Tax Executives Institute
Income Tax Questions
December 7, 2010
1. TEI Question
CRA Audit Approach — Tax Governance of Large Corporations
The CRA, along with tax authorities from other countries, has been working through the OECD’s Forum on Tax Administration to develop and share best practices in tax administration and audits. One initiative is to develop an “enhanced relationship” with taxpayers. As part of the enhanced relationship, CRA is implementing a risk-based audit approach in which a large corporate taxpayer’s compliance is graded as low, medium, or high risk. The grade is based on CRA’s evaluation of the company’s tax filing and audit history as well as its tax governance structure. The scope and amount of time to be spent on an audit is then based on CRA’s risk evaluation.
- Would the Agency elaborate on the specific factors used in the risk-based audit approach? Also, how is the approach being implemented? Is it being phased-in in select Tax Services Offices (TSOs) or is it being implemented contemporaneously across all TSOs, corporate taxpayers, and taxation years?
- Please comment on when and how the risk evaluation is conducted, by whom, and whether and how CRA takes account of the taxpayer’s input and views during the evaluation.
- Will taxpayers be informed of the compliance risk grade assigned by CRA?
- Will CRA provide feedback to or otherwise work with taxpayers to identify necessary governance changes or compliance processes that must be implemented or improved in order to lower their risk-grade profile?
- Finally, how does the risk-based audit approach affect CRA’s decision to engage in a real-time audit for a particular taxpayer? More generally, are there collateral administrative or policy consequences arising from the risk-based audit approach or the grade assigned to a taxpayer?
1. CRA Response (CPB)
- Audit History
- Industry Sector issues
- Unusual and/or complex transactions
- Corporate Structure
- Major acquisitions and disposals
- International transactions
- Corporate Governance
- Participation in aggressive tax planning
- Openness and transparency
This approach will be phased in nationally over five years, whereby CRA representatives will be meeting with taxpayers and discussing their risk categorization with them. It is anticipated that over the five year phase in period, all taxpayers within the large file population will have been contacted.
The approach calls for an annual risk determination of the entire large file population. Although, the Large File Case Manager (LFCM) familiar with the taxpayer group is the focal point for the risk assessment, each specialized audit area provides their input into the process. Although the model does not allow for initial taxpayer input, the taxpayer will have an opportunity to provide information when they have been contacted in order to discuss tax compliance risk.
Over the coming years, CRA officials will be initiating contact with large file taxpayers to discuss the tax compliance risks associated with their business entities and the avenues available to potentially address those risks. The LFCM and or the CRA Section Manager will provide the taxpayer with our assessment at a particular point in time and that assessment may change if we become aware of any new issues in a subsequent year. As part of the discussion, the LFCM should accept any additional information provided by the taxpayer that may affect the segment classification in subsequent years.
Taxpayers can reduce the costs of audit by embracing ILBD’s new approach to large business compliance through the establishment of good corporate governance principles related to tax decisions and by openly and frankly sharing information with CRA. Examples of approaches available to taxpayers to prevent audit disputes can include:
- Establishment of clear corporate governance frameworks that ensure all tax risks are properly identified and addressed on a timely basis.
- A sound framework to manage tax risks and comply with tax obligations
- A strong in-house tax capability
- Reporting requirements that ensure that significant tax risks are elevated to decision makers such as the CFO, CEO, the Board or its Audit Committee
- Appropriate review and sign off procedures for material transactions
- An effective tax risk mitigation capability including the business’s relationship with the applicable tax jurisdictions
- Capacity to regularly evaluate the effectiveness of tax governance systems
- Meeting the CRA on a regular basis to openly discuss tax management strategies adopted by businesses.
- Ensuring clear and accurate documentation is readily available and shared with CRA to fully explain differences between accounting and taxable income as well as other business issues.
- Informing CRA on a timely basis of changes undertaken to the business (e.g. acquisitions, mergers, new foreign affiliates, new/different transfer pricing transactions etc.)
- Soliciting CRA’s opinion regarding the tax treatment of risky transactions through meetings with the LFCM or by seeking Advance Pricing Arrangements or Rulings.
- Responding to CRA’s questions openly and in a timely manner including making available to CRA on a timely basis foreign based documentation
It is our view that real-time audits will act as a complement to this new approach. We anticipate that early consultation referrals will increase over time. The action of informing CRA of contentious tax issues in advance and the willingness to cooperate with CRA in an open and transparent manner will be taken into consideration when considering the risk factors used to determine the entities’ risk category. Real-time audits will continue to be administered in the same manner as they were in the pre risk-based approach era.
2. TEI Question
Members report that CRA has seemingly implemented a new practice whereby audit teams across the country may initiate an audit of a taxpayer even though it is part of a corporate group that is subject to audit as a Large File case. Where this occurs, the “new” auditors are unfamiliar with the files, companies, or businesses they seek to examine and consequently begin the audits with voluminous requests for data — data that (i) the Large File audit team are already familiar with and (ii) tax department personnel must expend considerable time retrieving (or refreshing) and then organizing and delivering to the new auditors.
Where taxpayers have asked their Large File Case Managers about the inquiries from the “other” audit team, they have been told that if the particular file is not under active audit by the Large File audit team, the Large File Case Manager cannot intercede and the taxpayer should treat it as a separate audit and respond accordingly. Since Large File Case Managers spend considerable time assessing compliance risk, planning audits, and working closely with their corporate tax department counterparts to manage calendars and resources, the practice of permitting other audit teams to initiate separate audits undermines audit efficiency for both CRA and the affected taxpayers. Indeed, the inquiries from the other CRA audit team diminish the time and resources available for the taxpayer to respond to the Large File audit team, which presumably is assigned to review the higher risk files, entities, and transactions.
TEI recommends that the practice of “file sharing” be discontinued for Large File cases under full-time, continuing audit. We believe this would be beneficial for both CRA and taxpayers. We invite CRA’s comments.
2. CRA Response (CPB)
In files where a risk of non-compliance is identified and where the assigned large File audit teams are unable to address this, “other” audit teams may be activated to address the risk area. In these situations, the Large File Case Manager remains the contact person for the entity and any contentious issues should be directed to the Large File Case Manager (LFCM). As the focal point, the LFCM is responsible to work with the entity and the “other” audit team in order to resolve any concerns. In our view this approach allows CRA the flexibility to address tax at risk in an efficient manner, while still providing a single point of focus to address and resolve any contentious audit issues that may arise.
3. TEI Question
Currently, audit adjustments are processed independently by various specialty audit teams, including international, tax avoidance, scientific research & experimental development (SR&ED), etc. TEI believes that the administrative time for both CRA and taxpayers can be reduced — and the overall quality of audits improved — by centralizing reassessment authority and case control with the Large File Case Manager. Would CRA consider having the Large File Case Manager consolidate and approve all adjustments prior to a tax return’s being reassessed?
More generally, would CRA please enumerate the responsibilities and role of the Large File Case Manager in terms of exercising control over their cases?
3. CRA Response (CPB)
The large file case manager (LFCM) is responsible for managing the compliance relationship with the entity for all tax-related business lines. They prepare audit plans with the help of specialists as required (i.e. International Tax, Aggressive Tax Planning, SR&ED, GST/HST, Business Equity Valuations, Real Estate Appraisals etc.), arrange and manage the audit process with the entity and provide a single point of contact for the entity if issues may arise. Whenever a specialty audit area has a potential adjustment, the LFCM is provided with the details prior to proposal and is afforded the opportunity to comment. When the LFCM is aware that the specialty audit areas involved with the audit will be completing their audit work at approximately the same time, then the LFCM may determine that issuing one reassessment is possible and thus the best course of action to undertake. In other situations, the LFCM may not be in a position to consolidate all adjustments prior to a reassessment. This may be due to various reasons such as varying statute barred dates, availability of information, staffing, etc. When a LFCM is in such situations, the LFCM must determine the appropriate course of action including the possibility of issuing multiple reassessments.
4. TEI Question
Technical Interpretation Process
We invite a discussion of the process for referring technical questions from a TSO to Ottawa Head Office during the course of a taxpayer’s audit.
- What process does CRA currently employ to ensure that the taxpayer’s facts and legal position are properly reflected in the auditor’s technical interpretation request?
- To ensure that the taxpayer agrees with the description of the facts and legal positions in the technical interpretation request, would CRA consider providing the taxpayer with CRA’s summary of the taxpayer’s position as well as an opportunity to comment on it prior to its submission to Ottawa?
- To ensure a complete and well-documented technical interpretation request TEI recommends that the taxpayer also be permitted to comment on the TSO’s position in respect of the technical interpretation. We invite CRA’s reaction to this proposal.
- Finally, for the sake of transparency, TEI recommends that the taxpayer be provided with a copy of the final technical interpretation request that is submitted to the Ottawa Head Office. We invite CRA’s comments.
4. CRA Response (CPB)
- Technical Applications and Valuations Division (TAVD) in Headquarters (HQ) assists Large File auditors in ensuring consistent application of legislation and Canada Revenue Agency (CRA) policies by providing technical advice and assistance to the Tax Services Offices (TSOs). ). If specialized knowledge is required, the request may be sent to the responsible area for action, such as International Tax Division, Aggressive Tax Planning Division or Scientific and Research Experimental Directorate. Whenever a Large File auditor identifies the need to use TAVD services, the auditor is encouraged to provide a thoroughly comprehensive analysis of the issue, including all facts and legal positions that reflect both the TSO’s position as well as the taxpayer or their representative. The request could include:
- a description of the facts (usually ordered chronologically) with copies of any relevant documents;
- a summary of the issues and the advice sought;
- the relevant provisions of the ETA or ITA;
- a reference to any Agency publications or branch policy;
- the details of the auditor's research and findings;
- the position of the Tax Services Office (TSO) and any differing opinion or submission, including that of the taxpayer or registrant;
- When an issue is referred to TAVD, the audit report must disclose the details and include references to any correspondence.
- In preparation of the technical interpretation request to TAVD, the entity can request a copy in order to ensure that that the Large File auditor has included all pertinent information. If the taxpayer discovers that the request is incomplete, then they should inform the Large File auditor of the details.
- In making a referral to TAVD, Large File auditors are encouraged to provide a thoroughly comprehensive analysis of the issue, including all facts and legal positions that reflect both the TSO’s position as well as the entities’ position. Furthermore, it is also encouraged that Large File auditors provide any submissions from the taxpayer or their representatives on the issue in addition to the auditor’s interpretation of their position. This would include any response by the taxpayer or representative to the Large File auditor’s position to ensure that a complete and thorough understanding of the issue and facts is provided for consideration. As such, transparency and cooperation are encouraged between the Large File Auditor and the entity in order to ensure that all pertinent information is included in the request.
- If a taxpayer or registrant asks for copies of referrals and correspondence with TAVD, every effort should be made by the Large File auditor to comply with the request; this will enable the taxpayer or registrant to avoid making a formal request for information under the Privacy Act and Access to Information Act. In addition, a copy of the recommendation provided by TAVD to the auditor is available to the taxpayer or their representative upon request.
- TEI Question
Miscellaneous Administrative Matters
In order to improve administrative efficiency, TEI invites a discussion of the following:
- Online Tax Payments
Members report that CRA permits financial institutions to accept online tax payments for up to two preceding taxation years. Taxpayers wishing to make payments for earlier taxation years must either issue manual cheques or make an on-line deposit for the current tax year and then ask CRA to transfer the payment to an earlier tax period. This policy seemingly causes unnecessary complications and duplication of effort for both taxpayers and CRA. Would CRA consider accepting on-line payments in respect of any open tax year?
- Statements of Interim Payments — Transfers of Payments between Accounts
Large corporate taxpayers have a significant amount of activity in their tax payment accounts. Where CRA initiates transfers between tax accounts without the taxpayer’s knowledge, the account reconciliation can be extremely challenging. Indeed, taxpayer personnel frequently must contact CRA to obtain an explanation of the transfers in order to understand the nature of the account activity. Moreover, in 2009 CRA reduced the level of detailed information on monthly “Statements of Interim Payments.” Prior to the change, the statement identified the specific parties in a related corporate group affected by transfers between tax accounts. Now, the only information provided is the amount of the transfer in a transaction. For additional information on the nature of and reason for the transfer, as well as the identity of the parties, the taxpayer must contact CRA.
- Partnership Returns — Acknowledgment of Receipt
When a partnership files a return there is no acknowledgement that CRA received or processed the return. In addition, unlike corporate tax returns, no notice of assessment is ever issued. Does CRA keep a partnership return filing log that taxpayers could check to confirm that the returns have been received?
- Reporting for Foreign Affiliates and Non-Arm’s Length Transactions with Non-Resident Corporations
CRA auditors frequently request that taxpayers provide paper copies of returns and statements filed electronically, especially Forms T1134A (Information Return Relating to Foreign Affiliates that Are Not Controlled Foreign Affiliates), T1134B (Information Return Relating to Controlled Foreign Affiliates) and T106 (Information Return of Non-Arm’s Length Transactions with Non-Residents). When making the requests, the auditors frequently assert that it is easier and more expedient to obtain the information from taxpayers than from internal CRA sources. TEI invites a discussion of how these returns and statements are indexed, analyzed, archived, and distributed to auditors for use during audits. The promised efficiency of electronic filing is undermined if taxpayers are required to maintain and provide information to CRA auditors in both electronic and paper formats.
- Form T2200 — Declaration of Conditions of Employment
Subparagraph 8(13)(a)(i) of the Income Tax Act, Canada (hereafter “the Act”) states that, in order to obtain a deduction with respect to a work space, the work space must be “the place where the individual principally performs the duties of the office or employment.” Question 10 of current Form T2200 (Declaration of Conditions of Employment) requests information on the percentage of the “workday” that an employee works at his/her home office. (The previous version of the form did not request that information.) The reference to “workday” on the Form is undefined and implies that the employee must work principally at home for not less than 50 percent of each work day in order to be able to deduct home office expenses. Since the reporting period for individuals is a calendar year, we believe that home office expenses should be deductible if an employee is required to maintain a home office and uses the home office for not less than 50 percent of his or her work time during the tax year regardless of whether that office is used daily. Thus, for example, an employee should be able to qualify for a home office expense deduction where he/she works in that office more than two-and-a-half days per week or two to three weeks per month on average. Moreover, employee travel on behalf of an employer should not count against the employee in satisfying the test. Would CRA confirm that employees are not required to test whether they have used the home office for not less than 50 percent of every work day during a tax year? If so, would CRA modify question 10 of Form T2200?
5. CRA Response
Thank you for bringing this situation to our attention. This type of feedback is helpful to the CRA as we are continuously looking for ways to improve our services.
Generally, the CRA is encouraging all taxpayers to make use of our electronic services.
As an alternative to online banking through a financial institution, the CRA offers My Payment, a new online payment service available at http://cra-arc.gc.ca/mypayment . The My Payment service offers an electronic payment option for businesses and individuals to remit tax payments directly to the CRA.
The two year restriction referred to only applies to T2 Corporate tax payments for an outstanding arrears payment. Other revenue lines such as GST/HST and Payroll source deductions are not limited in this way.
As it is not a requirement that corporations specify a tax year when making an arrears payment, we have initiated discussions with service providers to have this field removed from online banking web sites. Until this process can be completed, all T2 arrears payment made, regardless of the tax year specified, will be allocated to a prior year outstanding amount owing based on a sequence order built into our accounting system. As a result, corporations will not have to follow up with the CRA in order to correctly allocate their payment.
Generally, the CRA is encouraging all taxpayers to make use of our electronic services.
The CRA understands that TEI members and other taxpayers in the same segment have complex tax affairs. The CRA will hold a separate meeting to discuss these needs and to develop possible solutions.
Transfers between interim periods are performed by Canada Revenue Agency staff in response to taxpayer requests, or performed by taxpayers themselves or their authorized representatives using Transfer Payment in My Business Account (MyBA), and the results are reflected on the Statement of Interim Payments and in MyBA.
If the taxpayer requires a statement or additional remittance vouchers, there are three options available:
- My Business Account allows you to view up-to-the-minute account information, request remittance vouchers, and create customized statements.
- You can also request statements or remittance vouchers at www.cra.gc.ca/requests-business.
- Taxpayers or their authorized representatives can call our business enquiries line at 1-800-959-5525 to have a customized statement mailed to the address of their choice.
The CRA has developed an automated offset process within the standardized accounting system in order to decrease the cost of manual processing as well as ensuring refunds are issued with all due dispatch. The suggestion to delay the automated off-set process would increase processing costs due to the manual intervention that would be required. This would likely result in the CRA having to pay refund interest, which is a requirement by law, and something the CRA attempts to avoid when possible. Furthermore, it is important that the CRA treat all taxpayers in the same way regardless of the size of the particular taxpayer. Accordingly, the CRA is not considering any modifications that would result in the fully automated offset process becoming one that relies on manual intervention.
If a taxpayer calls the CRA and asks for the status of the return for a partnership information return, we will always confirm that a return was received.
We are looking at adding the return status to MyBA in the future, in which case partnerships could look up the status themselves. The CRA will also consider a paper notification process as part of the on-going development of Information Returns.
The question refers to returns filed electronically, we wish to clarify that at present T1134A, T1134B and T106 cannot be filed electronically; paper copies have to be sent to the CRA as per the instructions on these prescribed forms.
Regarding the processing and use of these forms, the information on the filed forms is input into the Foreign Reporting Requirements Management System (FRRMS). CRA has procedures and the system in place for its staff to obtain the forms and the information contained therein. Auditors can request and obtain a paper copy of the filed forms, print a form or report from the system. It should be noted that in certain situations it would be a legitimate audit step to ask for a copy of the form with the supporting documents from a taxpayer though the form has been filed; for example, when an auditor suspects a possible error on the input data.
We will continue to monitor our operations for opportunities to enhance efficiency and reduce administrative burden for all stakeholders.
Question 10 on Form T2200, Declaration of Conditions of Employment, has been revised on the 2010 version of this form. It now refers to the “percentage of the employee’s duties of employment” as opposed to “percentage of the workday”. Therefore, this issue has been resolved. I have attached an English and French copy of the 2010 version of Form T2200 for your reference.
Question 10, Form T2200 now reads:
Did you require this employee under a contract of employment to use a portion of his or her home for work? If yes, approximately what percentage of the employee's duties of employment were performed at their home office?
- TEI Question
- Mandatory Arbitration Process
We understand that the competent authorities for Canada and the United States are developing procedures to implement the mandatory arbitration provision in the Fifth Protocol of the Income Tax Convention between Canada and the United States. When does CRA anticipate finalizing these procedures? Will requests for Advance Pricing Agreements (APAs) be eligible for mandatory arbitration if CRA and the Internal Revenue Service (IRS) are unable to reach agreement about the terms of an APA?
In addition, over the past several years, the number of U.S.-related cases referred to competent authority has grown substantially and the length of time required to resolve cases has also seemingly lengthened. Would CRA provide an update on the number of requests for competent authority relief and APAs (with respect to the United States) as well as the length of time the cases have been pending?
- Transfer Pricing Safe Harbours
Both the IRS and CRA have increased the staff devoted to the examination of transfer pricing issues. Even though both countries subscribe to the arm’s length principle, the application of that principle to taxpayers’ facts and circumstances is subject to considerable uncertainty and inconsistency. Since taxpayers face substantial tax burdens in both jurisdictions, taxpayer compliance costs would be eased by implementing safe-harbour approaches to transfer pricing. As an example, the U.S. has established a so-called service cost method that requires either no or a very low markup on certain routine services. Would CRA consider working with the IRS to agree upon a unified approach to transfer pricing for transactions between Canada and the United States for management fees encompassing routine services?
6. CRA Response
On November 12, 2010, the Canadian and U.S. Competent Authorities entered into a Memorandum of Understanding (MOU) that provides guidance under which the U.S.-Canada arbitration procedure will operate.
Bilateral APAs will be covered by the mandatory arbitration provisions under the Fifth Protocol of the Canada – US Income Tax Convention (1980).
The CRA does not provide MAP cases by country in order to ensure that the content is consistent with similar reports we and other tax administrations have recently started to provide to organizations such as the Organization for Economic Cooperation and Development.
Inventory of Negotiable* MAP and APA cases: 2009 -2010 fiscal year
||Inventory as at April 01, 2009
||Inventory as at March 31, 2010|
|* Negotiable cases require bilateral negotiations with another tax administration to resolve double taxation or taxation not in accordance with an income tax convention. |
** Excluding two post acceptance withdrawals from the APA program.
- 78 cases were completed in 2009-2010 fiscal year compared to 83 cases in 2008-2009;
- 100 cases were accepted in 2009-2010 fiscal year compared to 108 cases in 2008-2009;
- On average, it took 24.2 months to complete a MAP case in 2009-10 compared to 29.3 months in 2008-2009.
- Generally, the time to complete a case varies with the complexity of the issue(s) and/or transaction(s), taxpayer cooperation in providing requested information to both competent authorities, adequate staffing levels at the Canadian and other competent authorities to handle the cases, and the volume of those cases.
- In any given year, 80% to 85% of all MAP cases are with the United States.
- 16 cases were completed in 2009-2010 fiscal year compared to 11 cases in 2008-2009;
- 29 cases were accepted into the program in 2009-2010 fiscal year compared to 32 cases in 2008-2009;
- There has been an exponential increase in applications to the APA program over the past three years, which has resulted in a significant increase in APA case inventory. Previously, we averaged about 15 new cases annually to the program. The number of new cases accepted to the APA program has increased to about 30 cases annually in recent years. The 2009-2010 fiscal year opened with 84 APA requests in inventory and ended with 95.
- In 2009-2010, the average time to conclude an APA from start to finish was 48.8 months, of which 17.4 months related to the due diligence stage (review of the submission including additional facts provided by the taxpayer and formulation of the CRA position) and 9.7 months for negotiations. The remaining time related to other stages such as time waiting for a taxpayer’s APA submission. Excluding two outlier cases, the average time is reduced to 42.0 months.
- Historically, APAs involving the United States have represented about 75% of the total APA inventory.
As noted in the question, both APA and MAP caseloads have increased significantly in recent years. The CRA anticipates that the number of MAP and APA cases will continue to grow in future years.
With respect to the APA program, the primary objective of the program is to provide taxpayers and tax administrations with increased certainty with respect to future intercompany transfer pricing issues in a manner consistent with the Income Tax Act (ITA), and guidance delivered through the CRA’s information circulars (IC) and by the Organization for Economic Co-operation and Development (OECD). For the program to be successful, it requires the unfettered cooperation of taxpayers and the free flow of information. Given existing resource constraints, the CRA is encouraging taxpayers at the pre-file stage to provide a more thorough explanation of their proposed transactions and corresponding transfer pricing methodologies in order for the CRA to evaluate the appropriateness of the transactions for the APA program.
Increased due diligence at the pre-file stage is one way to reduce the risk of APA cases/transactions being un-negotiable or, with respect to cases with the United States, ending up in arbitration. Furthermore, we have experienced difficulty in resolving transfer pricing of certain types of transactions with other tax administrations. Drawing from this experience, it is prudent on our part to make an informed assessment of the potential for a successful resolution of an issue and to provide the necessary feedback before the taxpayer devotes substantial resources on the preparation of APA submission and before the CRA commits its limited resources.
Our increased due diligence at the pre-file stage includes asking for more information on certain types of transactions, including transactions involving intangibles, to make an informed decision about whether to accept or reject an APA request. We are providing more feedback during and after the pre-file meeting with the intention of helping taxpayers come up with a balanced and complete submission with which the CRA can work.
Another example of CRA’s increased pre-file scrutiny relates to business restructurings. We have recently confirmed in response to queries from accounting and legal representatives that the CRA will not accept business restructuring transactions or the valuation / ownership issues that result from a restructuring during or before the APA period. APAs are best suited for current transactions that will likely continue on into the future with little to no change to the transactions themselves, and where the underlying assumptions that form the basis of an APA transfer pricing methodology (TPM) do not change over the duration of both the immediate pre-APA period and the APA period itself. Without this stability we are unable to conduct a proper analysis. The CRA requires a certain stable cycle or period of time without a significant event in order to work an APA file.
Taxpayers may also include transactions in their APA requests at the direction of the other tax authority. We would merely note that it is important for the taxpayers to justify the inclusion to assist both tax administrations in understanding the basis for the transaction’s existence; it is CRA practice to question any transaction for which an apparent rationale is lacking.
For transfer pricing issues, Canada has always used the Arm’s Length Principle (ALP) to assess transactions between related parties. In our view, safe-harbour rules do not necessarily follow the ALP, which is why the CRA has been reluctant in using safe-harbours in transfer pricing. This does not mean that Canada does not wish to bring a certain degree of certainty and consistency to its audit approaches.
Foremost, the OECD Working Party 6 (WP6) is examining the use of simplification measures by different countries. Canada strongly believes that these measures should be discussed by the OECD member countries for a consensus view.
- TEI Question
Functional Currency Reporting Rules
Under paragraph 261(7)(g) of the Act, a taxpayer is required to convert its paid-up capital (PUC) from the Canadian dollar amount to the elected functional foreign currency as of the last day of the taxpayer’s last tax year that it uses Canadian currency (the “Conversion date”) for tax reporting. If the taxpayer subsequently redeems some or all of its shares (on the “Redemption Date”), is PUC determined in Canadian or the foreign currency for purposes of subsection 84(3)? If PUC is determined in Canadian currency for subsection 84(3), and the Canadian currency has decreased (increased) in value relative to the foreign currency between the Conversion Date and the Redemption Date, does the taxpayer realize and recognize a taxable gain (loss) on the foreign exchange fluctuation?
- CRA Response (LPRAB)
The PUC attached to the shares of any class of the capital stock of a taxpayer that is a functional currency reporter is converted to the elected functional currency of the taxpayer only for the purposes of computing the Canadian tax results of the taxpayer. With respect to any shareholder of the taxpayer, the PUC continues to be maintained in Canadian dollars. Accordingly, in applying subsection 84(3) of the Act, the taxpayer is considered to have paid a dividend equal to the difference between the amount paid on the redemption, acquisition or cancellation of its shares and the PUC of those shares (as maintained in the taxpayer’s elected functional currency). For the purposes of determining the amount of the dividend received by the shareholder the amount of the dividend is determined by reference to the PUC of the shares as maintained in Canadian dollars. There is no foreign exchange gain (loss) realized by the taxpayer as a result of the redemption, acquisition or cancellation of its shares.
Xco is a taxable Canadian corporation - its shares are held equally by another corporation (Yco) and by an individual (Mr. X). The tax reporting currency of Yco and Mr. X is the Canadian dollar (C$). Yco and Mr. X each acquired 100 shares of Xco in 2007. At that time the shares were acquired, the PUC of the Xco shares was C$1 per share. In 2008, Xco became a functional currency reporter and, pursuant to subsection 261(7), the PUC attached to its shares was converted (for the purposes of computing Xco’s Canadian tax results) to US$170 (US$85 for both the 100 shares held by Mr. X and by Yco). The shares owned by Yco were later purchased for cancellation at US$120. The relevant spot rate on the day the shares were purchased for cancellation was US$1.00 = C$1.10.
In these circumstances, Yco is deemed to have received a dividend equal C$32 computed by taking the amount received by Yco converted to C$ on the day the shares were purchased [C$132 = (US$120 x C$1.10)] less the C$ PUC of the shares (C$100).
8. TEI Question
Private Health Services Plan (PHSP)
CRA Interpretation (external 2005-0126211E5) — Private health services plan — benefit allocation (November 24, 2005) — states that:
A plan that allows a participating employee to allocate a nominal amount to a particular component of a plan in a year merely to allow the carry forward of excess expenses into another plan year would not be considered a PHSP. We cannot envisage how such a plan contains the requisite element of insurance since it has little or no risk. (Emphasis added.)
8. CRA Response (LPRAB)
The commentary in the Interpretation and the meaning that the word “nominal” carries must be considered in the context of the response. The private health services plan (PHSP) being discussed in the Interpretation was a Health Care Spending Account (HCSA) in a flexible benefit plan (Flex Plan). A Flex Plan is a vehicle whereby an employer can provide benefits to its employees and in which the employees are able to select the type and level of coverage from a menu of available benefits. The taxation consequences to an employee depend on the nature of the benefit chosen and how it is paid for. Some are taxable benefits (for example, contributions to an RRSP), while some are non-taxable (for example, PHSP coverage).
Where a Flex Plan offers coverage for medical expenses, that component of the plan must comply with the rules regarding PHSPs in order to preserve the tax-free nature of the benefit. In order for a plan to qualify as a PHSP, it must, among other things, be a plan of insurance. In this regard, there must be an element of risk. A plan which minimizes or eliminates risk will likely not be a PHSP. It is for this reason that the Flex Plan rules require that either the allocation to a HCSA or the medical expenses of the covered individual(s) only be permitted to be carried forward for 12 months from the end of the plan year. To be able to have a carry forward at all, a valid PHSP must exist. In order to consider that a valid PHSP exists in a flex plan, there must be a sufficient allocation to the HCSA such that the allocation would be considered reasonable in respect of the medical expenses eligible to be covered by that particular provision. What is reasonable depends on the nature of the expense category. Accordingly, what would be considered “nominal” would be similarly variable. Allocating an unreasonably low amount to a HCSA merely to preserve the carry forward and thereby to possibly take advantage of a more fulsome allocation of flex credits to another benefit provision in the Flex Plan is not in keeping with the notion of an element of risk required by the PHSP rules nor the Flex Plan rules in general.
In our view, the opinion is not dependent on whether the particular Flex Plan separates allocations to specific categories of medical coverage.
9. TEI Question
Regulation 105 — Timing of Withholding Tax Credit for Non-Residents
When non-residents provide services in Canada to residents of Canada, Regulation 105 (Reg 105) requires service recipients to withhold and remit 15 percent of any payment. The amount withheld by the payer is considered to be a tax remitted by the non-resident that the non-resident can claim as a credit against its liability (or obtain as a refund) on a tax return filed in Canada.
When the non-resident performs services in Canada in one taxation year, the services may not be billed to the Canadian customer until the following year. Even where the Canadian customer is billed in the year services are performed, the cash payment may not be made until the following year. In either case, the taxes are withheld on the date of payment. Income earned from a business or property for the year, however, is determined under section 9 of the Act and companies using GAAP reporting must accrue the income and calculate the tax payable based on the amounts earned in the year even for payments received in the following year.
Under CRA’s interpretation of Reg 105, the tax withheld by the Canadian resident customer can only be credited to the non-resident service provider in the taxation year in which the amount is remitted to CRA. As a result, a non-resident may be required to pay tax on the income earned in Canada for a particular year but will be unable to claim a credit for the withheld tax that relates directly to that taxable income. The non-resident can file a claim for a refund in the subsequent year, but the policy results in a non-interest bearing loan to the government for a year or more for the amount of the non-credited withholding.
Would CRA consider revising its position with respect to the timing of the credit for taxes paid on behalf of a third-party non-resident under Reg 105 where it can be demonstrated that the tax withheld relates to a specific taxation year regardless of the year in which it is withheld? Would CRA consider revising its position where the payment is made to a non-resident related party?
9. CRA Response (LPRAB)
In such circumstances, the CRA will allow the non-resident taxpayer to apply the withholding tax, regardless of when remitted, against the tax payable for the year provided the tax was withheld from payments made in respect of work completed in the year, and a request to do so is made in writing to the CRA. The taxpayer will be required to submit any relevant information or documentation to support the claim should CRA make a request in this regard.
Our position is the same where the tax is withheld on payments made to a non-resident related party.
10. TEI Question
IC 87-R2 International Transfer Pricing
Paragraph 188 of IC87-R2 International Transfer Pricing (September 27, 1999) states that “[i]n preparing documentation, taxpayers should attempt to weigh the significance of the transactions in terms of their business with the additional administrative costs required to prepare or obtain such documentation. The obligation to find comparable transactions for applying the arm’s length principle is not an absolute one. The cost and likelihood of finding such comparables relative to the significance of the transactions to the taxpayer should be taken into account.” TEI believes it would be helpful for CRA to elaborate on the statement in the information circular and provide examples in respect of its application. We invite CRA’s response.
10. CRA Response (CPB)
Question 10 refers to paragraph 188 of IC 87-2R, International Transfer Pricing, which outlines with the administrative cost of obtaining transfer pricing documentation compared to the significance of the transactions with regards to of the taxpayer’s business. TEI believes that it would be helpful for the CRA to elaborate on the statement in the information circular, and to provide examples with respect to its application.
On September 18, 2006, the International and Large Business Directorate (ILBD) issued a Transfer Pricing Memorandum (TPM-09) with regards to reasonable efforts under section 247 of the Income Tax Act. In that memorandum, the CRA provided some guidance on what constitutes reasonable effort and commented on paragraph 188 of IC-87-2R.
We are aware that this memorandum is dated and that additional guidance and examples would be beneficial for businesses. Furthermore, the Transfer Pricing Review Committee (TPRC) has been evaluating a substantial amount of cases since September 2006, and additional examples are now available.
The ILBD does recognize the importance on issuing policies, and has put TPM-09 on the list of TPMs to be revised in the next few years.
11. TEI Question
Article V, Section 9, Canada-U.S. Tax Treaty
Under the new Permanent Establishment (PE) provision in Article V, section 9 of the Canada-U.S. Tax Treaty, the existence of a PE can be triggered retroactively after a tax year-end, which can result in inadvertent non-compliance. Specifically, under subparagraph 9(b), where an enterprise’s services are provided in a host State for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are either residents of the host country or who maintain a PE in the host State, the enterprise providing the services is considered to have a PE in the host State. It is often difficult or impossible to foresee when a project will exceed 183 days. Because of the retrospective nature of the provision, corporate, individual, and payroll tax returns may not be timely filed and the taxes (or withholdings) may not be timely paid. Since it is nearly impossible to avoid late filings and withholding, taxpayers will incur penalties and interest. Would CRA be willing to announce an administrative position addressing the practical challenges of complying with the new provision? Would CRA consider permitting taxpayers to file for an extension of filing or payment deadlines (or protective extensions) in such circumstances? Would CRA consider waiving the penalties for late payment or late filing as well as the interest on the penalties?
11. CRA Response (CPB)
Basically, a non-resident corporation is subject to tax in Canada on its Canadian-source income. However, treaty provisions can override this. In the Canada-US treaty, article 7 exempts a non-resident corporation from tax in Canada on its Canadian-source income when it does not have a permanent establishment in Canada. Permanent Establishment (PE) is defined as something tangible, usually a building, place of management, etc. When there is no tangible PE, article 5, paragraph 9, of the treaty, deems a PE to exist, when the services provided by a non-resident corporation in Canada are an aggregate of 183 or more days in a twelve-month period. Consequently, the corporation is taxable in Canada on its Canadian-source income. This provision was added to the treaty by the 5th protocol entered into force on December 15, 2008.
Therefore, using the example below:
- A corporation comes into Canada to provide services from March to May 2010. Its tax year end is June 30, 2010.
- The corporation is required to file its return by December 31, 2010, but because it was not here for 183 days, it does not consider itself taxable and does not file the return.
- The corporation returns to Canada to provide additional services from February to May, 2011.
- The 12-month period began in its previous fiscal year and now the corporation has exceeded the 183 days in Canada.
- Article V, paragraph 9, deems the corporation to have a PE for its tax year ending June 30, 2010. So the corporation files its 2010 return, but late.
The question is: Will we provide administrative relief on interest and penalties as a result of the late-filing due to this article of the treaty?
Yes, T2 Programs will offer administrative relief in this scenario and waive interest and penalties. However, this can only take place if the corporation specifically states in a letter attached with the return that it is late filing for this reason.
T2 Programs would not be able to identify these corporations. Unlike T1 individual returns, the T2 corporation return does not require the completion of the number of days in Canada. Adding a question on the T2 return or on Schedule 97 to ask if the corporation is filing under article V may lead to a widespread pursuit of administrative relief.
It is not practical to review every late-filed non-resident return. Even then, Audit would be in the best position to determine if the corporation is late because of Article V as the assessors would not make such a determination.
12. TEI Question
In May 2010, CRA announced several administrative modifications to the Regulation 102 (Reg 102) withholding and reporting obligations that will be helpful in simplifying the compliance and administrative burdens for non-resident employees traveling to Canada on short notice. We believe, however that the current legislative framework would support a broader application of treaty-based waivers under Reg 102. For example, the expanded waiver process addresses only non-resident employees who qualify for the $10,000 exemption under Article XV of the Canada-U.S. Treaty. It is unclear why the waiver process could not be extended to non-resident employees who qualify for the 183-day exemption.
More broadly, under section 153(1.1), where the Minister is satisfied that the withholding requirements would create undue hardship; CRA is authorized to reduce the amount of withholding required. The section does not state that each individual employee providing services must satisfy the hardship requirement. Instead, the provision could be interpreted to include the significant hardship that employers and the employee group as a whole suffer from multiple payroll withholdings and filings. Employers incur significant costs in withholding and administering the requirements of Reg 102 from the filing of multiple tax returns, to reporting, reconciliation with home-country tax reporting, to recovery of amounts advanced to employees to mitigate excess withholding taxes. Thus, we believe that section 153(1.1) can be interpreted to permit CRA to adopt simplified reporting and payment processes such as Employer Reporting and Payment Agreements (similar to those used in the U.K.) or other alternatives as set forth below. In addition, under section 220(2.1) the Minister has the authority to waive the requirement for filing of personal tax returns by treaty-exempt individuals. Finally, under section 227(8.4) the Minister can collect from the employer any amounts that the employer fails to deduct or withhold from its employees. Other provisions in section 227 permit CRA to assert penalties and interest against the employer to ensure compliance.
We believe that a broader interpretation of these provisions, together with changes to the guidelines for treaty-based waivers, would significantly reduce the time consuming and costly administrative burdens as well as the payroll withholding requirements on treaty-exempt employees.
Would the CRA consider the following alternatives to the current Reg 102 requirements and the overly stringent policy for obtaining waivers for treaty-based withholding?
a. Adopt an Exemption System Similar to the United States. Under U.S. law, if remuneration earned by a non-resident employee is exempt from U.S. federal income tax pursuant to an income tax treaty, the remuneration is not subject to withholding provided that the employer (the withholding agent) obtains appropriate documentation from the non-resident employee. The employee claims the exemption by providing the employer with a Form 8233, Exemption from Withholding on Compensation for Independent Personal Services (and Certain Dependent) Personal Services of a Non-resident Alien Individual.
b. Annual Treaty-Based Waiver. CRA should consider permitting an employer to file an annual request for a treaty-based waiver for all employees qualifying for an exemption. The information could be provided by the employer for each qualifying individual. In order to provide CRA assurance that the tax will ultimately be paid, the employer might be required to provide a lump-sum payroll deposit or a letter of credit. Either would be trued up on expiration of the waiver. The employer would then file an information return for non-resident employees that would include the following information: name, employer, number of days spent in Canada, and the treaty exemption claimed. To reduce the compliance burden, the employer could file this information on one standard form for all employees who performed services in Canada during the calendar year. CRA might also consider waiving the requirement of filing a personal tax return where a treaty-exempt individual satisfies the waiver requirements. Non-treaty-exempt employees would still file a Canadian income tax return.
c. Adopt an Employer Reporting and Payment Agreement Similar to the U.K. The requirements of section 151 of the Act could be satisfied by having the employer provide an Employer Reporting and Payment Agreement similar to those used in the U.K. To ensure payment of the applicable taxes, the employer might be required to provide a letter of credit or make an advance deposit. Where CRA demands a deposit, the employer would have to make an estimate of potential liabilities even though they may believe no tax would ultimately be payable for a year. Alternatively, CRA could specify in the Employer Reporting Agreement the dates for filing any reports and remitting the taxes due. The U.K. reporting agreement requires the employer to provide an undertaking to pay the taxes due on behalf of the employee.
If CRA does not agree with TEI’s overall legislative analysis or its recommendations for alternative administrative processes, would CRA be willing to meet jointly with the Department of Finance and TEI to develop the outline of a legislative regime that would implement a simplified Regulation 102 withholding and reporting requirements with broader exemptions for treaty-based waivers?
12. CRA Response (CPB)
The CRA would need review the new process introduced with Form R102-J and evaluate its effect on compliance with withholding, remitting and reporting obligations in order to determine whether expanding the use of the form would be appropriate. At this time, the new process has not been in effect long enough for the CRA to do such an evaluation. We will consider this in a future year.
The CRA does not agree with TEI’s position that that subsection 153(1.1) can be interpreted broadly enough to allow the implementation of its suggested alternatives (a,b, or c). Our position is that the Minister must be satisfied of the existence of hardship for each employee in order to allow a reduced withholding.
As you may know, we have been part of a working group with representatives from the big six accounting firms and Finance officials, with a view to developing a recommendation that could be made on how to improve the administration of Regulation 102. In this context, there are issues that remain, and it would be premature to report to this large group. However, we would be happy to make arrangements to discuss this issue further with representatives from your group. The Department of Finance will also be involved in the process to the extent changes to the tax law are required.
13. TEI Question
Interest Rates on Arrears/Payments for Anticipated
The Auditor General’s 2009 report stated that CRA was holding a substantial amount of advance deposits from corporate taxpayers and was paying an interest rate in excess of the government’s cost of funds. As a result of the report, CRA implemented an administrative policy that requires taxpayers to justify the amount of their advance deposits and to allocate the deposits to specific taxation years. Large File Case Managers were required to review the allocations and determine the reasonableness of the advance deposits. Subsequent to the implementation of the designation and review process, the interest rate on refunds of excess cash deposits was reduced to the 90-day Treasury bill rate. As a result, the interest rate on taxpayer funds on advance deposit is now the same as the government’s cost of funds.
TEI agrees with the Auditor General’s findings and recommendation that the government should not pay excessive interest on funds on advance deposit by taxpayers. Given the reduction in the interest rate paid to taxpayers, though, the issue identified in the Auditor General’s report has seemingly been resolved. As a result, the administration of advance deposits for reassessments can be simplified by reverting to CRA’s prior process of holding taxpayer funds in an undesignated account as of the effective interest date and applying the funds as reassessments are made. The advance deposit mechanism protects corporate taxpayers from onerous, non-deductible interest charges on deficiencies. By reducing the after-tax cost of settling disputes, the mechanism also reduces the scope and degree of controversies with taxpayers.
13. CRA Response (ABSB)
The CRA is always pleased to discuss ways to improve its processes and welcomes the opportunity to discuss this matter with the TEI.
Overall, the CRA is committed to better documenting its due diligence with taxpayers in the management of advance deposits.
The existing administrative process encourages one on one discussion between each taxpayer and our Business Accounting and Audit staff. This dialogue ensures that taxpayers do not pay interest unnecessarily, that the CRA fully consults with taxpayers so that they understand their potential for reassessment and that taxpayers do not leave funds on deposit needlessly. Indeed, during the 2009 review of advance deposits, many taxpayers expressed their appreciation for this open dialogue.
The CRA does accept advance deposits for proposed reassessments as well as for expected adjustments to subsequent tax years.
Not at this time. The recently implemented changes will be subject to on-going review and the CRA is committed to ensuring it has reviewed, in consultation with taxpayers, the propriety of amounts on deposit. We believe the large file case manager is the most appropriate contact for such a determination.
Despite the legislated refund interest rate change for corporate taxpayers, there is still a need to manage advance deposits in a consistent and prudent manner. The administrative process allows all businesses (including unincorporated ones) to deposit funds to protect themselves from interest costs resulting from a reassessment. The Auditor General, in her Spring 2009 Report, recommended that the Agency should:
"develop and consistently apply a robust administrative policy framework for managing advance deposits, whether or not a legislative or regulatory change is determined to be necessary."
Consequently, the requirement for Large File Case Managers to review the propriety of a taxpayer’s advance deposit will not be eliminated.
14. TEI Question
Surtax and Loss Carry Backs to a Closed Tax Year
The current carry back provisions allow a carry back to statute-barred tax years as long as there is a valid objection in the carried back year. In one particular situation (See Document 2010-0374531I7, Taxpayer Requested Adjustment to Change a Loss Carryback (July 30, 2010)), the taxpayer received a Notice of Reassessment for a current year that increased its surtax credits. The taxpayer requested that the surtax credits be carried back to the third preceding tax year. The CRA auditor refused to permit the carry back since the current tax year was open due to an objection. In the auditor’s view, the carry back could not be initiated until the current tax year was settled in Appeals since the amount of the surtax credit could change.
The third preceding tax year remained open with Appeals for many years, but at a certain point, CRA Appeals proposed confirming the assessment for the third preceding tax year and closing that year. CRA Appeals also refused to permit the surtax credit to be carried back to the third preceding tax year, prior to confirming the assessment, on the basis that — should the current year be settled and the surtax credits be reduced — CRA would be unable to open the third preceding tax year and recover some or all of the carried back surtax from a potentially statute-barred tax year.
The taxpayer’s recourse from the CRA’s action would seemingly be to file a claim for refund in the Tax Court of Canada for the third preceding tax year, but the courts are reluctant to decide cases where the only issue is a carry back to an earlier year that arises from a mechanical or arithmetic adjustment to a subsequent year. Is CRA required to process a surtax credit carry back request that is generated under a Notice of Reassessment to an open tax year that is under objection? We invite CRA’s comments.
14. CRA Response
15. TEI Question
Requests for Payment of Auditor’s Travel Costs
Increasingly, CRA auditors are requesting that member companies pay travel costs for audits of Canadian taxpayers and their foreign affiliates. The requests include domestic and foreign travel. Although the reimbursement or payment of CRA’s travel costs might be appropriate in limited circumstances, e.g., in connection with an APA application or where the books and records are not available at the taxpayer’s office in Canada, it seems inappropriate for the CRA to routinely request payment of travel costs because the requests can create a conflict of interest for the individual tax auditors. If taxpayers decline a request, a cordial working relationship may be impaired or, worse, the auditor’s judgment about the merits of a taxpayer’s tax positions may be affected. We invite CRA to explain its policy in respect of requesting taxpayers to pay or reimburse travel expenses for auditors.
15. CRA Response (CPB)
The International and Large Business Directorate (ILBD) is not aware that requests for reimbursement of auditor’s travel expenses outside of the general policy cited in the TEI question (i.e. described in letter confirming permission to keep records outside Canada) have become routine.
In order to determine the frequency to which these requests are being made, and their impact on the audit process, ILBD invites an open dialogue on the issue with the affected TEI members.
If, during the course of an audit, the taxpayer feels that CRA has made a request that is outside of the general policy in respect of the reimbursement of travel costs leading to a possible conflict of interest, the taxpayer should immediately bring this to the attention of the auditor’s section manager or the Assistant Director of Audit at the local Tax Services Office.
16. TEI Question
Auditor Fairness and Impartiality
According to the CRA website, two of the guiding principles or values of CRA are, as follows:
Integrity: is the foundation of our administration. It means treating people fairly and applying the law fairly.
Respect: is the basis for our dealings with employees, colleagues, and clients. It means being sensitive and responsive to the rights of individuals.
A similar approach to tax administration was expressed by the U.S. Commissioner of Internal Revenue Douglas Shulman at Tax Executives Institute’s 60th Midyear Conference on April 12, 2010, as follows:
Our responsibility is the same as the responsibility of our taxpayers. Apply the law as it currently exists . . . not how we would like it to be . . . and do so with neither a thumb on the scale in favor of the government, nor in favor of the taxpayer. This is the key to balanced and fair tax administration.
We believe the perception of fairness is key to a self-assessment system. Regrettably, an increasing number of CRA auditors are seemingly adopting a pro-government view of issues without duly considering the taxpayer’s position. This creates a perception of arbitrariness, which is frustrating, causes disputes to escalate, and significantly retards issue and case resolution. Just as taxpayers must understand and consider the government’s view, CRA auditors should dispassionately evaluate the taxpayer’s view. Large File Case Managers rarely intervene, but often reflexively side with the auditor when they do. Even where the case manager acknowledges the taxpayer’s position is more likely correct, he or she may feel compelled to defer to a proposed adjustment from an audit specialist (e.g., from the International or Aggressive Tax Planning Directorates).
Is CRA aware of taxpayer concerns and perceptions? If a taxpayer believes an auditor is failing to apply the law in a fair manner, is there any recourse short of waiting for a reassessment and filing an appeal? Are there steps taxpayers can undertake to bring performance issues to the attention of CRA management other than by filing a formal service complaint and following up with the Taxpayers’ Ombudsman?
16. CRA Response (CPB)
All employees at the CRA have a duty to follow four guiding principles (Integrity, Professionalism, Respect and Co-operation) when conducting their daily activities. As a taxpayer, you should expect that these four values will be adhered to when dealing with tax auditors. If the situation ever arises where you feel that an auditor or a Large File Case Manager has not followed one of these values or guiding principles, then you can request a meeting with their Manager to voice your concerns. If you are still not satisfied after discussing the issue with the Manager, you can request a meeting with the Assistant Director of Audit at the local Tax Services Office. Your concerns will be addressed in a fair and impartial manner.
17. TEI Question
Taxpayer Advisory Committees
Before the taxpayer advisory committees (e.g., for large business, international) were eliminated, CRA and representative taxpayers met regularly in a non-adversarial setting to discuss issues of common concern. We believe those committees were helpful for taxpayers and CRA, providing a forum for an exchange of views and educating both about their respective administrative burdens and challenges. The opportunity for taxpayers to meet regularly with CRA also increased the perception of fairness. As important, potential problem areas were often identified and resolved before they escalated into significant compliance or administrative issues. Hence, we regret the elimination of the advisory committees. Would CRA consider reinstating them?
17. CRA Response (LPRAB)
CRA also feels that taxpayer advisory committees provided excellent opportunity to exchange of views, increase the perception of fairness, and to resolve contentious issue before they escalate to significant compliance or administrative issues. Unfortunately, the formal reinstatement of taxpayer advisory committees is not possible for the foreseeable future due to budgetary constraints.
CRA however, continues to encourage and participate in open and transparent dialogue such as the annual TEI Liaison Meeting. Such dialogue will serve to address significant issues as they arise, and determine solutions and accountability.
18. TEI Question
- 18-month deadline
To claim SR&ED benefits, corporations must file the prescribed forms (T661 Scientific Research and Experimental Development (SR&ED) Expenditures Claim and schedule 31 Investment Tax Credit – Corporations (2008 and later tax years)) with the required information within 18 months of the end of the taxation year in which the SR&ED occurs. Projects and claims for which the paperwork is filed late are rejected (even though they are eligible otherwise) and unless errors or omissions on the original forms are discovered and amended within the 18-month deadline, the taxpayer’s claim can be adversely affected. Moreover, CRA auditors often use the 18-month deadline to limit the submission of new information, whether technical or financial, even though it pertains to eligible projects that were included in a timely filed claim. This “gatekeeper” perspective causes downward adjustments that undermine the incentive that the government intends to provide for SR&ED activity. Would CRA consider modifying its administrative practices in order to permit upward adjustments of claims during an audit assuming certain minimum disclosure conditions are satisfied?
- Appeals — SR&ED
Section 3.3 of Application Policy SR&ED 2000-02R Guidelines for Resolving Claimants’ SR&ED Concerns (June 30, 2005) states that “[o]nce the SR&ED technical and financial reviews are completed and the SR&ED report is finalized, the claimant will be sent a Notice of Assessment.” In a situation where:
- an SR&ED claim is made via an amended tax return (after the taxpayer’s original filing due date and before the day that is 12 months after the taxpayer’s filing-due date for a particular year); and
- the entire SR&ED claim is denied by CRA (and thus no changes are made to the original assessment);
would CRA confirm that it will send a revised Notice of Assessment? Such a step ensures that the taxpayer will have an opportunity to file a Notice of Objection after the CRA decision.
18. CRA Response (CPB)
The Canada Revenue Agency (CRA) administers the Income Tax Act (the Act), including the SR&ED provisions in accordance with the law. The SR&ED filing requirements are not an administrative practice of the CRA. The CRA encourages claimants to file their SR&ED claims on or before the filing deadline. The present filing requirements can be found in subsection 37(11), and in paragraph (m) of the definition of investment tax credit (ITC) in subsection 127(9) of the Act.
According to those provisions, a claimant must file a prescribed form containing the prescribed information in respect of the expenditure or investment tax credit on or before the day that is 12 months after the claimant’s income tax return filing due date for the year in which the expenditure was incurred. Therefore, in order to claim an investment tax credit for SR&ED, a claimant must satisfy the filing requirements of Form T661 and Schedule T2SCH31 or Form T2038 (IND), as the case may be.
If the claimant filed the prescribed forms before the SR&ED reporting deadline, but did not provide all the prescribed information, the claimant will be informed of the deficiencies and of the consequences of not supplying the prescribed information by the SR&ED reporting deadline.
If the claimant does not provide the prescribed information with respect to an expenditure before the SR&ED filing deadline, the CRA cannot extend the filing deadline. In addition, subsection 37(12) of the Act deems that expenditure not to be an expenditure on or in respect of SR&ED but an ordinary business expense. The claimant will be precluded from deducting the expenditure under subsection 37(1) of the Act and the expenditure will not qualify to earn an ITC under subsection 127(9) of the Act.
When a taxpayer files an amended tax return, the CRA will only issue a revised Notice of Assessment if there is a change to tax payable from the original assessment. If there is no change to tax payable then a revised Notice of Assessment is not required.
In the situation where a refundable investment tax credit may be in question, a Notice of Determination under paragraph 152(1)(b) may be issued where it had not already been issued. The claimant would then be able to object to this determination.
19. TEI Question
Amendments to Section 244
Recently announced amendments to section 244 of the Act will facilitate CRA’s use of electronic communications in administering the Act. Since implementation will be critical to the success of the initiative, we have a number of questions and comments about the process.
Rather than sending notices of assessment or determination directly to the taxpayer, an email notification will be sent stating that an item is available for the taxpayer to access in a secure CRA electronic account.
- What is the anticipated content of the email notification? Will it refer to a particular year, type of tax, or notice of assessment, or will the notification simply say that “something” is available for the taxpayer to review?
- Whom will the notification be sent to? How should the taxpayer change the email address to which notifications are sent?
- What will CRA do if it receives an automatic response from the taxpayer’s email account stating the “mailbox is full” or “over quota”? In such cases, the email has been rejected by the taxpayer’s server and thus has not been received. Because of the technological limitation, the taxpayer has no notice of the contents even though the deeming provision in section 244 states that delivery is presumed to be the date that the notice was sent.
- Would CRA consider sending a notification that a notice of assessment or determination is available in a secure account to more than one representative or authorized person for each taxpayer?
- Does the taxpayer need to provide an authorization for each of its “sub-accounts” and for each type of tax, or would an authorization be valid for all accounts or types of taxes?
- Is CRA authorized to send notices of assessment or determination electronically by virtue of subsection 244(14), or must the taxpayer first provide an authorization or request to CRA? If taxpayer action is required, what is the format of the request or authorization?
- What is the “specified manner” for revoking the authorization to receive a notice of assessment or determination electronically?
19. CRA Response (ABSB)
The Agency is not in a position, at this time, to respond to the questions that have been asked in relation to this legislative amendment. Currently, the CRA is conducting preliminary research and analysis into the possible options on how this new service will be designed and implemented.
We will ensure that the questions you have provided to us on this subject are considered during our analysis.
In addition, there may be a future opportunity to seek additional feedback from your organization as we progress through our analysis phase.
20. TEI Question
Follow-up on Prior Year Questions and Discussions
- International Tax Forms Simplification (Question 6 of the 2009 Agenda)
At the 2009 liaison meeting, CRA said that it was reviewing the scope and content of various forms, including Forms T1134A and B, and would consult with stakeholders on potential changes. We invite an update on the status of CRA’s review and a discussion of potential revisions to various forms, especially Forms T1134A and B.
- Advisory Panel on Canada’s System of International Taxation — Large Corporations and Double Taxation Cases
In Question 11 of the 2009 liaison meeting, TEI noted that CRA’s Legislative Policy and Regulatory Affairs branch was reviewing the policy that requires large corporations to prepay 50 percent of the disputed tax before seeking competent authority relief in double taxation cases. In response, CRA noted that it had established an internal working group to review various administrative recommendations of the Advisory Panel on Canada’s System, including the requirement to prepay 50 percent of the disputed tax. At the time of the 2009 meeting, the working group’s deliberations were “ongoing.” Would CRA (1) update TEI on the work performed by the working group and, if possible, share its conclusions (including the requirement that large corporations prepay 50 percent of the disputed tax prior to seeking competent authority relief) and (2) comment on the next steps in the evaluation of the current system?
20. CRA Response (CPB)
Regarding the T1134A and T1134B forms, the CRA has received many suggestions from both internal and external sources such as our Centres of Expertise, the International Tax Data Working Group – a joint effort of CRA and the Department of Finance, The Secretariat of the Advisory Panel, as well as the Tax Executives Institute. The suggestions received were very diverse; they vary from keeping the status quo to merging the two forms, or combining it with the T106.
We are also considering expanding the information requested on the T1135. The impetus for the change is mentioned in Budget 2010 Annex 5: Tax Measures: Supplementary Information and Notices of Ways and Means Motions:
The CRA continuously review prescribed forms to balance the information requirements for CRA and the administrative burden on all stakeholders. CRA will consult with stakeholders on all important potential changes.
In 2007, a study of Canada’s system of International taxation was commissioned by the Minister of Finance and the resulting report, otherwise known as the Godsoe Report was released in the late fall of 2008.
In addition to the main report, an advisory panel subcommittee report was released, containing 20 recommendations that pertained mainly to the effective administration of transfer pricing.
As mentioned in the above question, a working group was created to study these recommendations for possible legislative amendment or policy development. This working group includes members from the Department of Finance Tax Policy, the Department of Justice Advisory Services, and the Competent Authority Services Division (CASD). The working group is also in discussion with the Appeals Branch and the Tax Services and Debt Management Branch.
The working group is in the process of evaluating the different recommendations and was able to issue a communiqué on mandatory referrals in response to the Advisory Panel’s recommendation to centralize the audit of transfer pricing issues. In order to increase efficiency and consistency in the audit of important transfer pricing issues, the International and Large Business Directorate (ILBD) has issued a policy on the mandatory referral of transactions involving cost contribution arrangements, intellectual properties, and the potential re-assessment beyond the tax treaty deadline.
The majority of other recommendations involve modifications to the income Tax Act, which must be made by the Department of Finance, including the prepayment of 50 percent of the disputed tax. The working group is still in discussion.