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Correcting Tax Mistakes after Fairmont and Jean Coutu

I was very glad to be a panelist for the Canadian Tax Foundation’s conference on the Supreme Court of Canada’s decisions in Fairmont and Jean Coutu.

During the discussion the panelists were asked about the ways taxpayers may correct tax mistakes after these two decisions of the Supreme Court.

In my remarks, I suggested taxpayers would be wise to review the revised requirements for rectification, and to consider the other remedies that may be available. I cited a list of potential remedies and, as a starting point, a selection of cases on these remedies:

The Supreme Court’s decision in Fairmont did not diminish or alter the other remedies that may be available to a taxpayer following an unintended tax result. I suggest that these other remedies may become more significant as taxpayers and their professional advisers determine how a particular tax mistake may be corrected following Fairmont and Jean Coutu.

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Correcting Tax Mistakes after Fairmont and Jean Coutu

506913 N.B. Ltd.: Jarndyce v. Jarndyce Revisited

On a procedural motion in 506913 N.B. Ltd. v. The Queen (2016 TCC 286), the Tax Court ordered the Respondent to answer all questions refused on discovery, reattend at a further discovery, and pay the Appellant’s costs on the motion.

The Tax Court also referred to the fictional interminable estate case of Jarndyce v. Jarndyce from Charles Dickens’ novel Bleak House in describing the slow progress of the litigation in 506913.

In 506913, the taxpayers filed their appeals in 2003 in respect of GST/HST for reporting periods in 1998 to 2000. The parties filed amended Notices of Appeal and Replies in 2010, and the Respondent was permitted to file further amended Replies in 2015.

The Tax Court judge’s reasons address the scope of discovery under sections 95 and 107 of the Tax Court of Canada Rules (General Procedure) and the test to be applied on a refusals motion. The Court considered the leading cases on this issue (see Canada v. Lehigh Cement Limited (2011 FCA 120)Canadian Imperial Bank of Commerce v. The Queen (2015 TCC 280)Baxter v. The Queen (2004 TCC 636) and Shell Canada Ltd. v. Canada, [1996] T.C.J. No. 1313), and included a comprehensive summary of the applicable principles (see para. 11 of 506913).

Additionally, regular observers of the Tax Court will be interested to see the Court’s reference to Jarndyce:

[34]        These are appeals that, in Dickensian language, drag their weary length before the Court. There have been several case management and motions judges involved in the more than thirteen years these appeals have been before this Court. A previous case management judge ordered that no further motions or other proceedings could be brought before the Court in these appeals prior to the hearing of the appeals. The Respondent’s motions to amend its replies were brought just before the deadline imposed on further motions. These appeals can be expected to proceed promptly to a hearing — and it would be best if the parties make that happen themselves.

The text of the first chapter of Bleak House states ” … but Jarndyce and Jarndyce still drags its weary length before the court, perennially hopeless.”

The only other reference in a Tax Court decision to Jarndyce that we’re aware of is found in the reasons of former Chief Justice Donald G.H. Bowman in Garber v. The Queen (2005 TCC 635) (see para. 6).

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506913 N.B. Ltd.: Jarndyce v. Jarndyce Revisited

OCAC Publishes Report on Voluntary Disclosure Program

The Offshore Compliance Advisory Committee (OCAC) has published its report on the CRA’s Voluntary Disclosure Program, the first of several anticipated OCAC reports in furtherance of the OCAC’s mandate to provide advice to the Minister of National Revenue and the Canada Revenue Agency (CRA) on administrative strategies to deal with offshore compliance.

The OCAC’s recommendations in respect of the voluntary disclosure program include:

  • Less generous VDP relief in certain circumstances
  • Limited access for repeat users
  • Requirement to pay tax and interest within specific time frames
  • Insistence on all necessary and relevant information
  • No relief from transfer pricing penalties (see subsection 247(3) of the ITA)
  • Disclosure of identity of advisors who assisted with non-compliance
  • Consideration of higher-level approval requirements
  • Introduction of procedures for review by specialists in complex cases
  • Elimination of right of objection in respect of VDP reassessments
  • Consideration of amending VDP in respect of failure to file T1135 forms
  • Continuation of similar treatment for domestic and offshore non-compliance

In response, the Minister of National Revenue Hon. Diane Lebouthillier stated,

“I welcome the Offshore Compliance Advisory Committee’s first report and wish to thank the committee for its unique insight and for providing its invaluable experience to help improve the tax system for the benefit of hard-working middle class Canadians.”

“Our government has made it a priority to make the tax system fairer for middle class Canadians and to crack down on those who cheat and who do not pay their share. That is why we created the Offshore Compliance Advisory Committee – to advise us on the best ways to improve our tax system. We will continue with our efforts to crack down on tax cheats. My message is clear: the trap is closing.”

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OCAC Publishes Report on Voluntary Disclosure Program

Auditor General Provides Recommendations for Improving CRA Review of Objections

Under the federal Income Tax Act, the Canada Revenue Agency must consider a taxpayer’s objection and must vacate, confirm or vary the underlying tax assessment. This review must be completed “with all due dispatch”.

Unfortunately, no specific timeline is required for the CRA’s review of an objection (unlike the many specific deadlines imposed on taxpayers pursuant to the Income Tax Act or otherwise). Generally, a taxpayer’s only recourse in a case of excessive delay is to request interest relief or make a service complaint to the Office of the Taxpayer’s Ombudsman. The CRA has stated that it is aware of these potential delays, and has implemented service standards in respect of the various types of objections it receives each year

On November 29, 2016, the Office of the Auditor General of Canada released its report on the CRA’s review of income tax objections and included the following summary of its conclusions:

We concluded that the Canada Revenue Agency did not process income tax objections in a timely manner.

Although the Agency had developed and reported performance indicators for the objection process, the indicators were incomplete and inaccurate. Specifically, there was no indicator or target for the time that taxpayers should wait for decisions on their objections.

In addition, the Agency did not adequately analyze or review decisions on income tax objections and appeals, and there was insufficient sharing of the results of these objection and court decisions within the Agency.

This issue is very well-known to many Canadians (and their professional tax advisors) who have filed and pursued objections, and it is not surprising when you consider the CRA currently has an inventory of more than 171,000 objections in respect of personal and corporate income taxes totaling more than $18 billion.

Interestingly, the report notes that the amount of federal income tax dollars in dispute more than tripled from $6.2 billion in 2005-06 to $18.8 billion in 2013-14, and the amount in dispute has remained around $18 billion in 2014-15 and 2015-16.

The report recommends the following:

  • The CRA should provide timelines for resolving objections
  • The CRA should develop and implement an action plan with defined timelines and targets for reducing the inventory of objections
  • The CRA should review the objection process to identify and implement modifications to improve the timely resolutions of objections
  • The CRA should modify its performance indicators so that it may accurately measure and report on its performance
  • The CRA should review and share the results where objections are decided in favour of taxpayers in such a way that may improve the quality of audit results

Minister of National Revenue Hon. Diane Lebouthillier released a statement in response to the Auditor General’s report, and stated (in part): “An action plan is already underway to reduce processing times and it will be ready at the beginning of 2017.”

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Auditor General Provides Recommendations for Improving CRA Review of Objections

CRA Provides OTIP Update

The CRA’s Offshore Tax Informant Program (OTIP) was launched in January 2014.

From the CRA’s webpage describing the program:

Launched as part of the Canada Revenue Agency’s (CRA) efforts to fight international tax evasion and aggressive tax avoidance, the new Offshore Tax Informant Program (OTIP) allows the CRA to make financial awards to individuals who provide information related to major international tax non-compliance that leads to the collection of taxes owing …

… To be eligible under the OTIP, individuals must provide the CRA with specific and credible details of major international tax non-compliance that lead to additional taxes being assessed and collected. When program requirements are met, the CRA may enter into a contract with the individual that could lead to an award if the potential additional assessment of federal tax, excluding interest and penalties, is more than $100,000.

Any individual, no matter where they are in the world, is eligible to participate as an informant, subject to certain limitations …

At a recent STEP conference roundtable, the CRA stated that, from January 2014 to April 2016, the CRA had received 2,984 calls (812 of which were from potential informants) and 333 written submissions. The CRA also said that it has entered into over a dozen contracts with informants.

The CRA’s report on the volume of OTIP calls and the recent media focus on the Panama Papers are reminders for any non-compliant Canadian taxpayers that they may wish to consider contacting a tax professional and using the Voluntary Disclosure Program to correct any non-compliance regarding offshore assets and/or unreported income.

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CRA Provides OTIP Update

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

Tax Court Introduces Common Books of Authorities Project

The Tax Court has implemented a new common books of authorities program for its Toronto courtrooms that will eliminate the need for taxpayers to print copies of certain frequently-cited (and lengthy) authorities. The pilot project will apply only to general procedure appeals in which both parties are represented by counsel.

Parties will not be required to include in their book of authorities those cases that are included in the Court’s list of 27 commonly-cited decisions (i.e., those on statutory interpretation, source, onus of proof, capital/income, GAAR, CPP/EI, etc.). However, the Court will require the parties to include in their book of authorities printed copies of the passages from those cases on which they intend to rely (rather that the entire decision). A list of the cases included in the Court’s common books of authorities is detailed on the Court’s Notice to the Public and the Profession (March 31, 2016).

The Tax Court stated that this pilot project may be expanded to other cities in the future.

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Tax Court Introduces Common Books of Authorities Project

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