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CRA Creates New Offshore Compliance Advisory Committee

The CRA continues its efforts to strengthen tax compliance in Canada.

Following the CRA’s recent announcement of its efforts to crackdown on international tax evasion, the CRA announced the creation of a new Offshore Compliance Advisory Committee. From the CRA’s news release:

… The Offshore Compliance Advisory Committee (OCAC) will be composed of seven independent experts with significant legal, judicial and tax administration experience.

The members will provide input to the Minister and the CRA on additional administrative strategies for offshore compliance to build on the Budget 2016 investment.

The OCAC’s first meeting will be in spring, 2016, and its initial areas of focus will include:

  • Strategies to help alleviate and discourage offshore non-compliance;
  • Administrative policies being used by other tax administrations to address this global issue
  • Advice to the CRA in moving forward with its measurement of the tax gap;
  • Additional strategies and practices related to promoters of tax schemes; and
  • Potential ways to improve the CRA’s criminal investigation functions.

The OCAC will be chaired by Dr. Colin Campbell. Dr. Campbell is currently Associate Professor of Law at Western University and a published author on tax matters. The Committee’s Vice-Chair is Kimberley Brooks, Associate Professor of the Schulich school of Law at Dalhousie University. Ms. Brooks, a member of the Canadian Tax Foundation Board of Governors and a member of the International Fiscal Association, practiced law in Toronto and the United Kingdom.

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CRA Creates New Offshore Compliance Advisory Committee

CRA Provides Update on Efforts to Combat Tax Evasion

Following the release of the “Panama Papers” and the Canadian federal government’s budget announcement that additional resources will be directed to the CRA to collect existing tax debts and combat tax evasion, the CRA has provided an update on its “crack down on tax evasion and tax avoidance”.

The CRA stated that the first jurisdiction that will be investigated is the Isle of Man, which the CRA had identified as the recipient of CDN$860 million of electronic funds transfers by approximately 800 taxpayers. Additional jurisdictions and financial institutions will be included in a second investigative project starting in May 2016.

The CRA also announced several other aspects of its program including the hiring of new auditors/specialists, a focus on tax schemes targeted to wealthy taxpayers, investigations of high-risk multinational corporations, use of investigative tools and technology, larger investigation teams, international collaboration, and the formation of an independent advisory committee on tax evasion and aggressive tax planning.

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CRA Provides Update on Efforts to Combat Tax Evasion

CRA: Drones Depreciable at 25%

Aerial drones appear to have many commercial uses. If you use a drone in your business, you may be able to deduct capital cost allowance in respect of the drone.

In CRA Document 2016-0633111E5 “CCA Class of a Drone” (March 11, 2016), the CRA provided its views on the correct classification of a drone for the purposes of the capital cost allowance (“CCA”) provisions of the Income Tax Act.

Under the CCA provisions of the Act, a taxpayer may deduct an amount in respect of the cost of certain property used in a business. The classes of property and the applicable allowance rates are described in section 1100 and Schedule II of the Income Tax Regulations.

The CRA stated that, where the cost of a property qualifies for inclusion in the classes of property described in Schedule II, the specific class of the property is determined by reference to the specific functions of the property and the circumstances of its usage.

The CRA stated that “drone” is not defined in the Act or Regulations, but that the CRA understands that an aerial drone is a type of unmanned aircraft. The CRA also stated that the Canadian Aviation Regulations “describe aerial drones as a type of aircraft” (ed. note: we were unable to find a reference to “drone” in the Canadian Aviation Regulations, but the definition of “unmanned air vehicle” appears to include aerial drones).

Accordingly, in the CRA’s view, an aerial drone would be included in Class 9(g) (“an aircraft”) of Schedule II of the Regulations, which has a CCA rate of 25 percent of the undepreciated capital cost of the property in the class.

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CRA: Drones Depreciable at 25%

FC Dismisses JR Application for Delay

A party may bring an application pursuant to section 18.1 of the Federal Courts Act for review of a discretionary decision of a government board, commission or other tribunal.  Generally, the application must be made within 30 days of the decision.

In R & S Industries (2016 FC 275), the Federal Court dismissed a taxpayer’s application for judicial review of a discretionary decision of the CRA because the Court held that the taxpayer had missed the 30-day deadline and no extension of time should be granted.

In R & S, the taxpayer made some errors in a T2059 form in connection with a subsection 97(2) rollover of property to a partnership. The CRA reassessed, and the taxpayer objected.

The CRA Appeals Officer told the taxpayer that an amended T2059 must be filed in order to properly deal with the reassessment.  Accordingly, the taxpayer filed an amended T2059 pursuant to subsection 96(5.1) of the Income Tax Act, which allows a subsection 97(2) rollover election to be amended where “in the opinion of the Minister, the circumstances of a case are such that it would be just and equitable” to permit the taxpayer to amend an election.

A CRA officer (other than the Appeals Officer) denied the application under subsection 96(5.1) and various letters were sent to the taxpayer to that effect.  The Appeals Officer then confirmed the reassessment on the basis that the taxpayer’s request under subsection 96(5.1) had been denied.

When the taxpayer appealed the reassessment to the Tax Court, the Crown alleged that the Tax Court had no jurisdiction to review the CRA’s decision to reject the taxpayer’s application under subsection 96(5.1) to amend the T2059 because it was a discretionary decision of the Minister of National Revenue and not subject to an appeal to the Tax Court.

The taxpayer then commenced a judicial review application in the Federal Court on the basis that the decision under subsection 96(5.1) was both procedurally unfair and unreasonable. The Crown rejected both arguments and further argued that the application was out of time and no extension should be granted.

In dismiss the taxpayer’s application, the Federal Court stated that it was clear that the taxpayer had missed the 30-day deadline because there had been a lengthy delay from the date of the decision (January 31, 2014) to the filing of the application for judicial review (May 19, 2015).

The Federal Court refused to consider the subsequent correspondence between the taxpayer and the CRA as having created a later date on which the decision was communicated.

The Court did not accept the taxpayer’s argument that the character of the decision as an exercise of Ministerial discretion was not conveyed to the taxpayer until sometime after January 2014. Further, the Federal Court noted that the taxpayer had counsel throughout the process, and counsel was knowledgeable about the CRA’s decision-making process. The Court held that the CRA had no obligation to inform the taxpayer of the availability of judicial review of the discretionary decision.

In respect of an extension of time to file the application, the Federal Court held that the taxpayer had failed to establish that (i) it had a continuing intention to pursue the judicial review application, (ii) no prejudice arose to the Minister of National Revenue, (iii) there was a reasonable explanation to the delay, and (iv) there was merit to the application (see Exeter v. Canada, 2011 FCA 253).

Despite having found that the taxpayer was out of time to pursue a judicial review application, the Federal Court considered the taxpayer’s arguments in respect of the merit of the application, and held that the CRA’s decision was neither unfair nor unreasonable.

The appeal in the Tax Court continues. It is still an open question whether or not the Tax Court has jurisdiction to consider the taxpayer’s arguments regarding subsection 96(5.1) in the context of an appeal of the reassessment.

This case is an important reminder to tax professionals that if the CRA communicates a discretionary decision to a taxpayer, the appropriate relief is sometimes in Federal Court rather than Tax Court. Identifying and quickly responding to those discretionary decisions is key to preserving the client’s right to pursue a remedy.

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FC Dismisses JR Application for Delay

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

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

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