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Strict tax compliance has its innocent victims

Panama City on April 4, 2016. A massive leak of 11.5 million tax documents on Sunday exposed the secret offshore dealings of world leaders and celebrities.

RODRIGO ARANGUA/AFP/Getty Images

The leak of the so-called "Panama Papers" is once again exposing the scourge of offshore tax havens.

Canada may be losing billions of dollars a year in tax revenue as companies, wealthy individuals and their accountants exploit gaps in the international tax system. The sum globally may reach nearly a quarter trillion.

That's money that governments don't have to fix potholed roads, care for the sick and police streets.

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The fairness and integrity of Canada's tax system depends on authorities doing their best to minimize the leakage. Canadians may grumble about paying taxes, but they're likely to be more compliant if they believe their neighbours are also paying their fair share.

But repatriating all this revenue is not without costs – financial and otherwise. In its recent budget, the federal government said it will spend nearly half a billion over five years to give the Canada Revenue Agency more personnel and resources to combat tax avoidance (the legal kind) and tax evasion (the illegal kind). The CRA will spend cash to collect cash.

There are other inherent tradeoffs in any tax crackdown, including potential intrusions on privacy and individual freedoms.

The extent of those trade-offs depends on how targeted the crackdown is. It's not unlike the fight against global terrorism.

Authorities can impose sweeping security measures on everyone to stop the few, or it can target suspected individuals through better intelligence.

Just look at the U.S. approach to fighting tax evasion. The U.S. Foreign Account Tax Compliance Act, or FATCA, is one of the most sweeping and intrusive regimes ever put in place. The law is based on the idea that if the Internal Revenue Service can locate every dollar Americans (and dual citizens) have stashed away anywhere in the world, they can also tax it.

And they've bullied virtually every developed country to help them in the effort, including Canada, where taxes are generally higher than in the United States.

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The crackdown has forced thousands of Americans living in Canada to spend small fortunes to come out of the shadows, even though they owe little or no taxes. They include so-called accidental Americans, whose only crime was being born in a U.S. hospital.

Far from rejecting the FATCA model, Canada and much of the rest of the world are now embracing it. Tax authorities in 96 countries, including in Canada, are poised to jump on the bandwagon, under an initiative at the Organization for Economic Co-operation and Development known as the Common Reporting Standard. It's essentially FATCA for the rest of the world, involving automatic sharing of personal tax information between countries – not just by request. And it's slated to come to Canada in 2017.

As a result, the CRA will start providing information to foreign tax authorities, and vice versa. Canadian financial institutions will be required to identify accounts held by all non-Canadians and report details to the CRA. The volume of data could easily eclipse what Canada is currently sharing with the United States.

Countries are going through a similar exercise of automatic information sharing on the corporate side through the OECD's Base Erosion and Profit Shifting or BEPS initiative.

At the same time, tax havens are also under pressure as tax authorities in the United States and elsewhere put pressure on countries to get rid of strict bank-secrecy laws. The result is that the number of places where people can hide their cash from tax authorities is dwindling. Panama is among the last holdouts.

"We have constantly and consistently warned of the risks of countries like Panama failing to comply with the international tax transparency standards," OECD secretary-general Angel Gurría said in a statement Monday. "The consequences of Panama's failure to meet the international tax transparency standards are now out there in full public view. Panama must put its house in order by immediately implementing these standards."

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These efforts are generally good news for honest taxpayers. They'll inhibit tax competition between countries and make it easier for governments to recoup revenues they desperately need for vital services.

But as the FATCA experience shows, the intersection of strict tax compliance and arcane citizenship laws could trip up thousands of innocent individuals, whose only crime is being born in another country.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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