U.S. and Canada Unravel Cross-Border Tax Scheme

Officials of the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS) have announced that the agencies have made significant progress in unraveling an abusive cross-border tax scheme involving hundreds of taxpayers and tens of millions of dollars in improper deductions and unreported income from retirement withdrawals. The effort stems from leads and information first developed by the Joint International Tax Shelter Information Center (JITSIC).

Under the scheme, investors purchased what appear to be high-yield offshore investments through offshore corporations and foreign bank accounts. Typically, investors make these purchases using cash or proceeds from withdrawals, allegedly tax-free, of retirement funds (RRSPs in Canada, IRAs in the U.S.). Investors also make purchases through using tax refunds improperly generated by alleged losses claimed for natural resource industry investments. Promoters in both the U.S. and Canada have been marketing the scheme on both sides of the border to individual investors, ranging from middle- to high-income individuals.

CRA and IRS agents continue to identify promoters, participants and entities involved in the scheme. Promoters and participants engaged in abusive schemes have routinely been subjected to strict enforcement action by both tax administrations.

“Tax administrations in many parts of the world are working together to detect and shut down abusive tax schemes,” CRA Commissioner Michel Dorais said in a prepared statement. “Promoters who believe they can play one country against another in developing tax schemes should beware.”

Leaders of the IRS and CRA state that the collaborative effort reflects the progress being taken by JITSIC in the complex task of tracking international tax schemes and shelters involving individuals and corporations.

“The real time exchange of information, including the identities of promoters and hundreds of investors has been critical to this investigation,” IRS Commissioner Mark W. Everson said in a prepared statement. “JITSIC is emerging as an important part of efforts to combat abusive schemes.”

JITSIC was established in 2004 by the tax administrations of four countries, Australia, Canada, the United Kingdom and the United States, to supplement the ongoing work of the Australian Tax Office, Canada Revenue Agency, Her Majesty’s Revenue and Customs, and the Internal Revenue Agency in identifying and curbing tax schemes. Delegates from each of the four countries work together in Washington, D.C.

An article in the International Tax Review from 2004, acknowledges there is an element of international super-cop to JITSIC but quickly asserts that “The initiative is more about information sharing that overzealous tax administration.” The law firm of Burt, Staples and Maner LLP did not appear to be convinced of JITSIC’s intent, issuing a client letter in May 2005 expressing some reservations about the Center and its mission. Of specific concern appears to be the unique authority to JITSIC staff to exchange information regarding suspicious transactions without seeking approval to do so from their respective country’s chain of command. Further, the firm asserts that widely marketed plans, as the scheme currently being unraveled appears to be, are likely to come to the attention of JITSIC staff more swiftly than plans tailored to a specific need or limited group of taxpayers.

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