The Bahamas’ recent enactment of the domestic legislation required to adopt and implement the Common Reporting Standard (CRS) will greatly impact Canadian residents with financial assets in The Bahamas.

Fortunately for Canadians, the Canada Revenue Agency (CRA) has an extremely forgiving Voluntary Disclosure Program (VDP), which offers tremendous advantages and amnesty to those who participate. Canadians who partake in the VDP traditionally experience immediate peace of mind knowing that they are in the process of becoming fully tax compliant in Canada.

The Canadian VDP allows a Canadian taxpayer to first enter the programme on an anonymous basis during which time the taxpayer has immunity against a tax audit. This often allows the taxpayer and their representatives to obtain historic bank records from the taxpayer’s bank and determine what the approximate tax cost of the voluntary disclosure will be prior to having to disclose the taxpayer’s name to the Canadian tax authorities.

The anonymity period endures a minimum of 90 days and allows the taxpayer to get more familiar with the voluntary disclosure process and overcome the fears often associated with the disclosure of such sensitive information. Should a taxpayer change his or her mind during the anonymity period, they can close their voluntary disclosure file without consequence.

Voluntary disclosure
As of now, the Canadian VDP provides full assurance that there will be no criminal or penal prosecution for tax evasion. In addition, all civil penalties are waived and substantial interest relief is granted for statute-barred taxation years.

Should a taxpayer get caught with undisclosed financial assets outside of Canada, the penal fines, civil penalties and interest charges can result in a taxpayer owing more than the value of the foreign investments.

It is important to note that the CRA is implementing several strategies purported towards catching Canadians with undeclared foreign assets, such as a whistleblower hotline that pays 15 per cent of all taxes collected to the whistleblower.

In addition, the CRA instituted an Offshore Compliance Division, which processes information received from various sources in order to identify and locate undeclared foreign accounts held by Canadians. As a result of the foregoing and the CRS, most Canadians decide that the risk and cost of getting caught are too great and choose to file voluntary disclosures.

On average, a voluntary disclosure filed with the Canadian tax authorities results in an overall tax cost ranging from 15-35 per cent of the portfolios’ current value, which is much more manageable than the cost of getting caught.

It is important to note that the filing of a voluntary disclosure with the CRA does not require Canadian residents to repatriate their funds back to Canada. The Bahamas’ financial sector should therefore emphasize client retention as it strategizes on how to sensitize Canadian clients to the CRS and its effects.

Lesson learned from Europe
In this regard, the Bahamian financial sector should learn from the mistakes made by its European counterparts, which adopted an approach towards their Canadian clients that left many feeling abandoned and betrayed.

The implementation of the CRS in Europe resulted in some Canadians being forced to close their accounts. In other instances, Canadians were given an ultimatum whereby they would either have to sign a form solemnly declaring that they were tax compliant in their country of residence or have their accounts closed. This was done in direct violation of the bank secrecy laws that existed at the time, creating feelings of distrust and betrayal among Canadians who grew to resent their banks and the jurisdictions in which they were located.

The European banks ceased servicing their Canadian clients and did not assist or guide them towards solutions. Rather, they provided deadlines and ultimatums during a time when Canadians needed understanding and support. Consequently, the vast majority of Canadians who previously held financial assets in Europe chose to file voluntary disclosures and have their funds repatriated back to Canada or another jurisdiction.

Fully compliant Bahamas
In comparison, The Bahamas is implementing the CRS in a manner which is consistent with Bahamian law and not in violation of any domestic bank secrecy laws.

Accordingly, Canadians will not develop the same distrust and resentment for their Bahamian banks as they did in Europe. This is supported by the fact that, as investors consider post-voluntary disclosure investment strategies with clients, many choose to maintain financial assets outside of Canada for reasons ranging from asset protection to confidentiality.

In addition, these Canadians have a particular interest in The Bahamas because they prefer to maintain a diversified portfolio and have their investments managed from a North American perspective, which allows them to hold some Canadian and American financial products.

In addition to the above, there is The Bahamas Advantage, which is a concept that explains why Canadians have an added openness to maintaining and even relocating financial assets to The Bahamas in comparison to other jurisdictions.

The Bahamas Advantage includes things such as its location, convenient for residents of Eastern Canada (three and a half hours by plane) of which many vacation and maintain properties in Florida. Contrary to popular European and Asian banking jurisdictions, The Bahamas is also a member of the Commonwealth and can be accessed in a reasonable amount of time and at minimal cost.

Moreover, The Bahamas shares a time zone with Eastern Canada, has English as its official language and has a desirable climate, which makes it a favorable vacation destination for Canadians.

All of these attributes comprise The Bahamas Advantage and explain why Canadians are additionally open to having tax compliant financial assets in The Bahamas, even despite the implementation of the CRS.

Client-centric approach
Accordingly, the Bahamian financial sector should adopt a strategy towards Canadians and the CRS that focuses on client retention and attracting new investors.

In order to effectively retain Canadian clients, the Bahamian financial sector should place a high importance on servicing and supporting their Canadian clients through the implementation of the CRS, which will certainly be destabilizing for Canadian investors. It is important that the Bahamian financial services sector addresses this matter with care and sensitivity and is equipped to discuss potential solutions.

Most importantly, the Bahamian financial services sector should avoid leaving its Canadian clients feeling abandoned. Canadian investors will certainly appreciate any assistance and support they receive, which will also facilitate client retention.

In order to effectively attract new Canadian investors, The Bahamas’ financial services sector members must act as ambassadors on the international stage to ensure that foreign investors know about The Bahamas Advantage and Bahamian investment opportunities.

For example, De Grandpré Chait LLP and the Bahamas Financial Services Board (BFSB) joined forces to host a Bahamas Landfall event in Montréal, Canada in May this year where Canadian banking and investment contacts attended a presentation by the BFSB.

This event is purported towards sensitizing Montréal investors to Bahamian investment opportunities and to encourage greater ties between their respective economies.

In addition to Bahamian ambassadors such as the BFSB, a network of foreign professionals is needed to sensitize its clients to these opportunities. If not, the idea will never be considered and Canadians will simply repatriate their funds back to Canada.

When I began assisting Canadian taxpayers through the voluntary disclosure process, the foreign banks did not focus on client retention and most Canadians repatriated their funds back to Canada. More recently, we began discussing with clients the possibility of maintaining fully tax compliant financial assets outside of Canada post voluntary disclosure, to which a material and urprising number of clients responded favourably. It is therefore very important to have Bahamian and foreign ambassadors actively promote The Bahamas’ financial services sector in order to attract new Canadian investors.

Future in our hands
In summary, The Bahamas financial services sector is on the verge of experiencing a revolution as a result of the implementation of the CRS. The impact of the CRS on The Bahamas’ financial sector does not need to be as damaging as it was in Europe where Canadian investors fled and never looked back. A service-oriented approach with an emphasis on providing information and support will help The Bahamas’ financial services sector retain Canadian clients.

As a result of the CRS, The Bahamas may anticipate the loss of some foreign investors. However, it should also be known that the end to this story has yet to be written and that the approach The Bahamas’ financial services sector adopts in the coming months will be paramount in determining whether Canadian investors take flight or stay put.