TEI liaison meeting with Canada Revenue Agency on income tax questions: December 7, 2010.

Position::Tax Executives Institute

On December 7, 2010, 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 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 (hereafter "CRA" or "the Agency") during the December 7, 2010, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call Rodney C. Bergen, TEI's Vice President for Canadian Affairs, at 604.488.5231 or, Carmine Arcari, Chair of the Institute's Canadian Income Tax Committee, at 416.955.7972.

  1. CRA Audit Approach--Tax Governance of Large Corporations

    The CRA, along with tax authorities from other countries, has been working through the OECD's Forum on Tax Administration to develop and share best practices in tax administration and audits. One initiative is to develop an "enhanced relationship" with taxpayers. As part of the enhanced relationship, CRA is implementing a risk-based audit approach in which a large corporate taxpayer's compliance is graded as low, medium, or high risk. The grade is based on CRA's evaluation of the company's tax filing and audit history as well as its tax governance structure. The scope and amount of time to be spent on an audit is then based on CRA's risk evaluation.

    1. Would the Agency elaborate on the specific factors used in the risk-based audit approach? Also, how is the ap proach being implemented? Is it being phased-in in select Tax Services Offices (TSOs) or is it being implemented contemporaneously across all TSOs, corporate taxpayers, and taxation years?

    2. Please comment on when and how the risk evaluation is conducted, by whom, and whether and how CRA takes account of the taxpayer's input and views during the evaluation.

    3. Will taxpayers be informed of the compliance risk grade assigned by CRA?

    4. Will CRA provide feedback to or otherwise work with taxpayers to identify necessary governance changes or compliance processes that must be implemented or improved in order to lower their risk-grade profile?

    5. Finally, how does the risk-based audit approach affect CRA's decision to engage in a real-time audit for a particular taxpayer? More generally, are there collateral administrative or policy consequences arising from the risk-based audit approach or the grade assigned to a taxpayer?

  2. Allocation and Management of Audit Files--Organizational Changes?

    Members report that CRA has seemingly implemented a new practice whereby audit teams across the country may initiate an audit of a taxpayer even though it is part of a corporate group that is subject to audit as a Large File case. Where this occurs, the "new" auditors are unfamiliar with the files, companies, or businesses they seek to examine and consequently begin the audits with voluminous requests for data--data that (i) the Large File audit team are already familiar with and (ii) tax department personnel must expend considerable time retrieving (or refreshing) and then organizing and delivering to the new auditors.

    Where taxpayers have asked their Large File Case Managers about the inquiries from the "other" audit team, they have been told that if the particular file is not under active audit by the Large File audit team, the Large File Case Manager cannot intercede and the taxpayer should treat it as a separate audit and respond accordingly. Since Large File Case Managers spend considerable time assessing compliance risk, planning audits, and working closely with their corporate tax department counterparts to manage calendars and resources, the practice of permitting other audit teams to initiate separate audits undermines audit efficiency for both CRA and the affected taxpayers. Indeed, the inquiries from the other CRA audit team diminish the time and resources available for the taxpayer to respond to the Large File audit team, which presumably is assigned to review the higher risk files, entities, and transactions.

    TEI recommends that the practice of "file sharing" be discontinued for Large File cases under full-time, continuing audit. We believe this would be beneficial for both CRA and taxpayers. We invite CRA's comments.

  3. Audit Reassessments Currently, audit adjustments are processed independently by various specialty audit teams, including international, tax avoidance, scientific research & experimental development (SR&ED), etc. TEI believes that the administrative time for both CRA and taxpayers can be reduced--and the overall quality of audits improved--by centralizing reassessment authority and case control with the Large File Case Manager. Would CRA consider having the Large File Case Manager consolidate and approve all adjustments prior to a tax return's being reassessed?

    More generally, would CRA please enumerate the responsibilities and role of the Large File Case Manager in terms of exercising control over their cases?

  4. Technical Interpretation Process

    We invite a discussion of the process for referring technical questions from a TSO to Ottawa Head Office during the course of a taxpayer's audit.

    1. What process does CRA currently employ to ensure that the taxpayer's facts and legal position are properly reflected in the auditor's technical interpretation request?

    2. To ensure that the taxpayer agrees with the description of the facts and legal positions in the technical interpretation request, would CRA consider providing the taxpayer with CRA's summary of the taxpayer's position as well as an opportunity to comment on it prior to its submission to Ottawa?

    3. To ensure a complete and well-documented technical interpretation request TEI recommends that the taxpayer also be permitted to comment on the TSO's position in respect of the technical interpretation. We invite CRA's reaction to this proposal.

    4. Finally, for the sake of transparency, TEI recommends that the taxpayer be provided with a copy of the final technical interpretation request that is submitted to the Ottawa Head Office. We invite CRA's comments.

  5. Miscellaneous Administrative Matters In order to improve administrative efficiency, TEI invites a discussion of the following:

    1. OnlineTax Payments

      Members report that CRA permits financial institutions to accept online tax payments for up to two preceding taxation years. Taxpayers wishing to make payments for earlier taxation years must either issue manual cheques or make an on-line deposit for the current tax year and then ask CRA to transfer the payment to an earlier tax period. This policy seemingly causes unnecessary complications and duplication of effort for both taxpayers and CRA. Would CRA consider accepting on-line payments in respect of any open tax year?

    2. Statements of Interim Payments--Transfers of Payments between Accounts

      Large corporate taxpayers have a significant amount of activity in their tax payment accounts. Where CRA initiates transfers between tax accounts without the taxpayer's knowledge, the account reconciliation can be extremely challenging. Indeed, taxpayer personnel frequently must contact CRA to obtain an explanation of the transfers in order to understand the nature of the account activity. Moreover, in 2009 CRA reduced the level of detailed information on monthly "Statements of Interim Payments." Prior to the change, the statement identified the specific parties in a related corporate group affected by transfers between tax accounts. Now, the only information provided is the amount of the transfer in a transaction. For additional information on the nature of and reason for the transfer, as well as the identity of the parties, the taxpayer must contact CRA.

  6. Would CRA consider revising its statements to provide more detailed information electronically so that taxpayers will not have to contact CRA personnel for an explanation of every account transfer?

  7. More broadly, would CRA be willing to eliminate systemic transfers between tax accounts, especially for large corporate taxpayers that do not pose a significant credit risk?

    1. Partnership Returns--Acknowledgment of Receipt

      When a partnership files a return there is no...

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