OBA Tax Section Presentation Policies, Penalties and Tax Dispute Resolution John Sorensen Gowling Lafleur Henderson LLP (416) 369-7226 john.sorensen@gowlings.com
Fundamentals of Tax Dispute Resolution • Stages of a Typical Tax Dispute • Audit • 30 Day Letter • Notice of Reassessment • Notice of Objection • Assessment / reassessment may be: – varied; – vacated; or – confirmed
Fundamentals of Tax Dispute Resolution • Stages of a Typical Tax Dispute • Appeal to the Tax Court of Canada (“TCC”) • Further appeals to the Federal Court of Appeal and the Supreme Court of Canada
Fundamentals of Tax Dispute Resolution • Other means to remedy various tax problems: • Voluntary disclosures to the CRA • Fairness / taxpayer relief applications • Rectification applications • Remission order applications • Judicial review applications
Fundamentals of Tax Dispute Resolution • Tax Returns • Self-assessment and filing tax return • Corporations: within 6 months of year end, if resident in Canada, carried on business, had taxable capital gain, disposed of taxable Canadian property or had tax payable in Canada for any other reason
Fundamentals of Tax Dispute Resolution • Tax Returns • Trusts: within 90 days of year end • Individuals: April 30 or June 15 if taxpayer carried on business (tax still payable April 30) • Initial Assessment – usually just confirms the filing position (unless desk audit) – starts the clock running on the normal reassessment period (limitation period for reassessing)
Fundamentals of Tax Dispute Resolution • Audits • Desk audit – verify or confirm information in a tax return at initial assessment stage • Field audit – initial contact / letter • defines audit scope, # of taxation years – attendance at taxpayer’s premises • document gathering and review • interviews with personnel & questionnaires
Fundamentals of Tax Dispute Resolution • Audits • Audit management critically important – former senior CRA personnel say that appropriate audit management more important than technical legal arguments in a taxpayer’s favour
Fundamentals of Tax Dispute Resolution • Audits & CRA Policies • Current areas of interest for CRA – shareholder benefits • personal use of corporate assets and loans to shareholders – planning to multiply small business deduction – management fees • documentation and consistency from one year to the next – payroll audits • independent contractor vs. employee status
Fundamentals of Tax Dispute Resolution • Audits & CRA Policies • Current areas of interest for CRA – Foreign tax credit documentation – Late filed information returns (T1135, for example) • aggressive application of very onerous penalties – Tendency to reassess outside statutory limitation period without full justification – Deduction of expenses • professional fees & other expenses - actually paid to earn income?
Fundamentals of Tax Dispute Resolution • Audits & CRA Policies • Current areas of interest for CRA – SR & ED documentation – High net worth individuals (global initiative)
Fundamentals of Tax Dispute Resolution • Audits • Tips: – authorized persons carry CRA-specific ID – at any “reasonable” times authorized CRA personnel may enter premises where business is carried on, property is kept, anything is done in connection with the business and any books and records are kept, for the purpose of the administration & enforcement of the ITA – but a warrant is required to enter a dwelling house
Fundamentals of Tax Dispute Resolution • Audits • Tips: – co-operate with authorized CRA personnel • obligation to provide reasonable assistance and answer proper questions - must not hinder – confused or suspicious auditor is a bad thing – offer clarifications and explanations – be prepared to make and supply copies • stories after the fact about how the CRA auditor lost your documents are unpersuasive – keep track of auditor’s timing and delays • may help support interest relief application
Fundamentals of Tax Dispute Resolution • Audits • What may be examined? – books and records of taxpayer – documents of taxpayer or any other person • relates or may relate to information that is or should be in taxpayer’s books and records – documents include money, security and records (which includes invoices, books, agreements, charts, tables, diagrams, images, maps, memos, vouchers, letters, telegrams, statements, and anything containing written information
Fundamentals of Tax Dispute Resolution • Audits • Understand when materials can be withheld from the CRA – Legal opinions – Accounting work under privilege umbrella when accountant is engaged as agent – privilege not retroactive – Segregate privileged material • mark materials as privileged • keep in separate folders • consider document retention and elimination policy
Fundamentals of Tax Dispute Resolution • Audits • 30 day proposal letter – extensions of time to respond usually granted • Representations to auditor – further information and legal submissions – ask that the auditor seek legal opinion • Technical Applications group in Ottawa • CRA Rulings in Ottawa • Industry Specialist Services • Department of Justice – don’t be afraid to escalate
Fundamentals of Tax Dispute Resolution • Audits • Auditor’s response letter and T7W C • Audit Triggers – past “aggressive tax planning” – engaging in complex structuring and transactions – international transactions – lack of transparency
Fundamentals of Tax Dispute Resolution • Audits • Sidebar notes: – “Tax earned by audit” or TEBA supposedly no longer a benchmark – Special CRA projects • condo flipping • Non-profits – Audit report (T20) available upon request and/or through access to information legislation
Fundamentals of Tax Dispute Resolution • Notice of Reassessment • Normal reassessment period – 4 years for mutual fund trusts and corporations other than CCPCs – 3 years for everyone else • Extension of normal reassessment period – misrepresentation due to carelessness, negligence, willful default, fraud – waiver / stapled waiver – transactions with non- arm’s length non -residents
Fundamentals of Tax Dispute Resolution • Notice of Objection • Independent review by CRA Appeals – Can and should make substantive legal submissions at this stage – Sometimes information not provided to auditor may resolve dispute • Must be filed within 90 days of notice of (re)assessment • Extension may be possible for period of up to one year after initial deadline – this is a hard and fast deadline
Fundamentals of Tax Dispute Resolution • Notice of Objection • Large Corporations – Corporation (or related group) with $10M of taxable capital employed in Canada – Must specify: • each issue • relief sought (as amount of change in a a balance) • facts and reasons – policy basis - parked objections and threat to tax base – failure to observe this rule can substantially prejudice client – limits scope of TCC appeal
Fundamentals of Tax Dispute Resolution • TCC Appeal • CRA appeals may vary, vacate or confirm assessment • TCC appeal next procedural step if required relief is not obtained from CRA appeals division – May be initiated after CRA confirms or reassess within 90 days – … or if 90 days pass after notice of objection was filed
Fundamentals of Tax Dispute Resolution • TCC Appeal • Extensions of time to appeal possible but risky if deadline was missed • Limitations on Large Corporation appeals • Court cannot increase tax payable – That would be tantamount to Minister appealing her own assessment • Reverse onus in tax appeals - assessment is deemed valid and binding • Ministerial assumptions at audit and appeal – prima facie burden to demolish assumptions
Fundamentals of Tax Dispute Resolution • Scope of TCC Jurisdiction • Correctness of a tax (re)assessment • No equitable jurisdiction – rectification of mistakes in transactions with tax results is a matter for superior courts • Judicial review of Ministerial exercise of discretion a matter for the Federal Court (“FC”) • FC cannot vacate or vary an assessment • and, as a corollary, the TCC doesn’t overtly decide cases based on the conduct of the auditor, other CRA officials or “abuse of process” arguments
Fundamentals of Tax Dispute Resolution • Settlements • no purely risk-based settlement process • settlement must be principled – in other words, supportable by fact and law • deals can be struck – trading on issues of various levels of merit – valuations / allocations
Fundamentals of Tax Dispute Resolution • CRA Collections Powers • Broad powers • General limitation to collect disputed amounts - 90 day appeal period – income tax vs GST/HST vs source deductions – stay on income tax collections while matter at CRA appeals or Court
Thank You • John Sorensen (416) 369-7226 john.sorensen@gowlings.com montréal ottawa toronto hamilton waterloo region calgary vancouver beijing moscow london
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