Income tax questions for Revenue Canada: December 10, 1996

Tax Executive, The, Jan-Feb, 1997

In the case of services rendered by a related foreign parent company to a Canadian subsidiary, will Revenue Canada permit the Canadian service recipient a deduction for the amount of a reasonable mark-up over the parent's actual cost of providing the intercompany service charges? In answering the posed question, assume that the parent company (service provider) is not rendering comparable services to third parties, it applies a uniform mark-up on costs for services rendered to all group members, and that the service is not a principal business activity of the provider.

In a case where the service provider is a Canadian-based parent company, will Revenue Canada require the Canadian company to add a reasonable mark-up over the cost of providing services to related foreign subsidiaries in order to establish that the charge is a proper arm's-length charge?

Auditor General's Report

The Auditor General issued a report recently concerning the advance ruling process. TEI is concerned that the report may diminish the ability of taxpayers to seek advance guidance and attain certainty in respect of the tax effects of their transactions. Does Revenue Canada foresee the report affecting the ruling process in any fashion?

Part XIII Non-Resident Tax Issues

A. Statute of Limitations

Should a payer fail to withhold Part XIII tax for amounts paid to a non-resident recipient, there is seemingly no statute of limitations for assessing the Part XIII tax against the payer for its secondary liability. That is to say, if the payer fails to withhold the tax and file the proper forms, there appears to be no provision that triggers an assessment that starts the statute of limitation. In such cases, does Revenue Canada adhere to an administrative policy against issuing assessments following a certain period of time?

B. Leases

In a technical interpretation dated March 28, 1991, Revenue Canada recommended that, when certain lease transactions are treated as financed purchases for the purposes of paragraph 18(1)(b) and subsection 16(1) of the Income Tax Act (hereinafter, "the Act"), the same assessing policy should be applied for all purposes of the Act, including Part XIII. Please provide an update on the status of the Department's recommendation. Has the recommendation been approved? If so, what is its effective date?

C. Discrepancy Notices

Some members report that their responses to Non-Resident Tax (and other similar) Discrepancy Notices have not forestalled the issuance of Notices of Assessments even though the response was submitted within the 30 days stated on the Discrepancy Notice. Moreover, collection actions have apparently commenced on such assessments immediately. Please comment on the controls the Department has established to ensure that responses to Discrepancy Notices are reviewed and evaluated before Notices of Assessment are issued. Does the Department routinely contact the taxpayer submitting a response on the Discrepancy Notice prior to issuing a Notice of Assessment?