Pending income tax issues: December 6, 2005.

On December 6, 2005, Tax Executives Institute held its annual liaison meeting with officials of the Canada Revenue Agency on pending income tax issues. Reprinted below is the agenda for the meeting, which was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is David V. Daubaras of General Electric Canada.

Tax Executives Institute welcomes the opportunity to present the following comments and questions on income tax issues, which will be discussed with representatives of the Canada Revenue Agency (hereinafter "CRA" or "the Agency") during TEI's December 6, 2005, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call Monika M. Siegmund, TEI's Vice President for Canadian Affairs, at 403.691.3210 or David V. Daubaras, Chair of the Institute's Canadian Income Tax Committee, at 905.858.5309.

1. Canada-United States Tax Convention

   The June 3, 2005, Memorandum of Understanding (MOU) between the Competent Authorities of Canada and the United States in respect of Article XXVI of the Canada-U.S. Income Tax Convention (relating to the Mutual Agreement Procedure (MAP)) is a significant and salutary step toward improving the performance and efficiency of the mutual agreement procedure. TEI commends CRA for working with the Internal Revenue Service to develop the MOU.

   1. In Part I. A. of the MOU, the Competent Authorities commit to the principles of consistency and reciprocity in the resolution of submitted cases. In the past, some taxpayers have viewed Canada as being preoccupied with the process while the U.S. Competent Authority has generally focused on the tax result. How will the approaches of the two Competent Authorities resolve themselves in the approach set forth in the MOU? Consistency and reciprocity in the administration of submitted cases are laudable goals if the decisions are based on, and can be tested against, objective standards such as the OECD's published transfer-pricing guidelines. Otherwise, the decisions may result in an informal body of rules to which taxpayers will not have access. Will MAP decisions, particularly those that serve as precedent, be based on legal authorities and publications available to taxpayers as well as the Competent Authorities?

   2. Part I. B. of the MOU describes a procedure for an "Agreement on the Facts" of a MAP case. Specifically, the MOU states that, if the Competent Authorities are unable to agree on the underlying facts and circumstances after six months of negotiations, the Competent Authorities will refer the case to a joint panel composed of tax administration officials chosen by the Assistant Commissioner of Appeals for the CRA and the Chief of Appeals for the IRS. Would CRA please elaborate on the role that it envisions for its Appeals officers in the new process? In addition, will taxpayers be informed of factual differences perceived by the Competent Authorities and be invited to make representations regarding the facts before a decision is made?

   3. The goals expressed in the MOU are commendable, but significant work remains before the respective tax administrations and taxpayers will reap the full benefit of streamlined administration of MAP cases. Specifically, in Part III of the MOU "the Competent Authorities have identified a number of issues that have resulted, or could result, in a failure to resolve double taxation or taxation contrary to the Convention." Has each of the issues been assigned to a working group for follow-up and resolution? When does CRA anticipate releasing guidelines for settling these issues? A related question is whether CRA considers cases under the general anti-avoidance rules (GAAR) to be eligible for resolution by the Competent Authorities. If such cases are eligible for resolution under MAP, are there special procedural or substantive considerations?

2. Decisions on General Anti-Avoidance Rules

   Will CRA be re-evaluating...