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Tax Controversy October 2019

October 11, 2019

Tax Controversy October 2019

Synopsis
6 Minute Read

A tax dispute can be costly. MNP discusses some of the latest Canada Revenue Agency developments around audits to keep you informed and prepared.

TAX CONTROVERSY

October 2019

Staying current with Canada Revenue Agency (CRA) developments can help you prevent, manage or resolve a tax dispute. In this newsletter, we will provide updates on ongoing CRA audit activity, discuss a recent court decision regarding the CRA’s reach when requesting information for audits and share developments in the agency’s collaborative relationships with other tax authorities.

Trends in Audit Activity

Below is a list of current CRA audit activity seen across MNP. Often these audits are routine, project driven or simply desk audits that result from advanced data mining of tax returns. If you have any questions or concerns with requests for information or proposed reassessments by the CRA, please contact your MNP Advisor.

Audit Type Description
Vehicle Expenses

Audit of vehicle expenses deducted on a Corporation Income Tax Return (T2). CRA requests:

  • a detailed list of all transactions included in vehicle expenses
  • copies of invoices for the 10 largest amounts plus all general ledger items from the third month of each year under review
  • list of all vehicles for which amounts are claimed and details on owner as well as vehicle logs
Reorganization Audits

The CRA requests all details of the series of transactions, planning letters, notes, emails, corporate minute books, etc. as part of their review.

Income versus Capital Audits of real property sales, with gain proposed to be considered as business income instead of a capital gain.
Part IV Tax Assessments

Part IV tax is being assessed where an operating company (Opco) pays a dividend to its corporate beneficiary (Holdco) via a trust and the trust sells the Opco shares in the same year. The CRA’s position is that the dividend is received by Holdco at the end of the trust’s taxation year and at that point, Opco is no longer connected with Holdco. This results in 38.33 percent tax being assessed.

Trust Audits

Audit where the capital gains exemption (CGE) claimed. CRA requests support on establishment of trust and whether shares validly subscribed for. Lengthy questionnaire accompanies start of the audit. In some instances, a deemed dividend is being proposed.

Net Worth Audits

Numerous audits across Canada. Cases include situations where couple’s personal net income is very low and one spouse has a business statement.

Real Estate

Consistent with Federal Budget 2019 and CRA’s ongoing focus on the real estate sector in B.C. and Ontario. Cases include audits of realtors and developers in B.C.

Cryptocurrency

Audit of all transactions related to cryptocurrency (bitcoins and sale of bitcoin) triggered by CRA screen of bank deposits linked to cryptocurrency platforms

Post-Assessment Reviews
  • Capital Cost Allowance Class 10 Audit (detailed information re additions to the Class > $30,000)
  • Capital Gains Reserves – detailed information requested relating to calculation of capital gains and reserves as well as summary of financial details of the purchase and sale agreement
  • Employment Expenses – Support
  • Foreign Tax Credit Claims – denied if foreign tax return not submitted (and translated if in a different language)
  • Tuition, Union / Professional Dues
  • GST – various refund integrity examination requests

Current General CRA Audit Trends

The Canadian Tax Foundation’s 2019 Prairie Provinces Tax Conference included two interesting presentations relating to tax controversy.

The first, Anatomy of a Tax Dispute,1included an anecdotal list of some of the common items and scenarios the CRA is currently screening for audit.

  • Terminology searches (i.e., the words “investment” or “holdings” in a corporation’s name);
  • Cessation of businesses such as amalgamations, wind-ups and dissolutions;
  • Dispositions of property where proceeds equal adjusted cost base (indicating a rollover);
  • Large gains or expenses, especially when compared to prior years;
  • Large decreases in cost of capital assets with no offsetting capital gain or proceeds reported;
  • Rental revenue reported where no aggregate investment income reported on the T2 Schedule 7 (the schedule where inactive income is differentiated from active income); and
  • Claiming the small business deduction where related and associated corporations are disclosed but no calculation of the group’s taxable capital is completed.

This is a good reminder to review those particular areas in more detail with your MNP advisor.

1 Dennis Auger and Sophie Virji, “Anatomy of a Tax Dispute: Understanding the CRA Audit and Objection Process” 2019 Prairie Provinces Tax Conference (27 May 2019).

The second presentation, Current Issues in Provincial and Federal Tax Law,2included information on current developments and projects within the CRA relating to data collection, data analysis and the use of electronic services. The presentation included more detail about each of these developments and projects, but the takeaway was the CRA is relying on increasingly sophisticated technology (including artificial intelligence, advanced datamining analysis and a new integrated risk assessment system for certain taxpayers), social media and the reciprocal support of foreign tax authorities to assist with data collection, analysis and taxpayer compliance.

The CRA also intends to expand their program which reviews electronic funds transfers greater than $10,000 which enter or leave Canada. This is not a new program, but many taxpayers are not aware that these transactions are subject to review. Thus, we can expect to see the CRA increasingly relying on technology and reciprocity to fight non-compliance.

The Current Issues presentation also touched on a Tax Court of Canada (TCC) pilot project. In September 2019, the TCC in Toronto and Vancouver launched a six-to-nine-month pilot program. The pilot will provide taxpayers with disputed amounts between $25,000 and $300,000 the opportunity to receive non-binding rulings from a TCC judge, which the parties can agree to apply. If the ruling is not agreed to by either party, the case will proceed through the usual steps of a general procedure matter. It will be interesting to monitor if this pilot assists taxpayers who might otherwise not be able to participate in the costly litigation process.

CRA Policy on Obtaining Information for Audits – Oral Interview Requests

The CRA recently released a communiqué which provides guidance on the CRA’s policy regarding requesting and obtaining information from multiple parties for audit and enforcement purposes. This document reflects the CRA’s views on recent court cases on this subject, specifically Cameco Corporation3(Cameco).

In Cameco, the CRA asked to interview 25 company employees to corroborate a transfer pricing report completed by Cameco. The company refused and instead offered to provide the interview responses in writing. The case escalated to the Federal Court of Appeal which ruled individuals cannot be compelled to provide oral testimony. After noting it would not seek to appeal the case further, the CRA conceded: “[T]he Minister … does not have the authority to compel the employees requested by the CRA to attend interviews and answer oral questions under a general audit and inspection rule of the Income Tax Act.”

However, on May 27, 2019, the CRA made a statement that “…CRA officials should continue to request oral discussions and interviews with taxpayers to expedite the audit process. If a taxpayer refuses to be interviewed…the CRA is free to make inferences and assumptions and to assess on that basis.”

This is a rapidly evolving area. Thus, if the CRA is requesting an in-person interview, reach out to your MNP advisor to discuss your particular circumstances and options.

CRA: Information Sharing with Other Tax Authorities

At a recent CRA conference, the agency made several comments regarding the request of information from / provision of information to other tax authorities, both in the domestic and foreign context:

2 Patrick Lindsay and Rick Barnay, “Current Issues in Provincial and Federal Tax Law”, 2019 Prairie Provinces Tax Conference (27 May 2019).

3 MNR v. Cameco Corporation, 2019 FCA 67, which affirmed Cameco Corporation v. MNR, 2017 FC 763.

  • CRA stated it is contemplating more frequent use of certain sections of the Income Tax Act which allow the agency to hold an “inquiry” pursuant to the Inquiries Act of Canada. The “inquiry” is held in front of a “hearing officer” who is appointed by the TCC and who is authorized to summon witnesses and compel evidence under oath as well as documents. The CRA also stated it may use this process in the more egregious cases of offshore non-compliance if the agency is unable to obtain information and cooperation in other ways.
  • There have been increased exchanges of information with Revenu Québec, which has traditionally been very cooperative.
  • Where the CRA comes across information that will be of interest to a foreign tax administration, it will proactively take that information and provide it to the other country. The CRA expects reciprocity in this regard and receives it. Note as well: Canadian financial institutions identify non-resident accounts and provide these annually to the CRA; this information is then shared with foreign tax authorities in exchange for reciprocal information. The CRA also has country-by-country reporting agreements with 67 other countries to exchange information.

All of the above are meant to encourage compliance with reporting requirements in all countries and jurisdictions in which taxpayers do business.

HELPFUL TIPS FOR CLIENTS WHEN THE CRA CALLS

  • Consult a tax advisor
  • Be courteous
  • Be on guard
  • Stay organized
  • Understand your rights

How MNP Can Help

Our Tax Controversy Specialists will work with you to prevent, manage and resolve tax disputes with the tax authorities in a way that reduces your tax cost and minimizes disruption to your business. We then go one step further to help you develop strategies and policies that work to protect your business in the case of future audits disputes. Contact us for more information at mnp.ca

About MNP

MNP is one of the largest national accounting and business consulting firms in Canada. We have proudly served and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world.

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