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STEP Canada: CRA Provides Update on Audit Activities

The Society of Trust and Estate Practitioners (STEP Canada) held its 16th annual national conference on June 16-17 in Toronto. As it has in previous years, the conference featured a Canada Revenue Agency Roundtable wherein two representatives from the CRA answered 19 questions about topical issues facing tax and estate practitioners and their clients.

The CRA was represented by Steve Fron (Manager, Trusts Section, Income Tax Rulings Directorate) and Phil Kohnen (Manager, Trusts Section, Income Tax Rulings Directorate).

The following is a summary of several of the questions and answers relating to audits and assessments. (The complete list of Roundtable questions is available here.)

Question 6 – Trust Audit Issues

The CRA was asked to provide an update on the most common audit issues that it finds / reviews regarding trusts.

The CRA stated it has reviewed a broad range of trust compliance issues in recent years, including:

  1. Attribution under subsection 75(2) of the Income Tax Act (Canada) (the “Act”);
  2. Benefits pursuant to subsection 105(1) of the Act;
  3. Gifts by Will – The CRA noted that it had recently determined that no gift could be made for tax purposes where the power to make such a gift did not exist in the Will;
  4. Stop loss rule in subsection 112(3.2) – The CRA stated that they deal with a variety of issues in regards to this subsection of the Act, but specifically mentioned the issue of the deductibility of professional expenses in the context of the administration of an estate;
  5.  Late or amended subsection 104(21) designations.

Question 9 – Interest and Penalties on Deficient Instalments of Inter Vivos Trusts

In response to Question 20 at the 2010 STEP Canada national conference, the CRA noted that under the current administrative policy, the CRA would not assess installment interest and penalties where an inter vivos trust does not make instalment payments required under section 156. The CRA was asked to confirm that this remains its current policy.

The CRA stated that, with respect to inter vivos trusts, the CRA will not assess penalties or interest where the trust fails to pay installments. However, in preparation for the changes to the trust rules in 2016, all trust rules are being reconsidered and that the policy will be reviewed during such this process.

Question 13 – Voluntary Disclosures

The CRA has held voluntary disclosures that cover more than 10 taxation years in “limbo” as a result of the decision in Bozzer v. The Queen (2011 FCA 186). Apparently, voluntary disclosures officers are awaiting direction from head office in Ottawa to determine how to deal with voluntary disclosures that exceed 10 years. The CRA was asked for an update on this situation.

In Bozzer, the Federal Court of Appeal held that the 10-year limit under subsection 220(3.1) of the Act refers to years during which the interest accrued, not the year for which the tax was originally paid. Before Bozzer, the CRA had taken a contrary administrative position on the application of subsection 220(3.1).

The CRA stated that the voluntary disclosures that exceed 10 years are now being processed in accordance with the findings in Bozzer.

Question 14 – Registration of Tax Preparers

Recently, the United States government lost its appeal of the decision in Sabina Loving et al v IRS et al, which stated that the IRS has no legal authority to regulate the tax preparation industry. The CRA was asked comment on this case and to provide an update on its consultations regarding the registration of tax preparers in Canada.

The CRA noted that it had previously announced its consultation process on the proposed Registration of Tax Preparers Program (RTPP), a component of the CRA’s efforts to ensure and improve compliance in the small- and medium-sized business community.

The CRA stated that it does not intend to introduce tax competency standards or professional development standards through the RTPP. The CRA stated that the registration of tax preparers (who will be issued an identification number) will allow the CRA to efficiently identify and work with tax preparers to prevent common errors.

Question 19 – Multiple Assessments

The CRA was asked to consider a lengthy hypothetical regarding multiple assessments of a series of transactions. In such situations, the multiple assessments (only one of which could be correct) could create a cumulative tax liability in excess of the transaction itself. The CRA was asked whether, in these types of situations, it would grant interest-relief under the fairness provisions.

The CRA stated only that subsection 220(3.1) of the Act gives the Minister discretion to waive or cancel arrears of interest in whole or in part.  Subsection 220(3.1) also gives the Minister the ability to cancel penalties in a 10-year period.  The CRA referred to Information Circular IC 07-1 “Taxpayer Relief Provision” (May 31, 2007),which states that interest and penalty relief may be available where the taxpayer cannot pay as a result of financial hardship.

STEP Canada: CRA Provides Update on Audit Activities

Tax Court of Canada Limits Shopping for Expert Witnesses: Aecon Construction Group Inc. v. The Queen

In his recent decision in Aecon Construction Group Inc. v. The Queen, Justice Angers of the Tax Court of Canada adopted a practical and sensible approach to the problem of an expert witness potentially being conflicted out of a tax appeal because of having been approached by one of the parties which then decides not to commission a report from that expert.

In Aecon, the disputed turned on the fair market value of mining properties in 1993.  The taxpayer contended that the value was $32 million while the Crown contended that the value was $3 million.  The taxpayer relied on two expert reports.  The Crown originally relied upon one expert report.  Prior to trial Crown counsel approached two other experts, Mr. F and Mr. R, both of whom had already been approached by the taxpayer.  The Crown wrote counsel for the taxpayer taking the position that the taxpayer’s limited contact with Mr. F should not disqualify him from acting for the Crown in the tax appeal.  The taxpayer’s counsel took the position that both Mr. F and Mr. R were disqualified and the Crown took this motion in the Tax Court to have the status of Mr. F determined in advance of trial.

Justice Angers quoted the famous statement of Lord Denning in Harmony Shipping Co SA v. Davis et al. as reproduced by Justice O’Keefe of the Federal Court in Abbott Laboratories v. Canada (Minister of Health), 2006 F.C. 340.

[20] Accordingly, the principles require that the Court balance the interests of the party seeking to retain an expert witness and the party seeking to protect its confidential information. In that regard, counsel for Pharmascience raises the danger of expert witnesses being contacted simply to deprive an opposing party of their expertise. This danger was eloquently described by Lord Denning in Harmony Shipping Co SA v. Davis et al, [1979] 3 All ER 177 (C.A.):

If an expert could have his hands tied by being instructed by one side, it would be very easy for a rich client to consult each of the acknowledged experts in the field. Each expert might give an opinion adverse to the rich man, yet the rich man could say to each, “Your mouth is closed and you cannot give evidence in court against me” ….. Does that mean that the other side is debarred from getting the help of any expert evidence because all the experts have been taken up by the other side? The answer is clearly No …. There is no property in an expert witness as to the fact he has observed and his own independent opinion of them. There being no such property in a witness, it is the duty of a witness to come to court and give his evidence in so far as he is directed by the judge to do so.

Justice Angers concluded that the limited contact between the taxpayer and Mr. F was not sufficient to support a disqualification:

[23] Neither party in this motion, has been able to clarify the nature of the confidential information that may or may not have been communicated. Mr. F’s affidavit does not disclose if he has, in fact, received any and the appellant did not cross-examine Mr. F on his affidavit. It is therefore unclear as to the risk associated with disclosing said information or if, it will cause a prejudice to the appellant. No evidence was put forward that allowing the respondent to retain Mr. F. would prejudice the appellant.

[24] In the light of the evidence presented, one cannot conclude that Mr. F and the appellant shared sufficient information for either one to expect that whatever that information may be would be kept in confidence or is privileged. Mr. F was never retained, no retainer agreement or confidentiality agreement was signed and there is no evidence that the appellant would have requested Mr. F not to discuss the matter with others. Mr. F did not open a file, did not invoice the appellant nor received any payment, nor was he asked to perform any services. It appears to me that the discussions Mr F had with the appellant in 2001 were of an informal nature and nothing more than an attempt to see if Mr. F shared their point of view. In his affidavit, Mr. F did not recall discussing specific legal strategy other than the fact that he refused to be “creative” in responding to CRA’s position. He cannot recall the documents he reviewed nor did he retain any documents. He also said that early on, he communicated to the appellant that, on the basis of previous experience with Watts, it was unlikely that the appellant would agree with his firm’s method of valuation. That is hardly the foundation necessary for the appellant to shield Mr. F from being retained by the opposing party and provide his opinion.  [Emphasis added]

What is clear from this decision is that a limited contact with a potential expert witness will not normally be sufficient to disqualify that witness.  There must be real concerns about confidential information shared with that potential expert and the taxpayer must be able to prove those concerns to the satisfaction of a judge if the potential disqualification is raised before the court.

Tax Court of Canada Limits Shopping for Expert Witnesses: Aecon Construction Group Inc. v. The Queen