Pending income tax issues.

PositionCanada

December 3, 2002

On December 3, 2002, Tax Executives Institute held its annual liaison meeting with officials of Canada Customs and Revenue Agency on pending income tax issues. Reprinted below is the agenda for the meeting, which was prepared under the aegis of the Institute's Canadian Income Tax Committee, whose chair is Monika M. Siegmund of Shell Canada Limited.

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 Customs and Revenue Agency (hereinafter, "CCRA" or "the Agency") during TEI's December 3, 2002, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call either Glenn G. Wickerson, TEI's Vice President for Canadian Affairs, at 403.233.1135 or Monika M. Siegmund, Chair of the Institute's Canadian Income Tax Committee, at 403.691.3210.

  1. Accountability for Assessments

    A TEI member's company has been reassessed seven times in respect of the same taxation year. In some cases, the reassessments were issued before the expiration of the 90-day objection period for the previous reassessment. Multiple reassessments in respect of the same taxation year are burdensome for taxpayers because each reassessment requires the taxpayer to calculate the differences from previous reassessments, analyze any new issues, and incorporate the revised calculations and issues into another timely filed objection.

    We believe that multiple reassessments of the same taxation year result from large-file case managers ceding too much independence and decision-making authority to the subject matter "experts" or specialists (e.g., Avoidance, International, and SR & ED auditors). Too often, the principal focus of subject matter specialists seems to be to raise issues within their narrow subject matter area rather than handle the logistics of reassessments. In TEI's view, the large-file case manager should coordinate all reassessments and subject matter experts should not be involved in the reassessment process. Prior to issuing a reassessment, the large-file case manager should determine the propriety of a proposed audit adjustment from a subject matter specialist in the context of all the proposed audit adjustments.

    In order to resolve issues quickly and efficiently, TEI believes the large-file case managers must be accountable to the taxpayer for all the assessing actions initiated by the audit team, including the specialists. Thus, the large-file case manager should apprise taxpayers of the critical facts in each issue, explain CCRA's position on the application of the law to those facts, and be the principal spokesman for CCRA on all issues in the case.

    We invite CCRA's comments on steps that it is taking to ensure that large-file case managers exercise effective oversight of the subject-matter specialists, resolve issues with taxpayers before reassessments are made, minimize the number of reassessments that taxpayers receive, and ensure resolution of cases as quickly as possible.

  2. Assessment Practices Inconsistent with Regulations

    Recently a CCRA auditor informed a Canadian Trust Company that the Agency would reassess the Trust Company's provincial allocation formula based on proposed but unpublished changes to Regulation 405. At a minimum, the proposed assessment will change the taxpayer's provincial income and capital tax liabilities for all open taxation years and give rise to non-deductible interest on any tax shortfall. Since the proposed changes have not been published, the auditor's assessing position is based solely on instructions from the Head Office and the taxpayer is unable to confirm the propriety of the reassessment. We believe this practice violates the principle of transparency that is fundamental to the tax system. What steps will the Agency take to ensure that taxpayers are not threatened with arbitrary assessing practices inconsistent with regulations? Alternatively, if the Agency supports the field auditor's assessing position, what is the justification for subjecting taxpayers to undisclosed rules? As important, any change in regulations should be applied prospectively, not retroactively. We invite CCRA to comment on its justification for applying the rules retroactively.

  3. Taxpayer Account Issues

    Recently, CCRA implemented a new accounting system designed to automatically offset debit and credit balances in a taxpayer's accounts. Balance due statements as well as arrears interest assessments are frequently triggered by the system, and because transfers and offsets are generally made without a taxpayer's knowledge or consent, tax account reconciliations have become extraordinarily difficult if not impossible. The taxpayer's inability to reconcile the accounts is exacerbated by the lack of a single point of contact for problem resolution at the Taxation Centres where the taxpayers' accounts are administered.

    Is CCRA aware of any specific accounting system issues (especially at the Sudbury Taxation Centre)? What course of action should a taxpayer undertake in order to rectify account problems directly with the Taxation Centre? Would CCRA consider implementing a "designated account executive" in the Taxation Centres for large-file taxpayers? Such a person would be a single point of contact for resolving tax account issues just as the large-file case manager is a single point of contact for resolving audit issues. Implementing a single point of contact for accounts at the Taxation Centres will significantly improve efficiency for both CCRA and taxpayers in respect of computing interest amounts, applying installment payments, opening accounts for new companies, closing accounts for wound-up companies, transferring balances among accounts, resolving issues on misapplied balances, and generally reconciling taxpayer accounts. TEI members have experienced problems with the Taxation Centres in respect of all of the foregoing areas. We invite a discussion of TEI's proposal.

  4. Section 116 Certificates

    The process for obtaining a section 116 certificate has become burdensome for taxpayers because the time required to obtain the certificate is far too long, especially for routine cases. We recommend that consideration be given to permitting the large-file case manager assigned to a taxpayer's case to approve the issuance of section 116 certificates. The large-file case manager is familiar with the taxpayer's affairs and will be able to protect the government's interest. We invite CCRA to comment on our proposal and invite a discussion of other steps CCRA will consider to expedite the issuance of the certificates.

  5. Audit Processes

    In question six of the December 6, 2000, CCRA liaison meeting agenda, TEI expressed concern about the Audit Directorate's challenging the validity of advance tax rulings as a result of minor discrepancies between the factual representations in the taxpayer's ruling request and the actual facts of the transaction. In its response, CCRA confirmed that "it is critical to the rulings process that the Agency be satisfied, through an examination by its auditors, that the material facts were accurately and completely stated in the ruling and that the transactions were carried out substantially as they were set out in the ruling." (Emphasis supplied.)

    We agree with CCRA's response, but we understand that Tax Avoidance personnel are now being assigned to conduct post-ruling reviews. TEI submits that the determination whether a proposed transaction should be treated as an avoidance transaction is a legal question that should be answered in the tax ruling process and not as part of the auditor's review...

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