Tag: CRA

Keeping those tax deals confidential? Be wary

There was no mention of it in the Federal Budget Speech, but there is a very important proposal in the Budget Plan itself that could have serious implications for wealth advisors, particularly those involved in sophisticated tax planning.

It has to do with requiring the reporting of certain tax avoidance transactions that fall outside existing tax shelter registration requirements.

The trend toward information reporting

The Canadian government is following a path that a number of jurisdictions have taken of late — to require disclosure of certain transactions that may warrant greater scrutiny by tax authorities. This includes many major economies and some of our closest trading partners, including the U.S., U.K., Ireland, New Zealand and Australia.

Closer to home, in January last year provincial authorities in Quebec circulated a working paper titled “Aggressive Tax Planning” for public consultation. Following those discussions, Revenu Quebec announced in October that it would be intensifying its efforts in this area, including requiring the mandatory disclosure of confidential or conditional remuneration transactions. Penalties for non-compliance can be as much as $100,000, with no time limit for the agency to review undisclosed transactions.

The proposal

There are existing substantive rules in the Income Tax Act intended to counter aggressive tax planning, including information reporting to help identify certain transactions and participants. 

Further, there are rules that may be applied to deny tax benefits, including the General Anti-Avoidance Rule (GAAR).

Still, we operate within a self-assessment system that relies on taxpayer disclosure to support the integrity of the system. The government sees these foregoing substantive rules as being more effectively applied if CRA is able to identify aggressive tax planning in a timelier manner. 

The proposal uses the term “hallmark” to describe the characteristics of an avoidance transaction that will be deemed a reportable transaction. Transactions would have to be reported if they bear at least two of the following three hallmarks:

  1. A promoter or tax advisor in respect of the transaction is entitled to fees that are to any extent:
    1. attributable to the amount of the tax benefit from the transaction;
    2. contingent upon the obtaining of a tax benefit from the transaction; or
    3. attributable to the number of taxpayers who participate in the transaction or who have been given access to advice from the promoter or advisor regarding the tax consequences from the transaction.
  2. A promoter or tax advisor in respect of the transaction requires “confidential protection” about the transaction.
  3. The taxpayer or the person who entered into the transaction for the benefit of the taxpayer obtains “contractual protection” in respect of the transaction (other than as a result of a fee described in the first hallmark).

According to the proposal, the presence of these hallmarks doesn’t necessarily imply there is abuse, but rather indicates there is a higher risk of abuse which merits a closer look by the CRA. 

It’s important to understand this is strictly a reporting exercise. Disclosure would have no bearing on whether the tax benefit is allowed, nor would it be considered an admission that the GAAR applies to the transaction.

Scope and timeframe of implementation

The focus is on whether the transaction itself may be reportable by the taxpayer, not whether other individuals must report or be registered in some manner. 

Nonetheless, professionals of all stripes will want to be aware whether they are touched by a given transaction — even if only tangentially. They may not be required to take action, but it’s prudent to be aware. 

The proposal language is a bit vague and references “promoter or tax advisor,” without any further details of how widely that net may be cast — at least not in the Budget Plan document. It will be interesting to see how this definition is fleshed out once all parties concerned have weighed in during the public consultation process.

As to timeline to implementation, the quick speed of the Quebec experience should be instructive. The Budget Plan purports the proposal (as modified through consultations) is intended to apply to transactions after 2010, and series of transactions completed after 2010. 

CRA’s best tool?

On a personal note, I’m reminded of a conversation in an earlier business life a dozen or so years back. 

During lunch at a wealth-planning conference I was running, a senior official in the International Tax Directorate was asked about recent legislative changes. He commented that it was certainly nice to have new tools, but that their best tool remained . . . divorce. 

Apparently, at least at that time, acrimonious marriage breakdown was a catalyst to not-so-anonymous tips to their hotline. 

And you thought disclosure was just an issue between you and the CRA.

Let me tell you about My Account: Not mine, but yours … or rather, CRA’s

Confusing though it may be to say aloud, April seems like a good time to shout out a word or two about the continuing evolution of the “My Account” service available for communicating with the Canada Revenue Agency (CRA).  

In fact, it’s timely to get a better understanding of the service, as the Federal Budget 2010 proposes some legislative amendments that will bring us and CRA further into the digital age, hopefully making our dealings with our tax authority easier and more effective.

The service

If you’re not familiar with it, My Account (and My Business Account on the commercial side) is the secure online platform where taxpayers can manage their tax affairs with CRA. Among the current functions on the personal side, you can:

Apply for tax benefits such as the Canada Child Tax Benefit, the GST/HST credit, the Universal Child Care Benefit and the Working Income Tax Benefit

File income tax returns in coordination with the NetFile program and review past years’ returns (even for years before you opened your My Account)

Track important balances such as RRSP and TFSA contribution room, and outstanding amounts under the Home Buyers’ Plan and Lifelong Learning Plan

Access certain tax slips, including CPP, OAS and EI statements

Establish wire connections, both to pay amounts due to CRA more securely and receive amounts due to you more expeditiously

You can even use it to register a formal dispute if you differ with CRA on tax matters. 

New developments

The Personal Information Protection and Electronic Documents Act became law in 2000, prescribing requirements and limits of communications between the government and ourselves. While it allowed for a number of technological advances, it could not reasonably anticipate all the digital developments of the past decade.  

In the tax realm, assessments have had to be communicated in writing and by regular mail, until now. The Federal Budget 2010 proposes to allow taxpayers to direct CRA to provide such assessments digitally, likely as a posting to My Account. Apart from speeding and simplifying communications for many of us, presumably this will cut down on paper, processing activities and other hard resources. 

In the end

Though the recurring calculation and payment of tax ranks below certain dental procedures for most of us, it’s not going away. As such, the easier it is to complete, the better. 

In my case, I filed online, was assessed within 48 hours and had cash directly deposited to my account – that is, my own account – by the end of the following week. Not bad 

Sometimes you can beat City Hall, or rather CRA

As we close out the year and head into RRSP season (I know that term makes some bristle, but it’s a practical reality for many others), here’s an exasperating decade-long battle to mull over.

Where it all began

Back in September 1997, Lindsay Kerr received her Notice of Assessment for her 1996 tax year.  The NOA showed her 1997 RRSP contribution limit to be about four times what it had been in recent years, even though nothing had happened in her employment, income sources or other circumstances that would have explained the jump.  

While she suspected a possible error, Lindsay proceeded to contribute $8,121 into her RRSP in February 2008.  As it turned out, this was far in excess of the $794 she was actually entitled to, though it would be years before this came to full light.  Complicating the arithmetic, and potentially compounding the problem, Lindsay had earlier exercised her prerogative to make a one-time over-contribution of $2,000 so that in total she had made excess contributions of $9,327.

Then Lindsay took a break.  Having no taxes owing in the following years, she did not file tax returns from 1997 to 2002.

The early correspondence

A couple of years on, Lindsay was solicited by CRA to file returns for those missing years.  The letter, received in February 1999, advised her that all taxpayers are required to file an annual tax return in specific situations, none of which applied to her. Specifically, she did not owe any taxes for those years.

Lindsay spoke to CRA on a number of occasions by phone to obtain filing extensions, but eventually she was served with arbitrary tax assessments for 1999 and 2000.  Faced with the prospect of paying taxes she knew she did not owe, in November 2003 Lindsay filed returns for 1997-2002.  As it turned out, indeed there were no taxes owing; in fact, refunds were paid for all the years.

Error discovered, penalty tax assessed

On filing the 1997 return in 2003, Lindsay properly recorded the $794 contribution limit, though there was no paper trail to explain how she came upon this information. 

Still, as a result of this disclosure, Lindsay was assessed the 1% monthly penalty tax for the duration of the over-contribution.  By the time the matter was heard in court in the fall of 2008, she had paid $11,270 in taxes, penalties and interest.

The odyssey: Requesting a waiver

While it would be difficult to say that Lindsay was completely innocent of knowledge of the error, the fact is that she relied on the official documents as she was entitled to do.  On that basis, she applied for a waiver of the penalty tax in September, 2004.

The first CRA response explicitly stated that each individual may make RRSP contributions within the limit “provided on the Notice of Assessment each year.”  A later internal report in 2007 found that CRA “had originally provided an incorrect amount and (it appears) we had never advised the taxpayer, in writing, that her revised 1997 RRSP deduction limit was $794.”

On her second request in September 2005, an administrative review, the content of the denial letter included a comment that “you should have been aware that the amount in Box 52 of your T4 slip is required to be reported on your return.”  Again, the 2007 report found fault: “This statement is of concern because, according to the copy of the 1996 return provided to us by the taxpayer, she did report the correct amount in box 206.”  Box 52 is the pension adjustment to be reported in Line 206: Lindsay entered it correctly; CRA transcribed it incorrectly and then apparently still blamed her for its error. 

On her third request in June 2006, Lindsay specifically asked for a different tax office to handle the review – No doubt there had been some acrimony over the years of wrangling.  That earlier mentioned 2007 internal report was the basis for the ultimate decision in July 2007, at which time Lindsay was again denied, this time on the basis she had not made “reasonable errors” in failing to report the appropriate amounts.  This was despite that the only official record was acknowledged by CRA to be that original erroneous NOA.

Oh, that independent 2007 report?  Despite Lindsay’s request (and CRA’s assurance) for an independent review, it was first approved by an official at the original office before being given to the senior official who wrote to Lindsay.  And to boot, a memorandum obtained from a Privacy Act request revealed that that final writer had some critical misapprehensions of the facts, and appeared to show a bias against Lindsay for not having filed returns in those interevening years … years she was not obligated to file returns.

Judgment for the Applicant    

Incredibly, there were even more twists and turns in this case, but in the end the court was convinced that Lindsay was entitled to the relief she sought.  An order was issued in September ’08 stating that her errors were reasonable, as were her corrective steps, and as a result she was entitled to the return of her $11,270.

Your own resolutions?  Pay close attention to your Notice of Assessment (checkin’ it twice?), keep good written records of your communications with CRA, and maybe hug a judge this new year’s.