Journalists, which was shared with other media outlets. The Canadian Broadcasting Corporation was the only Canadian one to see the more than 260 gigabytes of leaked data.

Among the 450 Canadians whose information was divulged was high-profile lawyer Tony Merchant, who put $1.7 million into offshore tax havens, according to CBC News.

Merchant did not immediately return a call from The Canadian Press seeking comment.

Also included in the leak were a senior Mongolian politician, Georgia's prime minister and members of Azerbaijan's ruling family.

Finance Minister Jim Flaherty sold cracking down on tax cheats as one of the marquee items in the budget aiming to bring in hundreds of millions of new tax dollars.

National Revenue Minister Gail Shea called on the International Consortium of Investigative Journalists on Thursday to hand over the documents it received.

"Anyone with information on tax cheats has an obligation to bring it forward," Shea said in a statement.

"Our government has long recognized that international tax evasion is a serious problem. For this reason, CRA officials will review any information they receive and aggressively pursue all suspected cases of tax evasion."

Canadians are required by law to report any offshore holdings worth more than $100,000 to the Canada Revenue Agency. And even though the income is housed in accounts outside Canada's borders, it must still be reported.

There could be perfectly legal reasons keep money offshore.

"Some people want to keep their affairs secret," said Mitchell, an assistant professor of managerial accounting and control at Western's Richard Ivey School of Business.

"People might just want no one to know that they have a whole bunch of money. You might want to keep it from family members."

It generally isn't the average Canadian using tax havens, said Mitchell.

"Obviously you'd have to have a fair bit of wealth to use these sorts of accounts to make it worthwhile, just with all the costs of doing that."

Geoffrey Loomer, a professor at Dalhousie University in Halifax, agrees it's possible there are above-board reasons to use offshore tax havens — hiring a fantastic fund manager who happens to live in the Cayman Islands, for instance — but he's dubious that's the case most of the time.

Speaking generally, Loomer said: "Frankly, it's probably because it's out of the sight of the revenue authorities and it's secretive and so the income is hard to find."

"They feel they can get away with it," said Loomer, who teaches at Dalhousie's Schulich School of Law.

Where matters get complicated is when individuals set up trusts or shell corporations to make it harder to link the funds to them.

In the case of a trust, an individual must relinquish total control of those funds in order for them not to be included in taxable income.

If a Canadian is found to be shielding income offshore without properly disclosing it to the CRA, the punishment can be severe.

In addition to the tax bill, there are additional penalties and interest to pay. Jail time is a possibility in particularly egregious cases.

Several governments have been cracking down on offshore tax havens since the 2008 financial crisis as a means to collect some of their tax revenue.

Canada has been signing what's known as "tax information exchange agreements" with governments, such as the British Virgin Islands, though Loomer doubts they're all that effective.

Canada can only request information regarding a specific individual they suspect of tax evasion, so most cases likely pass under the radar.

"It's been more for show, in my view," said Loomer, adding it may have the effect of spooking some tax-dodgers to come forward before they're caught.

The 2013 federal budget included a program to stop international tax evasion, under which people who tip off the CRA could get a financial reward if the investigation bears fruit.

If the CRA ends up collecting more than $100,000 based on the information, tipsters could get a fee of between five and 15 per cent of that amount, depending on how good the information is.

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