TEI-Revenue Canada liaison meeting (income tax issues).

• Position: Tax Executive Institute's December 10, 1996 meeting

On December 10, 1996, a delegation from Tax Executives Institute met in Ottawa with representatives of Revenue Canada to discuss pending income tax issues. The participants discussed the items as submitted.

Canada Revenue Commission

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

The following is an outline of the comments provided by Mr. Bill McCloskey, the Executive Director of the Canada Border and Revenue Services (now named Canada Customs and Revenue Agency) Implementation Team.

There are two main objectives in support of the agency initiative:

* Getting government right

-- through establishing faster/

alternative service delivery

mechanisms and human

resources and an administrative

regime that allows more

flexibility than that imposed by the

public service constraints/

conditions.

* Strengthening the federation

-- through establishing a

single tax collector for all

provinces which is an extension of

the current practice (via tax

collection agreements) and by

giving the provinces a greater

voice.

The idea is to promote one level of tax administration in Canada. Provinces are already spending in excess of $500 million a year. Major savings could be realized with a single administration and harmonization.

Revenue Canada has been working on the design of the structure of the Agency. It looks as though it will be a federal (not co-owned) agency designed to handle revenue administration, border services, trade administration, social benefits delivery.

How will the agency be governed/ accountable? This is a critical issue at this time. A team has visited all the provinces. The hope is to give the provinces a voice. Results have been inconclusive to date and there are differing views on important issues of who will direct and lead the agency -- provincial representatives, federal ones, or a mix.

Models exist and are being developed -- something like Food Inspection Agency. They turn on how arm's length or not this organization will be from the government, e.g.. a Department, a Crown Corporation, or something else. The form of structure is the first thing to be settled upon and action on this score is expected to be taken early in 1997.

Legislation on the formation of the Agency is expected to be presented in the House of Commons in late spring/early summer of 1997.

Mr. McCloskey was very interested to learn from James Murray of TEI about the U.S. National Commission on the Restructuring of the IRS and of TEI's interaction of it. Mr. McCloskey indicated that he would like to get more information from TEI on this score.

Audit Protocol

Commencing with the 1995 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 other "back-year" issues that may impede the transition to an audit framework governed by the protocol?

Response: Revenue Canada recognizes that there are a number of pending audit issues in many large corporations which require expedient resolution. Because of this, and to address different needs of different corporations, all protocols will be developed through a consultative process and each corporation will have its own protocol.

To ensure that all outstanding issues are addressed up-front, "Guidelines for developing an audit plan," which is a key element of the Audit Protocol, require that both parties describe the process to resolve outstanding compliance issues from previous audits. The audit plan prepared under the Protocol also requires that Revenue Canada auditors provide a commitment and a time frame to resolve any outstanding issues from previous audits.

With respect to becoming current in our large case audits, our objective is to have the 1993 year and all prior years completed by March 31, 1997.

Regarding the Scientific Research and Experimental Development (SR&ED) claims, Revenue Canada is committed to completing the backlog of taxpayer requested adjustments by March 31, 1997. The Department has also taken steps to ensure that current SR&ED claims are completed without any undue delay. However, we do not expect that any outstanding "back year" issues such as SR&ED claims will 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.

Response: The model audit protocol requires that Revenue Canada auditors keep the corporation regularly informed about the status of the Department's queries, proposed audit adjustments, and findings. In addition, the large file case manager and the tax manager will meet regularly to discuss the progress of the audit.

Where applicable, Revenue Canada auditors will ask corporations to review referrals to Headquarters to ensure that they have clearly and correctly stated the facts.

(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 filed 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.

Revenue Canada agrees that there must be a continuity of personnel in audits. Instructions to the field will be issued shortly, emphasizing the need for continuity of auditors during an audit cycle as well as carryover to another audit cycle. Where replacements are required from one cycle to the next, it is expected that one senior Large Business Auditor will remain in the new audit team to provide continuity.

(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 -- certainly 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.

Response: The Real Time Audit (RTA) envisages the auditing of issues (emphasis added) prior to a corporation's filing of the T2 return. There is certainty of tax liability on each RTA issue filed in accordance with an agreed position and with complete disclosure. The signing of a waiver of objection relates only to that issue which is resolved on a settlement basis.

The current policy for opening prior years applies to all corporations. Before adjusting an issue which was not audited previously, Revenue Canada will ensure the issue is significant and material. The corporation can help by identifying audit issues for which it wants certainty regarding its tax liability.

(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...