Panama Papers: Latest Hole in the Offshore Secrecy Dike

David Rotfleisch-03-500W
David Rotfleisch

By David J. Rotfleisch

Special to the Financial Independence Hub

The headlines are talking about an unprecedented leak of secret papers and data involving murky and even illegal offshore financial transactions of prominent politicians and celebrities all over the world. Some 11.5 million documents, 2.6 terabytes of data, detailing than 210,000 companies, foundations and trusts are contained in the information released from Mossack Fonseca, a law firm based in Panama.

Wondering why your next door neighbor takes a lot of long weekends to Belize, the Canary Islands, or Panama?

Includes 350 Canadians with offshore accounts

Included in the leak are the passport details of 350 Canadians who have offshore accounts and may, or may not, have been avoiding paying taxes on the offshore income. Canada Revenue Agency will go after any and all Canadians who have not paid the tax on those accounts. That’s the law and their job.

The information was provided over a year ago by an anonymous whistleblower who contacted a German newspaper, Süddeutsche Zeitung, and provided them with encrypted internal documents from Mossack Fonseca. This resulted in a year-long investigation by the International Consortium of Investigative Journalists, culminating in the release of the news story.

While the scale of the leak is indeed unprecedented, the dissemination of confidential details of improprieties or even outright criminal activities from large international organizations is becoming commonplace, further eroding the dike of secrecy that used to be almost a matter of religion for the murky offshore financial secrecy industry.

New normal is more scrutiny for offshore structures

The involvement of the International Consortium of Investigative Journalists (ICIJ) is also becoming a frequent factor in these leaks. It is now a familiar refrain that transactions that were intended to never see the light of day have become transparent, that offshore secrecy cannot be relied upon, and that participants in improper offshore activities have to fear the authorities. The new normal is that an offshore structure, whether nefarious or legitimate, will be subject to government, and possibly general internet, scrutiny.

An ICIJ analysis of the latest information shows that numerous banks have worked with Mossack Fonseca since the 1970s to enable banks’ clients to manage their offshore companies. HSBC, which set up more than 2,300 offshore companies through Mossack Fonseca, was itself the source of a leak one year ago, in which ICIJ was also involved.

Last year’s leak revealed a list of 100,000 HSBC clients who had been assisted in tax evasion by the bank, including a number of Canadians.

In 2013 in what was called Offshore Leaks, ICIJ, using 112 journalists in 58 countries, analyzed 2.5 million leaked offshore files and posted a searchable data base with names and addresses of some 100,000 entities in offshore tax havens. This included Canadian taxpayers.

CRA scrutiny of KPMG’s Isle of Man structure 

Last year, the Canadian arm of accounting giant KPMG was taken to court by CRA to reveal the names of new Canadian immigrants for whom KPMG had set up offshore structures in the Isle of Man designed to avoid all Canadian taxes on income, a structure CRA has characterized as a sham.

It is reported that before Süddeutsche Zeitung obtained the latest information German taxation authorities purchased a smaller subset of Mossack Fonseca documents, which resulted in tax raids in Germany in early 2015; and that these same files have been offered to the IRS in the United States and to tax authorities in the United Kingdom and other countries.

So, while the headlines are about the 12 current and former heads of state and 61 of their associates, 128 current and former politicians and public officials, 29 Forbes listed billionaires and sports and entertainment figures, as well as the interrelated global network of large law firms, banks and accountants who market and profit from offshore financial secrecy, the story also involves and impacts low profile Canadians who are evading taxes.

Some wrongdoing but legitimate uses for offshore structures

The leaks establish clear wrongdoing, indeed what appears to be criminal actions, on the part of some of the high profile personages, but they only form a small part of the exposed participants in offshore structures. There are legitimate uses for an offshore structure. Indeed from a Canadian tax point of view there is no impropriety in owning an offshore corporation or trust, with one large caveat. All offshore assets that exceed $100,000 have to be reported to CRA, as does all offshore income.

As with the previous tax haven leaks, CRA will follow up on all Canadian names that are revealed. They will impose civil penalties and will prosecute for tax evasion. But prosecution and jail are not inevitable.

Tax dodgers have to get to the CRA before the CRA gets to them. The CRA voluntary disclosure program is available to any Canadian taxpayer provided CRA has not yet begun an investigation into their tax affairs.

Merely having a name revealed as part of the Panama Papers should not in and of itself preclude the benefit of voluntary disclosure. A successful voluntary disclosure filing means that the taxes owing have to be paid, but there will be no penalties, no prosecution and there may be an interest reduction on the outstanding taxes.

David J Rotfleisch, CPA and JD,, is the founding Toronto tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto-based national boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and challenging CRA including tax litigation.

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