Income tax questions for Revenue Canada: December 10, 1996.

December 10, 1996

On December 10, 1996, Tax Executives Institute held its annual liaison meeting with Revenue Canada--Customs, Excise and Taxation on income tax matters. (TEI held a separate meeting on issues relating to the Goods and Services Tax and other commodity tax issues.) The Institute's agenda for the income tax meeting is reprinted below. The agenda was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Alan Wheable of Canada Trust. J.A. (Drew) Glennie of Shell Canada Limited, the Institute's Vice President-Region I, coordinated plans for the liaison meeting

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments and questions on pending income tax issues, which will be discussed with representatives of Revenue Canada--Customs, Excise and Taxation during TEI's December 10, 1996, liaison meeting. If you have any questions in advance of that meeting, please do not hesitate to call either J.A. (Drew) Glennie, TEI's Vice President for Canadian Affairs, at (403) 691-4900 or Alan Wheable, chair of the Institute's Canadian Income Tax Committee, at (519) 663-1623.

Background

Tax Executives Institute is an international organization of approximately 5,000 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,700 of the leading corporations in Canada and the United States.

Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters based in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

Canada Revenue Commission

We shall be pleased to hear a brief update and progress report on the activities of the Canada Revenue Commission.

Audit Protocol

Commencing with the 1996 liaison meeting and throughout the ensuing year, there have been a number of discussions between representatives of Revenue Canada and business taxpayers concerning the Department's audit protocol initiative. As a part of the consultation process, the Institute submitted formal written comments on the Draft Audit Protocol Reference Manual (hereinafter "the protocol") on September 27, 1996. In order to advance the consultation process and elaborate on the issues raised in our written submission, we invite Revenue Canada's comments concerning the following:

1. The protocol sets forth a framework for managing the audit process on a prospective basis. The speed with which taxpayers and Tax Services Office Auditors alike embrace the cooperative approach envisioned in the protocol, however, may depend upon the resolution of significant, pending audit issues in open taxation years. Has Revenue Canada developed any measures to expedite the resolution of pending audit issues and cases before, or in connection with, the implementation of the audit protocol? For example, the backlog of taxpayer Scientific Research and Experimental Development (SR&ED) claims is significant in scope and magnitude. Is expedited review of these claims envisioned? Are there additional "back-year" issues that may impede the transition to an audit framework governed by the protocol?

2. One underlying purpose of the protocol is to engender greater openness and trust between Revenue Canada and taxpayers. That trust may be undermined where significant decisions affecting the disposition of the taxpayer's case are made without direct input from and representations by the taxpayer. To allay taxpayer concerns, we recommend that instructions be given to Tax Services Offices that the taxpayer be apprised of all issues affecting it that are under study by Revenue Canada. In other words, where the facts, circumstances, or legal interpretations affecting a taxpayer's issues are under study by the Head Office or other branches within Revenue Canada, we recommend that steps be undertaken to assure that (i) the taxpayer is apprised that personnel outside of the Tax Services Office are involved in the taxpayer's case and (ii) the taxpayer's position on the issues is fairly presented to the Revenue Canada decisionmaker by, for example, inviting the taxpayer to make the presentation. We invite the Department's comments.

3. Building a cooperative audit relationship between Revenue Canada and large-file taxpayers will depend in part on the continuity of personnel assigned to the case by the taxpayer and Revenue Canada alike. Consequently, we recommend that Revenue Canada emphasize in its directions to the field offices the importance of assigning staff for a minimum of one complete audit cycle. In addition, we recommend that part of the audit team carryover from one cycle to the next thereby providing continuity. We invite the Department's comments.

4. The Real-Time Audit section of the draft Reference Manual includes statements to the effect that (i) "when a settlement is reached on any agreed issue, the corporation signs a waiver of objection..." and (ii) "each issue filed in accordance with an agreed position...will not be subject to further audit...." Notwithstanding the assurance that the issue will not be subject to further audit, Revenue Canada clearly retains the power to reassess in respect of the issue while the taxpayer is equally clearly precluded by its waiver from changing its position. We believe that the position espoused in the draft significantly diminishes the principal benefit of a real time audit -- certainty of tax liability at the time of filing a return. In addition, the lack of symmetry between taxpayer's and Revenue Canada's ability to reopen issues erodes taxpayer confidence that a protocol represents a consensual arrangement. Specifically, we believe the lack of mutual undertakings in respect of future reassessments is an impediment to the execution of protocol agreements and invite Revenue Canada's comments on whether it will reconsider the matter.

5. In the interest of promoting more efficient audits and the execution of protocols with taxpayers, has Revenue Canada considered encouraging its Tax Service Offices to agree not to pursue reassessments that fall below a de minimis threshold? The magnitude of a de minimis threshold might vary depending on such factors as the size, complexity, and risk profile of the taxpayer entering into the protocol.

   Advance Pricing Agreements

   Advance Pricing Agreements (APA) represent a substantial innovation in tax administration to minimize disputes about transfer pricing. Consequently, TEI has supported the APA initiative in both Canada and the United States. We are concerned, however, that the time required to complete an APA is so daunting that taxpayers may be discouraged from initiating the process or become frustrated and withdraw from it. We invite Revenue Canada's comments on whether it is satisfied with the time required to complete individual APAs or whether process improvements have been identified to expedite achieving agreements. Are there common errors that taxpayers should avoid in order to expedite processing of their APA requests?

   Transfer Pricing

   In determining the proper charge for cross-border services rendered by a parent (or other controlled affiliate) to other members of a multinational group of companies, a taxpayer must weigh a number of factors including the value-added by the service, whether the service provider is engaged in providing similar services to third parties in connection with its principal business activities, and whether the costs involved in providing the services are "shared" costs of the corporate group. In addition, where the same service is provided to affiliates conducting business in various countries, the taxpayer must consider whether the charge for the services is determined in a...