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Canada Revenue Agency Provides Update on Strategic Direction and SR&ED

On February 6, 2013, at the Toronto-Centre Tax Professionals Breakfast Seminar, the Canada Revenue Agency discussed its current strategic activities and priorities and changes to the Scientific Research & Experimental Development (SR&ED) program.

Strategic Direction

Derrick Smith, Director of Policy Integration and Coordination Division of the Strategic Policy Directorate, Strategy and Integration Branch, presented on the CRA’s current strategic activities and priorities. A brief overview of the issues he discussed are as follows:

  • Intelligent compliance management: The CRA is increasing its use of business intelligence and advanced analytics to ensure more efficient and effective compliance intervention. This is inspired in part by Australia’s “industry campaign” approach and may include informing taxpayers of errors or other methods of encouraging compliance before a formal audit.
  • Integration of taxpayer experience: The CRA intends to create more online tools for taxpayers to minimize interaction with the CRA and simplify access to information and services. This is similar to the U.S. digital government strategy and the Australian Centrelink initiative.
  • Early certainty about tax issues: The CRA intends to facilitate advance decisions, update technical bulletins by soliciting the assistance of private practitioners with the oversight of the CRA, and develop the online Quick View interface for taxpayers to learn about the status of charities.
  • Influence compliance attitudes: The CRA will use advertising campaigns and social media to attempt to change moral attitudes towards tax compliance. The CRA cited the recent announcement by Starbucks that it will voluntarily pay tax in the United Kingdom after a public outcry over the corporation’s tax planning.
  • Increased reliance on third parties: The CRA will reach out to third parties to help achieve policy goals. This may take a variety of forms including engaging academics for discourse on policy, partnering with provinces and territories to address the underground economy, engaging in social media, and inviting tax practitioners to be involved in the production of CRA commentary.
  • Continued transition to electronic communications: The CRA continues its efforts to encourage Canadians to file electronically and engage the online tools available to them.
  • Improved use of collected data: The CRA has amassed substantial financial and tax data, but this data is not being efficiently stored or accessed in the CRA’s computer systems. The CRA intends to enhance the use and usability of the data available to it.
  • Optimized organization and workforce: The CRA intends to modernize its workforce and working environment.

SR&ED Formal Pre-Approval Process

Nancy Karigiannis, Research & Technology Policy Coordinator for the Technical Guidance Division of the Scientific Research & Experimental Development Directorate, Compliance Program Branch, discussed the CRA’s initiative to streamline the SR&ED program. In particular, Ms. Karigiannis discussed recent initiatives to enhance the online accessibility and self-assessment tools available to taxpayers and the newly developed Formal Pre-Approval Process (“FPAP”).

The FPAP is a response to the report submitted by the expert federal panel on R&D to the federal government in October 2011, called Innovation Canada: A Call to Action, which called for the simplification of the SR&ED program (among other initiatives). After conducting a feasibility study and consulting internal and external industry experts, the CRA is now ready to initiate an FPAP pilot program and is looking for a diverse selection of claimants who are willing to participate.

The CRA intends to provide enhanced predictability to SR&ED applicants by allowing the CRA to conduct eligibility determinations in “real time” (i.e., during the development process) instead of after the application has been filed. The CRA will provide feedback to participants on agency expectations, the type of supporting evidence necessary for compliance, and other advice regarding filing requirements. By the end of the service, the necessary materials should be complete and ready for filing minimizing year-end work for the taxpayer.

Taxpayers interested in taking part in the FPAP pilot program should consult the requirements for eligibility and be certain to contact the CRA before February 14, 2013.

Canada Revenue Agency Provides Update on Strategic Direction and SR&ED

CRA Releases New APA Report

On January 10, 2013, the Canada Revenue Agency released its 2011-2012 Advance Pricing Arrangement Program Report (previous reports are available here).

This is the eleventh year in which the CRA has issued such a report, which is generally intended to enhance taxpayer awareness of the APA program and to describe (i) current operational status, (ii) relevant changes, and (iii) issues that may affect the program in future years.

The general purpose of an APA is to create certainty between the taxing authorities of Canada and a foreign country concerning the transfer pricing of cross-border intercompany transactions.  In the absence of an APA governing such transactions, taxpayers may be exposed to higher audit risk relating to their intercompany transfer pricing methodologies, which may ultimately result in costly and time-consuming negotiations with the multiple tax authorities as well as potential litigation. Accordingly, the CRA encourages taxpayers to avail themselves of the APA program to mitigate the transfer pricing risk in the appropriate circumstances, particularly where the taxpayer engages in intercompany transactions of a recurring nature (i.e., frequent sale of goods between affiliates or the ongoing provision of intercompany services).

The APA program has proven popular with taxpayers over the years and the number of applicants continues to grow – the 2011-2012 fiscal year had the highest number of applicants to the program (34) since the 2007-2008 fiscal year.  The inventory of unresolved cases also continues to grow (the inventory increased from 96 at the end of the 2010-2011 fiscal year to 102 at the end of the 2011-2012 fiscal year).  In the 2011-2012 fiscal year, 17 new cases were admitted to the APA program whereas only 10 cases were completed (and one was withdrawn).  The large discrepancy between the number of applicants and the number of cases formally admitted to the program in the year is partially a reflection of the changes introduced by the CRA beginning in the 2010-2011 fiscal year requiring that taxpayers invest significantly more time and resources during the initial application/due diligence phase of the APA process and to provide a greater amount of financial and business information prior to acceptance into the program.  This results in a longer and more extensive “screening” process but is intended to eliminate inappropriate cases before they are accepted into the program inventory.

Other highlights of the Report include:

  • The average amount of time required to conclude a bilateral APA from acceptance into the program until completion was 44 months, which appears generally consistent with prior years;
  • The majority of APA’s relate to the cross-border transfer of tangible property.  Approximately 47% of APA cases in process relate to tangible personal property whereas cases involving tangible personal property and intra-group services represent approximately 31% and 22% of cases in process;
  • The transactional net margin method (“TNMM”) continues to be the most frequently used transfer pricing methodology in APA cases; and
  • APAs involving the United States represent approximately 71% of all APA cases that are in process (which is slightly lower than the percentage of completed APA cases that involve the United States).

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CRA Releases New APA Report