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

Tax Executive, The, Nov, 1999

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.

I. 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?

II. 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.

III. 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.

IV. 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.