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Taxpayers’ Ombudsman Addresses CBA Meeting

On January 27, 2016, Sherra Profit, the Taxpayers’ Ombudsman, addressed a meeting of the Canadian Bar Association Tax Section on the subject of assisting taxpayers in resolving their service complaints.

The Office of the Taxpayers’ Ombudsman handles individual complaints from taxpayers where he/she was not able to resolve a service complaint through the CRA’s internal process or if the complaint process hasn’t been tried and there are compelling circumstances for the Ombudsman to review it. Such compelling circumstances could include, for example, situations in which an auditor repeatedly contacts a taxpayer when the taxpayer has asked them to deal with their authorized representative, or unexplained delays by the CRA in processing a refund.

The Ombudsman’s mandate with respect to individual complaints is strictly on the service side, and no technical tax issues will be considered in the investigation.

The Ombudsman also handles systemic investigations in respect of which she reports directly to the Minister of National Revenue. Such investigations have addressed processing delays, or system-wide mistakes (i.e., a large number of individual taxpayers being erroneously classified as deceased in the CRA’s database). These systemic investigations could arise out of recurring complaints, requests from tax professionals, or otherwise.

The Office of the Taxpayers’ Ombudsman operates independent of the CRA and attempts to be impartial and fair in the review of service-related complaints. The Ombudsman is ultimately accountable to the Minister, not the CRA.  All information communicated to the Ombudsman through the complaint process is kept confidential, except to the extent a taxpayer gives consent to its release to assist the investigatory process.

Ms. Sherra also provided a list of tips for tax professionals for assisting their clients with service-related complaints:

  1. Manage the taxpayer’s expectations
  2. Use the CRA Service Complaints Program first, unless compelling circumstances exist
  3. Provide a signed consent to authorize a representative
  4. Submit detailed information

Contact information, if a complaint is contemplated, can be found on the Ombudsman’s website.

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Taxpayers’ Ombudsman Addresses CBA Meeting

Kruger: Appeal Allowed … Crown Awarded Costs

How should the Tax Court award costs where the taxpayer’s appeal was allowed but no changes were made to the assessment at issue?

This unusual situation was considered by the Tax Court in Kruger Incorporated v. The Queen (2016 TCC 14).

In the main appeal (2015 TCC 119, under appeal to the Federal Court of Appeal (A-296-15)), the Tax Court had allowed the taxpayer’s appeal on the basis that certain foreign exchange option contracts should be valued in accordance with subsection 10(1) of the Income Tax Act (see our previous post here). However, success in the appeal was divided because certain of the taxpayer’s other foreign exchange option contracts were to be valued on a realization basis, as assessed.

The Tax Court asked the parties to provide submissions on costs.

The taxpayer asked for costs on the basis that the appeal had been allowed. The Crown asked for costs on the basis that the result of the proceeding was substantially in its favour as to the amounts in issue and the determination of the issue.

Interestingly, after the Court’s decision allowing the appeal, the parties discovered that the underlying assessment would not change. The Tax Court called this an “anomaly”.

The Tax Court stated that, despite its decision allowing the appeal, the Crown was the successful party. The case law on costs cautions against awarding amounts based on the success of particular arguments (see, for example, General Electric Capital Canada Inc. v. The Queen (2010 TCC 490)). However, the Tax Court noted that this was not a case in which a party won a Pyrrhic victory, as each party had been successful to different degrees.

The Court considered the factors listed in section 147 of the Tax Court of Canada Rules (General Procedure), including the amounts in issue, the volume of work, the complexity of the matter, and the conduct of the parties. The Court noted that two of the Crown’s witnesses were of significant assistance to the Court.

The Court concluded that no rule prohibits a judge from distributing costs between the parties, although this is not encouraged. In this case, it was appropriate to recognize the Crown’s success.

The Court awarded costs to the Crown in respect of two witnesses, and 50 percent of all other costs. In the Court’s view, this was an unconventional but reasonable award.

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Kruger: Appeal Allowed … Crown Awarded Costs

Tax Court Establishes Motion Days in Toronto

The Tax Court of Canada has established a pilot project for regular motion days in Toronto for the period of February to September 2016. The Court will review the initiative in September 2016. The project may be expanded to other cities.

The first motion day is scheduled for Monday February 22, 2016, followed by Monday March 21 and Tuesday March 29. Subsequently, motions will be scheduled every first and third Monday through to the end of September. If the motion day falls on a statutory holiday, the motion day will be scheduled the following week.

The Court also reminded the public and counsel of the Court’s practice for the requirements and scheduling of motions under the General Procedure, as described in the Court’s Practice Note No. 2 (amended).

Tax Court Establishes Motion Days in Toronto

CRA Ends Political Activities Audit Program for Charities

On January 20, the CRA announced that its controversial political activities audit program for charities has been wound-down.

From the CRA news release:

The results of the political activities audit program have shown substantial compliance with the rules regarding charities’ involvement in political activities. In light of these outcomes, the political activities program will be concluded once the remaining audits have been finalized.

Our Government’s commitment to openness and transparency includes providing more information on the regulation of charities to the public and the charitable sector in a timely manner and in ensuring the engagement of the sector. In order to achieve this, Minister Lebouthillier also announced that the CRA will publish an annual report to provide the public with more information about its activities and its contribution to an effective regulatory framework for registered charities.

Minister Lebouthillier is committed to engaging with key stakeholders and has asked CRA’s Charities Directorate to find ways to further clarify the rules governing a registered charity’s involvement in political activities. Details of the consultations will be made public as they become available.

See our previous posts on the political activities audit program here and here.

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CRA Ends Political Activities Audit Program for Charities

Yes, Those Emails are Tax Phishing Scams

We were alerted today that some individuals had received fake emails informing the recipient that he/she had received an Interac email money transfer (i.e., a surprise refund).

The emails arrive with the subject line “INTERAC e-Transfer from Canada Revenue Agency System” and appear to emanate from Interac, Dentons, or canadiantaxlitigation.com.

Those emails are a scam. If you receive one of these emails do not click any links in such emails, and do not confirm or provide any personal data. 

Several concerned individuals forwarded sample emails to us:

From: “notify@payments.interac.ca” <admin@canadiantaxlitigation.com>

Date: October 29, 2015 at 2:56:31 PM EDT

To: name@email.com

Subject: INTERAC e-Transfer from Canada Revenue Agency System

<>Dear Tax Payer,

<>Canada Revenue Agency has sent you an INTERAC e-Transfer (previously INTERAC Email Money Transfer).

<>Amount: $741.28
<>Sender’s Message: A message was not provided
<>Expiry Date: 30 October 2015

<>Action Required:
<>To deposit your money, click here: http:/www.cra-arc.gc.ca/confirm/interac/services/REF=IDREFCASE741.28

<>2015 Canada Revenue Agency (CRA) Support

Please see our previous post on fraudulent tax scams here and here.

The CRA’s Security page is available here.

These email tax scams should be reported to the Canadian Anti-Fraud Centre.

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Yes, Those Emails are Tax Phishing Scams

NHL Team Denied Deduction for Road Meals?

We noticed these recent items regarding the U.S. IRS denial of a 100% deduction by the NHL Boston Bruins hockey club in respect of the team’s provision of meals to employees during road trips.

In Canada, section 67.1 of the Income Tax Act limits the deduction of meals and entertainment to 50% of the lesser of the actual cost or a reasonable amount. There are several exceptions to this general rule (see subsection 67.1(2)), including exceptions for meals provided in the ordinary course of a business of providing meals and entertainment for compensation, fund-raising events, meal costs billed directly to a client, meals provided to employees at remote work locations, or holiday parties. If an exception applies, the taxpayer may deduct 100% of the cost.

We are reminded of the Canadian case of Pink Elephant Inc. v. The Queen (2011 TCC 396), in which the taxpayer was successful in establishing that the exception for meals provided in the course of a business of providing meals for compensation applied in respect of the taxpayer’s provision of meals during its information technology training seminars.

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NHL Team Denied Deduction for Road Meals?

Tax Court: CRA Employee May Not Testify as Expert

In HLP Solution Inc. v. The Queen (2015 TCC 41 ) the Tax Court held that a CRA employee lacked the necessary impartiality to testify as an expert witness because of her prior involvement in auditing the taxpayer.

Background

The taxpayer was a software company that claimed Scientific Research and Experimental Development (SR&ED) tax credits for the 2009 taxation year. The CRA reassessed to deny the SR&ED credit claims.

In the Tax Court, the taxpayer challenged the qualification of the CRA’s expert witness on the basis that she did not have the necessary impartiality to testify as an expert witness in the appeal. The Tax Court held a voir dire to determine whether the Crown’s proposed expert witness could testify in the appeal.

The proposed expert witness held a doctorate in computer science and was employed with the CRA as a Research and Technology Advisor (RTA). The taxpayer’s allegation of impartiality was not based on the fact that the proposed expert witness was employed with the CRA. Rather, the taxpayer argued that it was the proposed expert witness’s involvement in every stage of the file that impugned her impartiality.

The Crown submitted that it is rare for a court to refuse to hear the testimony of an expert witness, and that there must be clear evidence of bias, which, according to the Crown, was not present in this case. Moreover, the Crown submitted that it was in the capacity as an expert that the opinion was given, irrespective of whether this occurred at the audit stage, objection stage, or during appeal.

Analysis

In analyzing whether to admit the evidence by the Crown’s witness, the Tax Court reviewed the leading case on the admission of expert evidence, the Supreme Court of Canada decision R. v. Mohan ([1994] 2 SCR 9), in which the Court set out the criteria for determining whether expert evidence should be admitted, namely: relevance, necessity in assisting the trier of fact, the absence of an exclusionary rule, and a properly qualified expert.

In Mohan, the Supreme Court established that the question of relevancy is a threshold requirement for the admission of expert evidence and a matter to be decided by the judge as a question of law. There must first be logical relevance in order for the evidence to be admitted. The judge must then perform a cost-benefit analysis to determine whether the value of the testimony is worth the costs, in the sense of its impact on the trial process.

The Tax Court also reviewed R. v. Abbey (2009 ONCA 624), in which the Ontario Court of Appeal applied Mohan but also distinguished between the preconditions to admissibility and the judge’s role as a gatekeeper. The Ontario Court of Appeal noted that while the inquiry into the preconditions to admissibility is a rules-based analysis that tends to yield “yes” or “no” answers, the gatekeeper function does not involve the application of bright line rules and frequently requires the exercise of judicial discretion. The gatekeeper function is more subtle and involves weighing the benefits of the probative value of the evidence against the prejudice associated with admitting the evidence.

In HLP, the Tax Court held that it was preferable to disqualify the expert at the qualification stage. The Court based its conclusions on many of the taxpayer’s allegations, including the following:

  • the proposed expert witness was involved with the audit and objection;
  • the proposed expert witness delivered the opinion (the technical review report) that served as the basis for the assessment;
  • following the taxpayer’s representations, the proposed expert witness also wrote an addendum to the technical review report in which she maintained the same position;
  • the proposed expert witness participated in every meeting with the taxpayer as the CRA’s representative;
  • the proposed expert witness confused her role as an RTA with that as an expert witness; and
  • the proposed expert witness reproduced word-for-word paragraphs from her technical review report.

The Tax Court was careful to note that it was not disqualifying the expert on the basis of her employment with the CRA but rather on the basis of her close involvement throughout the audit and objection stages of the file.

The Tax Court allowed the Crown to submit a new expert report.

The Tax Court’s decision in HLP will have a direct impact on future cases in which proposed expert witnesses were involved in the audit and objection processes as CRA employees. Such employees – though they may have the required professional qualifications to testify as an expert witness – cannot be qualified as expert witnesses because they lack the necessary impartiality to testify.

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Tax Court: CRA Employee May Not Testify as Expert

CRA Publishes Reminder on Charities’ Political Activities

Political activities have been a hot topic for the CRA’s Charities Directorate in the last few years.

In the CRA’s 2015 Program Update, the Charities Directorate stated that its recent political activity audit included 60 charities, with various results (i.e., education letters, compliance agreements, revocations, etc.).

Generally, a registered charity may not engage in partisan political activities, but a modest amount of political activities are permitted (i.e., those political activities that are non-partisan and connected and subordinate to the charity’s purposes). As a general guideline, a registered charity cannot devote more than 10 percent of its total resources to political activities (the CRA applies slightly different percentages to small charities).

Political activities were revisited again recently when the Charities Directorate published an “Advisory on partisan political activities”, which stated:

Since we are in an election period, we remind registered charities that they are prohibited from devoting any of their resources to partisan political activities. A partisan political activity is one that involves the direct or indirect support of, or opposition to, any political party at any time, whether during an election period or not, or a candidate for public office.

Given the time and resources spent by the CRA educating the charitable sector on the subject, most or all charities should not be surprised to see this latest update from the CRA.

However, a surprising part of the Advisory may be the following statements:

Charities that use the Internet or social media to post information should ensure the information does not contain partisan political statements. Also, the information should not link to statements made by a third party that support or oppose a candidate or political party.

When a charity invites comments on its website, blogs, or on social media, it should monitor them for partisan political statements and remove, edit, or moderate such statements within a reasonable time.

Charities should be aware of the CRA’s views on social media and political activities, and during the 2015 federal election charities should be careful to ensure that any invited comments on a charity’s website, blog, Facebook page or Twitter account do not conflict with the CRA’s views on partisan political activities.

Charities may wish to consult their professional advisers if there are any questions about compliance with the Income Tax Act and the CRA’s views.

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CRA Publishes Reminder on Charities’ Political Activities

Beware of Telephone Tax Scams

Several clients have contacted me in recent weeks after receiving telephone calls from individuals who claim to be from the Canada Revenue Agency.

Typically, the caller will provide his name, an employee ID, a CRA office address and telephone number with a Canadian area code.

The caller is aggressive, alleges that the taxpayer owes an amount to the CRA, and demands immediate payment. The caller also threatens arrest or other punishments if the amount is not paid.

These telephone calls are a scam. If you receive one of these calls, do not provide or confirm any personal data.

The CRA has recently issued a warning about this type of telephone scam, and a news report on the scam is available here.

These telephone tax scam calls should be reported to the Canadian Anti-Fraud Centre.

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Beware of Telephone Tax Scams

FCA Dismisses Appeal of Revocation of Charity Status

In Public Television Association of Quebec v. M.N.R. (2015 FCA 170), the Federal Court of Appeal dismissed the appeal by the Public Television Association of Quebec (“PTAQ”) of the CRA’s decision to revoke PTAQ’s registered charity status.

Background

PTAQ was constituted to advance education through the production, distribution and promotion of non-commercial, educational television programs and films.

Generally, PTAQ carried out its charitable activities through an intermediary: Vermont ETV Incorporated (aka Vermont PBS) (“VPT”) pursuant to a fundraising agreement and a broadcasting agreement.

Under these agreements, PTAQ would purchase a slate of educational programming from VPT, and such programming would then be broadcast on certain television stations. VPT would, in the course of various fundraising activities, raise funds from Canadian donors as an agent of PTAQ, which would issue donation receipts to the Canadian donors.

Charitable Activities

Generally, a Canadian charity may carry out its charitable activities in two ways: directly, or through the use of an intermediary. If the charity uses an intermediary to carry out charitable activities, the charity must maintain direction and control of its resources (see CG-004 “Using an Intermediary to Carry out a Charity’s Activities within Canada” (June 20, 2011)). The CRA’s scrutiny of a charity’s use of an intermediary is greater where the activities are carried on outside Canada (see CG-002 “Canadian Registered Charities Carrying Out Activities Outside Canada” (July 8, 2010)).

In this case, the CRA reviewed PTAQ’s corporate objects and activities and determined that PTAQ had failed to devote all of its resources to its own charitable activities. The CRA issued a Notice of Intention to Revoke pursuant to paragraph 168(1)(b) of the Income Tax Act. PTAQ filed a Notice of Objection under subsection 168(4) of the Act, and the CRA confirmed the proposal to revoke PTAQ’s registration.

Pursuant to subsection 172(3) of the Act, an appeal of the CRA’s decision to revoke a charity’s registration is made directly to the Federal Court of Appeal (rather than the Tax Court).

Appeal

On appeal of a proposed revocation in respect of a charity that has used an intermediary to carry out charitable activities, the charity must adduce evidence that it was carrying on charitable works on its own behalf and not merely acting as a conduit (i.e., the charity must establish that it maintained direction and control of its resources).

The Court of Appeal dismissed the appeal and held that PTAQ had failed to establish the CRA’s conclusion that PTAQ was not devoting all of its resources to its own charitable activities – which was a question of mixed fact and law – was unreasonable.

The Court of Appeal stated:

[55] Based on the evidence outlined above, I conclude that it was reasonable for the Minister to determine that PTAQ failed to maintain direction and control over its resources as it did not devote all its resources to its own charitable activities. The provisions of the broadcasting and fundraising agreements were not followed or respected. PTAQ has not adduced evidence that it exercised proper control over the activities of its agent by demonstrating how it monitored the cost of the broadcasting activities, the donations received and the fundraising. It has not established how the Minister erred in coming to the conclusion that PTAQ is only used to issue receipts for donations received by VPT from Canadian donors, as the documentation contained in the record does not overturn the factual findings noted above with respect to the broadcasting and fundraising agreements.

The CRA’s revocation and the Court of Appeal’s decision are stern reminders of the necessity for Canadian charities that are essentially “friends of” foreign charitable organizations to implement measures that will ensure that direction and control of the Canadian charity’s resources remain with the Canadian charity.

Further, such direction and control must in fact be exercised by the Canadian charity, and evidence of such direction and control should be recorded in the Canadian charity’s corporate documents (i.e., meeting minutes, reports, correspondence, etc.).

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FCA Dismisses Appeal of Revocation of Charity Status