TEI liaison meeting with Canada Revenue Agency on income tax questions.

• Position: Tax Executives Institute

December 6, 2011

On December 6, 2011, Tax Executives Institute held its annual liaison meeting on income tax issues with officials of the Canada Revenue Agency. The agenda for the meeting, which is reprinted below, was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Carmine Arcari of The Royal Bank of Canada. Jeffery P. Rasmussen, TEI Senior Tax Counsel, serves as legal staff liaison to the committee. The minutes of the meeting will be posted to TEI's website when they become available.

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 the December 6, 2011, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call David V. Daubaras, TEI's Vice President for Canadian Affairs, at 905.858.5309 or, Carmine Arcari, Chair of the Institute's Canadian Income Tax Committee, at 416.955.7972.

Follow-up Questions from Prior Years

1. International Tax Forms Simplification

   In response to Question 6 of the 2009 liaison meeting agenda, CRA said that it was reviewing the scope and content of various forms, including Forms T1134A and B. In a follow-up question during the 2010 liaison meeting, CRA said that consultations with stakeholders about potential changes to the forms were continuing. 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.

2. Advisory Panel on Canada's System of International Taxation--Large Corporations and Double Taxation Cases

   Paragraph 7.24 of the Report by the Advisory Panel on Canada's System of International Taxation states:

   Rules regarding tax prepayment or security and deficiency interest in transfer pricing cases should differ from the general rules applying to other tax cases because, in double taxation cases, tax has already been paid to another government in respect of that amount.

   In Question 11 of the 2009 liaison meeting, TEI observed that CRA's Legislative Policy and Regulatory Affairs branch was understood to be reviewing the Advisory Panel's recommendations, including the requirement to prepay 50 percent of the disputed tax prior to seeking competent authority relief. In response, CRA said its working group's deliberations were "ongoing." In response to a follow-up question last year, CRA reported that its deliberations had not yet concluded. Would CRA (1) update TEI on the working group's status and its current thinking (especially about the requirement that large corporations prepay 50 percent of the disputed tax prior to seeking competent authority relief) and (2) comment on CRA's next steps in the evaluation of the administration of the current system of international taxation?

3. Partnership Returns

   In Question 5(c) of the 2010 liaison meeting, TEI inquired whether CRA kept a log of return filings so that a partnership can obtain an acknowledgement of the fact of filing its return. CRA advised that it would "consider a paper notification process as part of the on-going development of Information Returns" in order to advise when a partnership return had been received and processed. We invite an update on the status of CRA's efforts to provide a notification process for partnership returns.

4. My Business Account

   In response to Question 14 about "My Business Account" in the 2008 liaison meeting, CRA acknowledged that the system was designed with small business users in mind and that it was working on system enhancements for large businesses. In a follow-up meeting between representatives of CRA and TEI, a number of issues were discussed, including the need to balance proper authentication controls for users (including who within a corporate tax department should be able to access or view what information) with safeguards for the taxpayer and CRA (especially around transfers of funds among accounts); CRA said that making the system changes envisioned might require several years. TEI invites a discussion on the progress CRA has made in making "My Business Account" more usable by large file taxpayers.

   EFILE and Form T106

   Taxpayers generally use certified software packages listed on the CRA website to prepare their corporate income tax returns. Such software generally permits data entry for Form T2 (Corporation Income Tax Return) as well as other schedules, annexes, and forms, including information and data in respect of Forms T106 (Information Return of Non-Arm's Length Transactions with Non-Residents). The EFILE section of the CRA website, however, does not alert taxpayers to the separate paper filing requirement for Forms T106. Indeed, the only website reference to separate paper filing requirements is the following statement:

   Inform your client that elections, designations, agreements, waivers, and special elective returns must be submitted on paper by the appropriate due date, as established in the Income Tax Act. Form T106, however, is not an "election, designation, agreement, waiver or other special elective return."

   Some companies that employed the EFILE option for their T2 returns have been assessed late filing penalties and interest on the grounds that Form T106, which was included with the electronically filed return, must be filed in paper format even where the taxpayer uses the EFILE option. The affected taxpayers have filed requests for relief arguing the penalties and interest were unfairly assessed since (1) electronic returns prepared with certified software were accepted as filed and (2) there are no EFILE website instructions alerting taxpayers to file Form T106 separately on paper. Without regard to how CRA will resolve pending requests for relief, we invite a discussion of the following issues:

1. Will CRA consider expanding the EFILE process to include Form T106 in order to eliminate the separate paper filing requirement? If so, when might the system be updated to permit this?

2. Will the EFILE process be expanded to facilitate electronic filing of other forms, such as Forms T1134A, T1134B, and T5013? Is there a timetable for facilitating electronic filing of such forms and eliminating paper filing?

3. To minimize confusion about Form T106 filing requirements, will CRA update the electronic filing instructions on its website to clarify and confirm that Form T106 must be filed on paper even where EF1LE is employed?

   Details of Part XIII Reassessments Many taxpayers receive Part XIII tax reassessments as a consequence of Part 1 tax adjustments made by CRA's international tax directorate. The documentation CRA issues to the taxpayer, however, lacks detail making the account analysis and reconciliation of Part XIII tax difficult and time consuming. Unlike account statements issued by TSOs where account balances are segregated by taxation year, accounts coded "NR" lump all "non-current" year balances into a single "bucket." Does CRA plan to upgrade its accounting for "NR" accounts in order to mirror the detail provided for accounts coded "RC'? If not, how should taxpayers obtain the details underlying Part XIII reassessments?

   Functional Currency Reporting Rules

   The technical notes to subsections 261(20) and (21) state that they are intended to prevent abuses of the functional currency tax reporting regime. At the May 2011...