TEI-Canada Customs and Revenue Agency laison meeting agenda: income tax issues.

December 7, 1999

On December 7, 1999, Tax Executives Institute held its annual liaison meeting with Revenue Canada on pending income tax issues. The Institute's agenda for the meeting was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofasco, Inc. Marlie R.M. Burtt, the Institute's Vice President-Region I, coordinated preparations 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 the Canada Customs and Revenue Agency (hereinafter "Revenue Canada") during TEI's December 7, 1999, liaison meeting. If you have any questions about the agenda in advance of that meeting, please do not hesitate to call either Marlie R.M. Burtt, TEI's Vice President for Canadian Affairs, at (403) 269-8736 or John M. Allinotte, chair of the Institute's Canadian Income Tax Committee, at (905) 548-7200, ext. 6821.

1. Recent Developments

   We invite Revenue Canada to provide an update on recent developments and initiatives to improve the tax audit and administrative processes. We are especially interested in progress reports on pending guidance projects, including information circulars (IC), bulletins, and guidelines. For example, what is the status of the revised guidelines on withholding tax and the Regulation 105 waiver process? As another example, during last year's meeting there was a discussion of the steps that Revenue Canada would be undertaking, including a substantial increase in staffing, to accelerate the resolution of Advance Pricing Agreements (APAs) and Competent Authority issues. Have those steps been implemented and what progress has been made to address the backlog of cases, especially APAs?

2. Canada Customs and Revenue Agency

   TEI was pleased to support the legislation that resulted in the establishment of the Canada Customs and Revenue Agency. In addition, we appreciated the opportunity to have a representative on the steering committee and provide input to the Ministry of National Revenue in respect of the organization and operation of the Agency. TEI hopes to build on the fruitful relationship that has developed over many years with Revenue Canada and, indeed, augment the opportunities for constructive dialogue. Hence, TEI invites an update on the status of the reorganization of Revenue Canada as an independent Agency. TEI also requests a discussion of how the reorganization may affect TEI's national and chapter liaisons with the government and we solicit the government's views and feedback on how to improve and expand the consultative process on the widest possible range of substantive and procedural matters.

3. Transfer Pricing Information Circular

   We invite a discussion of the scope and degree of administrative tolerance that Revenue Canada will afford to taxpayers in satisfying the plethora of new transfer-pricing documentation requirements set forth in revised Information Circular IC 87-2R. The transfer-pricing legislation itself provides precious little guidance about the documentation that taxpayers are expected to create and maintain in order to establish the arm's-length nature of their prices. Moreover, the final revised IC, which was issued September 27, 1999, contains a number of changes from the draft IC released with the legislation in September 1997. Since the substantive provisions of the legislation came into force in 1998 and penalties were effective for 1999, we believe that, at a minimum, that taxpayers' 1998 and 1999 taxation year returns should benefit broadly from administrative tolerance in respect of satisfying all of the circular's numerous guidelines and requirements. Assuming Revenue Canada agrees, we urge it to issue public guidance on the degree and scope of administrative tolerance.

4. Tax Avoidance -- Audits

   Revenue Canada has significantly increased the resources assigned to tax avoidance audits. Indeed, TEI believes that a subtle shift in audit practice is underway. Increasingly, auditors are advancing strained interpretations of the Act in search of "avoidance" transactions rather than objectively determining whether a transaction is subject to section 245 of the Act. We believe that this may be a result of Revenue Canada's practice of hiring and assigning auditors to search exclusively for tax avoidance transactions. In other words, wherever a tax avoidance auditor is assigned to a case, there is a strong likelihood that such an auditor will find, in his or her view anyway, an avoidance transaction in order to justify the use of Revenue Canada's audit resources.

   When the general anti-avoidance rules (GAAR) were introduced, the Government assured taxpayers that they would be employed only as a last resort. Where tax avoidance auditors are assigned to work specific taxpayer cases even before the case manager has determined that a transaction should be scrutinized for the potential application of GAAR, however, the likelihood increases that the scope and magnitude of audit controversies will increase. Compliant taxpayers should not be placed in a position where every transaction is scrutinized for the potential application of GAAR.

   TEI invites a discussion of the training Revenue Canada is providing its auditors to identify "offensive" transactions and ensure that only the "right" issues are pursued pursuant to the guidelines provided by the Head Office. In addition, TEI invites a discussion of how Revenue Canada will employ the additional resources that were recently announced as being devoted to tax avoidance transactions.

5. Tax Avoidance -- Referral to Head Office

   The GAAR Committee at the Head Office seemingly becomes involved in GAAR issues at two stages. In an informal preliminary stage, Revenue Canada auditors seek an initial review by the Committee to determine the "GAAR-ability" of a particular issue. At that time, some of the underlying facts of a transaction are presented to the Committee by the auditors, but the taxpayer has no input into the process or the presentation of the issue to the Committee. Indeed, many taxpayers are not even aware that an issue has been referred to the GAAR Committee until the second stage. In that second stage, a formal review of the transaction and issues is conducted through substantive written representations to the Committee by the taxpayer and the auditor.

   Taxpayers frequently find during the course of developing their representations that the facts and analysis submitted to the GAAR committee during the first stage proceedings were either incomplete or described in a misleading or incorrect fashion. Moreover, additional facts or other related transactions that the taxpayer considers highly relevant to an understanding of the transaction are routinely omitted. When either occurs, and the GAAR Committee decides at the first stage to pursue an issue based on the incomplete or incorrect facts, the taxpayer is rarely able to persuade the Committee at the second stage to reverse its decision. Would Revenue Canada be amenable to permitting taxpayers to become involved at the very first referral in order to develop an agreed statement of facts to be presented to the GAAR Committee?

6. Audits of Scientific Research & Experimental Development (SR&ED)

   Audits of scientific research and experimental development (SR&ED) activities, expenditures, and related investment tax credits (ITCs) continue to be extremely time consuming and frustrating for taxpayers. Indeed, such issues are subject to rigorous scrutiny with more of Revenue Canada's resources seemingly devoted to auditing this area than other income tax matters. Moreover, the opportunity and process to resolve disputes about SR&ED claims is constricted, even after referral to Appeals.

   TEI believes that the program announced last year whereby Revenue Canada will co-ordinate the resolution of SR&ED claims on a national basis is a step in the right direction. We request a status report on the progress to date in restructuring the administration of the SR&ED program. In addition, TEI would be pleased to work with Revenue Canada in restructuring the administration of the SR&ED program.

7. SR&ED -- Joint Projects with a Foreign Participant

   SR&ED projects are often conducted jointly by a Canadian taxpayer and a participant in a foreign jurisdiction. Assuming the Canadian taxpayer carries out qualifying SR&ED activities, incurs the costs related to those activities in Canada, has an unfettered right to any benefit arising from the project, and ultimately does benefit from the results of the joint SR&ED project, will Revenue Canada confirm that the Canadian taxpayer may claim the ITCs related to eligible SR&ED expenditures incurred in Canada even though --

   1. The joint project was directed primarily from the foreign jurisdiction; or

   2. The majority of the project's expenditures were incurred in the foreign jurisdiction?

8. Paragraph 161(7)(b)

   Paragraph 161(7)(b) of the Income Tax Act (the Act) governs the computation of interest upon a carryback of non-capital losses. Specifically, interest is calculated from the "balance due day" to the latest of:

   1. The first day following the subsequent taxation year;

   2. The day the return for the subsequent taxation year is filed;

   3. The day on which an amended return for the year is filed; and

   4. The day on which a written request is made that results in a reassessment for the year after taking the deduction into account.

      These rules can produce inequitable results for corporations. For example, where a carryback is used to offset taxable income arising from a reassessment following an audit, the interest on the reassessment will often be higher as a result of circumstances beyond the control of the taxpayer, including delays in the commencement or conduct of the audit.

      Recognizing the potential inequity of these rules, Revenue Canada formerly provided...