Income tax questions for Revenue Canada: December 10, 1996

Tax Executive, The, Jan-Feb, 1997

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 -- certainty 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.

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 magnitude of a de minimis threshold might vary depending on such factors as the size, complexity, and risk profile of the taxpayer entering into the protocol.

Advance Pricing Agreements

Advance Pricing Agreements (APA) represent a substantial innovation in tax administration to minimize disputes about transfer pricing. Consequently, TEI has supported the APA initiative in both Canada and the United States. We are concerned, however, that the time required to complete an APA is so daunting that taxpayers may be discouraged from initiating the process or become frustrated and withdraw from it. We invite Revenue Canada's comments on whether it is satisfied with the time required to complete individual APAs or whether process improvements have been identified to expedite achieving agreements. Are there common errors that taxpayers should avoid in order to expedite processing of their APA requests?

Transfer Pricing

In determining the proper charge for cross-border services rendered by a parent (or other controlled affiliate) to other members of a multinational group of companies, a taxpayer must weigh a number of factors including the value-added by the service, whether the service provider is engaged in providing similar services to third parties in connection with its principal business activities, and whether the costs involved in providing the services are "shared" costs of the corporate group. In addition, where the same service is provided to affiliates conducting business in various countries, the taxpayer must consider whether the charge for the services is determined in a sufficiently uniform fashion to satisfy the multiple competent authorities that may ultimately review the service charges.