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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

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