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Zhang: BC SC Refuses to Rectify Share Transfer

In Zhang v. Canada (A.G.) (2015 BSCS 1256), the British Columbia Supreme Court refused to grant rectification of a transaction in respect of which the taxpayers had no common intention to avoid capital gains tax on a share transfer.

The taxpayer was resident in British Columbia. He carried on a business of manufacturing and distributing laser equipment. In 2002, the taxpayer incorporated LABest Optronics Co. Ltd. (“LABest”) in China to carry on the business.

In 2003, the taxpayer met with his accountant to discuss his 2002 Canadian tax return. In the course of this discussion, the taxpayer asked about the distribution of income from LABest, and the accountant suggested that income earned in the company could be taxed in China and distributed to a Canadian corporate shareholder as exempt surplus dividends without further Canadian tax being imposed, and then later paid to the taxpayer.

Subsequently, the taxpayer incorporated Beamtech Optronics Co. Ltd. (“Beamtech”), a B.C. company. The accountant suggested that the shares of LABest be transferred to Beamtech. The taxpayer sought and obtained regulatory approval for the share transfer from the Chinese government, and such approval included a transfer value (determined by the government) of $150,000 USD. Beamtech paid $150,000 USD cash to the taxpayer, and no section 85 rollover of the shares was undertaken.

The CRA subsequently reviewed and assessed the transaction on the basis that the fair market value of the LABest shares was $661,164 CDN, resulting in a capital gain of $221,950 for the taxpayer in 2003.

The taxpayer sought rectification of the share transfer to substitute a section 85 rollover of the LABest shares to Beamtech.

The Court stated that the “proper approach” to rectification under B.C. law is as follows:

  1. The focus of the analysis in tax cases is on the intention of the related parties when they entered the transaction. This is because the “mistake” in the written instrument is usually a mistake as to the tax consequences of the transaction. It matters not if the mistake was caused by misinformation from the taxpayer to his advisors, or mistaken advice provided by a professional advisor to the taxpayer.
  2. There is nothing objectionable about taxpayers attempting to avoid tax.
  3. The real question which must be considered is whether the taxpayer is able to establish a specific continuing intention to avoid the particular tax in question. A general intention to avoid taxes is not sufficient. The determination of what constitutes sufficient specificity of intention will depend on the context and the circumstances of each case.
  4. Where rectification is aimed at a wholly distinct kind of tax avoidance, which was not specifically contemplated at the time the written instrument was formed, rectification will not be granted.
  5. A common specific intention is one which existed before the formation of the instrument in question and continued since that time. It must be a “precise” and “clearly-defined object” before rectification will be granted.

In the present case, the Court was concerned that there were significant inconsistencies in the evidence of the taxpayer and his accountant. Further, the evidence established only that the taxpayer intended to implement a corporate structure (i) for the tax-efficient movement of funds from LABest to Beamtech, and (ii) that was acceptable to the Chinese government. The taxpayer had only consulted his accountant about discrete tax issues, but never retained his accountant to provide a comprehensive review of all tax issues that may arise in respect of the transaction. The Court held that the taxpayer had no specific intention to avoid capital gains tax on the share transfer.

The Court dismissed the taxpayer’s application.

The more challenging aspect of Zhang is the Court’s discussion of the requirements for rectification – i.e., whether a specific or general intention to avoid tax must exist for rectification to be granted. The B.C. Court referred to the leading tax rectification case, Juliar v. A.G. (Canada) ((2000), 50 O.R. (3d) 728 (Ont. C.A.), leave to appeal to the Supreme Court of Canada dismissed (File No. 28304)) (Dentons was counsel for the successful taxpayer), and the B.C. cases that have interpreted Juliar (see, for example, McPeake v. Canada (A.G.) (2012 BCSC 132)). The Court stated that, in B.C., “Rectification will not be granted where there is only a general intention to avoid taxes.”

The Alberta Court of Queen’s Bench reached a similar conclusion in Graymar Equipment (2008) Inc. v A.G. (Canada) (2014 ABQB 154) and Harvest Operations Corp. v. A.G. (Canada) (2015 ABQB 237)).

This may conflict with the reasoning in Juliar and other Ontario cases (see TCR Holding Corporation v. Ontario (2010 ONCA 233) and Fairmont Hotels Inc. v. A.G. (Canada)(2015 ONCA 441) in which the Ontario Court of Appeal has clearly stated that rectification was available where the taxpayers had a general intent to carry out their transactions on a tax-efficient (or tax-neutral) basis and had no expectation as to the specific manner in which the transaction would be carried out.

However, Zhang raises the question as to whether the distinction between specific and general intent is meaningful at all. On any rectification application, a court’s focus will always be on the nature of the mistake, the circumstances of the error, and the evidence of the taxpayer’s intent. Whether their intent is described as “specific” or “general”, taxpayers who are careless or cavalier about the Canadian tax implications of a transaction likely cannot establish that they intended to minimize or avoid taxes and cannot expect to obtain relief from the courts.

As of the time of the writing of this post, the taxpayer had not appealed to the B.C. Court of Appeal.

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Zhang: BC SC Refuses to Rectify Share Transfer

McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

In McNally v. Canada (National Revenue) (2015 FC 767), the taxpayer brought an application to the Federal Court for an order requiring the Minister to assess his tax return. The Federal Court allowed the taxpayer’s application and ordered the Minister to examine the taxpayer’s tax return and issue a Notice of Assessment within 30 days.

Background

The taxpayer invested funds in a gifting tax shelter in respect of which he claimed a number of deductions.

The taxpayer filed his 2012 federal income tax return in April 2013. Two months later – in June 2013 – he received a letter stating that his return had not been assessed because the CRA was undertaking an audit of the gifting tax shelter program. In July 2013, the taxpayer filed an application for judicial review of the CRA’s decision not to assess his return. Two years later, the taxpayer’s 2012 return still had not been assessed.

Arguments

Under subsection 152(1) of the Income Tax Act, the CRA shall examine a taxpayer’s return of income and assess the tax for that taxation year “with all due dispatch.”

The taxpayer argued that the CRA was deliberately delaying the assessment for the improper purpose of discouraging participation in gifting tax shelters. The court noted that, in the CRA’s view, widely-marketed tax shelters are generally invalid. In this case, the CRA admitted that it chose not to assess the tax returns of participants in the gifting tax shelters in order to discourage participation in such investments, to undertake an audit the tax shelter, and to educate the public about gifting tax shelters.

The CRA admitted that the main reason the taxpayer’s return was not reassessed was to discourage participation in gifting tax shelters. The CRA submitted that this motive did not conflict with its duty under subsection 152(1) of the Act.

Analysis

In allowing the application, Justice Harrington of the Federal Court followed the decision in Ficek v Canada (Attorney General) (2013 FC 502) in which the Court held that the Minister had failed to assess the taxpayer’s return “with all due dispatch.”

In Ficek, a delay in examining the taxpayer’s return arose from a new policy of discouraging certain types of tax shelter investments. In Ficek, the court acknowledged that the CRA has discretion in assessing taxpayers but noted “…the discretion is not unfettered, it must be reasonable and for a proper purpose of ascertaining and fixing the liability of the taxpayer” (para. 21). Importantly, the Court held that there should be some certainty to the taxpayer’s financial affairs (para. 34).

In McNally, Justice Harrington followed this reasoning. He held that the phrase “with all due dispatch” does not imply a specific time period before which the Minister must make an assessment. However, he found that while the Minister has discretion, it is not unfettered. The determination of whether the Minister has examined a taxpayer’s return “with all due dispatch” is a question of fact.

The Federal Court ultimately determined that the Minister had failed to assess the taxpayer’s tax return “with all due dispatch.”  The court held:

[41] … Although the Minister is responsible for administrating the Income Tax Act, ultimately it falls upon the courts to decide whether a claimed deduction is valid or not. It is plain and obvious that Mr. McNally’s rights have been trampled upon for extraneous purposes.

[42] The Minister owes Mr. McNally a statutory duty to examine his return “with all due dispatch.” There may well be circumstances in which it will take some time to reach a conclusion with respect to a given return. It may well be appropriate to await the audit of third parties. However this is not one of those cases.

[43] The CRA is entitled to express concerns with respect to certain shelters and to warn that such shelters will be audited. In Mr. McNally’s case, however, the resulting delay is capricious and cannot be allowed to stand. Even assuming these secondary purposes to be valid, they are overwhelmed by the primary main purpose and cannot save the day.

Interestingly, McNally goes a step further than the Court in Ficek, in which the Court had simply declared that the CRA had failed to assess with all due dispatch. McNally is a good example of the Federal Court exercising its judicial review authority to compel the CRA to carry out its statutory duty. This does not assure the taxpayer that he is entitled to his charitable donation claims, but at least he will be able to commence a challenge of the disallowance of the claims.

While the McNally decision does not go so far as to tell us what “with all due dispatch” means, the decision is the second important reminder that the CRA’s discretion in assessing taxpayers, while broad, is not unfettered.

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McNally: CRA Does Not Have Unfettered Discretion to Delay Assessment

BP Canada: CRA Entitled to Tax Accrual Working Papers

In BP Canada Energy Company v. Minister of National Revenue (2015 FC 714), the Minister brought an application pursuant to subsection 231.7(1) of the Income Tax Act (Canada) (the “Act”) before the Federal Court of Canada.

The Minister sought a compliance order requiring BP Canada to provide tax accrual working papers prepared by BP Canada’s own employees which were requested by the Canada Revenue Agency (“CRA”) during its audit pursuant to subsection 231.1(1) of the Act.

The Federal Court allowed the application and granted the compliance order.

Background

Under subsection 230(1) of the Act, a taxpayer must keep books and records in such form and containing such information as will enable the taxes payable under the Act to be determined.

Under sections 231.1 to 231.7, the CRA may request and a taxpayer may be required to produce such book and records. Additionally, the CRA has routinely made broad requests for tax accrual working papers.

Taxpayers are generally reluctant to produce tax accrual working papers to tax auditors because these documents could provide a roadmap of the taxpayer’s tax positions, an estimate potential exposure for tax, and an outline the possible assessing position the tax authorities may take. Moreover, these documents are required to be prepared pursuant to securities regulations and accounting standards rather than pursuant to the Act or for the determination of taxes payable.

In “Acquiring Information from Taxpayers, Registrants and Third Parties” the CRA stated that it will follow a policy of restraint in requesting tax accrual working papers during its regular income tax audits – namely, that it would only request them if a proper examination could not be carried out without access to those files.

In BP Canada, the CRA explicitly stated that it sought to obtain BP’s tax accrual working papers to assist the CRA in expediting its audit not only for the years for which the tax accrual working papers were prepared but also for subsequent tax years – thus implying that the documents were not required for the audit but were simply helpful as a matter of convenience for the auditor.

Arguments

BP Canada submitted that tax accrual working papers are subjective opinions regarding tax filing positions and are not required to establish the tax payable under the Act and therefore do not qualify as books and records that are required to be provided to support a tax filing position.

Moreover, BP Canada submitted that, even if the statutory requirements for a compliance order are met, the Federal Court must justify the exercise of its discretion to grant the order.

In this case, BP Canada argued that such discretion could not be justified because it would constitute a compulsory self-audit by the taxpayer and would violate the Minister’s own policy not requiring such documents to be produced.

Decision

In granting the compliance order, the Federal Court found while the Minister may not need the tax accrual working papers to complete an audit, if the Minister wants them, she should have them.  The Federal Court did not accept BP’s “roadmap” argument and put weight on the fact that the tax accrual working papers are already prepared and thus no additional work would be required by the taxpayer.

The Federal Court also stated even though the Act does not require these types of documents be retained, if they are maintained for another reason they can be requested by the Minister.

Finally, the Federal Court relied on the Federal Court of Appeal case Tower v. MNR (2003 FCA 307) in finding that tax accrual working papers do fit within the scope of subsection 231.1(1) which provides that the CRA may request “the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by the taxpayer under this Act”.

The Federal Court endorsed the Minister’s audit approach in this case, stating that the Minister’s request for tax accrual working papers is not part of a fishing expedition if the Minister knows that she wants a clear roadmap to be used for current and future audits (see para. 38) (we note, however, that the decision does not consider whether a clear sign of a fishing expedition may be a broad request by the CRA for a roadmap of the taxpayer’s tax considerations).

The decision in BP Canada clearly outlines the Federal Court’s opinion that tax accrual working papers should be produced when requested pursuant to section 231.1 of the Act. The decision serves as an important reminder that taxpayers should be cautious in preparing and maintaining tax accrual working papers.

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BP Canada: CRA Entitled to Tax Accrual Working Papers

Mac’s: Quebec CA Affirms Denial of Rectification

In Mac’s Convenience Stores Inc. v. Canada (2015 QCCA 837), the Quebec Court of Appeal affirmed a lower court decision (2012 QCCS 2745) denying rectification of corporate resolutions that had declared a dividend that unintentionally put the company offside the “thin-cap” rules in subsections 18(4)-(8) of the Income Tax Act.

Facts

Mac’s, an Ontario corporation, was a wholly-owned subsidiary of Couche-Tard Inc. (“CTI”). In April 2005, Mac’s borrowed $185 million from Sidel Corporation, a related Delaware corporation.

In April 2006, Mac’s participated in several transactions with various related entities, including the declaration of a $136 million dividend on the common shares held by CTI. A similar series of transactions had been undertaken in 2001. However, in 2006, Mac’s professional advisors failed or forgot to take proper account of the $185 million owed by Mac’s to Sidel.

While the $136 million dividend itself was generally without tax consequences, the dividend had the effect of putting Mac’s offside the (then) 2:1 ratio in the “thin-cap” rules in the Income Tax Act. This resulted in the reduction of deductible interest paid by Mac’s to Sidel in the years following the dividend payment (i.e., 2006, 2007 and 2008).

Rectification

After Mac’s was reassessed by the CRA to disallow the interest deduction, Mac’s sought rectification of the corporate resolution declaring the dividend, and additionally sought to substitute a reduction of its stated capital and the distribution of cash to CTI. This would have had the same effect of paying an amount to CTI while maintaining the proper ratio for interest deductibility.

The Quebec Superior Court dismissed the application on the basis that the Mac’s directors never had any specific discussions regarding the deductibility of interest on the Sidel loan after the payment of the dividend. The various steps in the 2006 transactions reflected the intentions of the parties, and thus there was no divergence between the parties agreement and the documents carrying out the transactions.

Appeal

The taxpayer appealed to the Quebec Court of Appeal. The Court described the taxpayer’s position as not invoking any error in the lower court judgment but simply alleging that, if the taxpayer’s advisors had made a mistake, then the lower court decision must be reversed on the basis of the Supreme Court of Canada’s decision in Quebec v. Services Environnementaux AES Inc. (2013 SCC 65) (“AES“) (see our previous post on AES here).

The Court of Appeal stated that it understood the Supreme Court’s decision in AES to stand for the proposition that parties who undertake legitimate corporate transactions for the purpose of avoiding, deferring or minimizing tax and who commit an error in carrying out such transactions may correct the error(s) in order to achieve the tax results as intended and agreed upon. The Court of Appeal cautioned that AES does not sanction retroactive tax planning.

In the present case, the Court of Appeal held there was no common intention regarding the “thin-cap” implications of the dividend payment, and thus there was no agreement that should be given effect by the courts.

The Court of Appeal held there was no error by the lower court and dismissed the taxpayer’s appeal.

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Mac’s: Quebec CA Affirms Denial of Rectification

Ironside: TCC Orders Hearing of Question on Rule 58 Motion

In Ironside v. The Queen (2015 TCC 116), the Tax Court allowed the Crown’s Rule 58 motion for a determination of a question of law before the hearing, namely whether the taxpayer was estopped from litigating an issue that had been adjudicated in an earlier Tax Court decision.

In the prior case (Ironside v. The Queen (2013 TCC 339)), the taxpayer had incurred legal and professional fees to defend himself against allegations of committing improper disclosures after being charged in June 2001 by the Alberta Securities Commission. The taxpayer sought to deduct such fees in the 2003 and 2004 tax years.

The Tax Court concluded that the taxpayer’s legal and professional fees had not been incurred to gain or produce income from his chartered accounting business, rather such expenses were personal in nature and were incurred to protect his reputation in the oil and gas industry. The Tax Court dismissed the taxpayer’s appeal.

Subsequently, the taxpayer sought to make the same deductions in the 2007, 2008 and 2009 tax years. The CRA reassessed to deny the deductions, and the taxpayer again appealed to the Tax Court.

In its Reply, the Crown raised the issue of whether “the appeal or a portion of it is barred by application of the doctrine of issue estoppel or is otherwise an abuse of the process of the Court”. The Crown then brought a motion for an order pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for a determination of a question prior to the appeal:

Whether the Appellant is barred from litigating within proceeding 2014-1619(IT)G whether the legal and professional fees paid to defend himself in Alberta Securities Commission proceedings and the subsequent appeal are deductible as amounts incurred to gain or produce income from a business or property, on the basis that the characterization of such fees has been previously adjudicated upon and therefore the doctrines of issue estoppel and or abuse of process operate to bar re-litigation of the issue.

The Tax Court noted that Rule 58 contains a two-step process. At the first stage, the Tax Court must determine whether the question posed by the moving party is an appropriate one that should be heard in a subsequent hearing (the second stage).

At the first stage, three elements must exist:

  1. The question proposed must be a question of law, fact, or mixed fact and law;
  2. The question must be raised in the pleadings; and
  3. The determination of the question may dispose of all or part of the appeal, may substantially shorten the hearing, or may result in substantial cost saving.

If all of these elements are present, the Court may set a hearing of the proposed question before a motions judge prior to the hearing of the appeal.

In the present case, the Tax Court held that all three requirements were satisfied. The Court stated,

[12] Clearly, there is the potential that a determination of this question may, according to the materials I have before me and the submissions I heard, dispose of part of the appeal and I need only be satisfied that it “may” so dispose of some of the appeal. I do not have to be absolutely convinced that it will do so in order to refer the question to a Stage Two determination prior to the hearing. If part of the appeal is disposed of, it follows that the proceeding will be substantially shortened. This is precisely the type of question that Rule 58 is meant to target.

The Tax Court ordered that the Crown’s question be set down for a hearing for determination by a motions judge and that certain evidence be presented at the determination (i.e., the pleadings from both appeals, and the Tax Court’s decision in Ironside v. The Queen (2013 TCC 339)).

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Ironside: TCC Orders Hearing of Question on Rule 58 Motion

Crowdfunding: Update From the CRA

In a short technical interpretation (CRA Document 2015-0579031I7 “Crowdfunding” (April 1, 2015)), the CRA has restated its views on the tax treatment of amounts raised via crowdfunding arrangements (see our previous post here).

The CRA stated that amounts received by a taxpayer under a crowdfunding arrangement could represent a loan, capital contribution, gift, income or a combination thereof. The CRA will evaluate each situation on a case-by-case basis.

The CRA stated that, in its view, where funds are received by a taxpayer for the development of a new product and the taxpayer carries on a business or profession, the funds will be taxable income unless the taxpayer can establish that such funds are a loan, capital contribution or other form of equity. The CRA noted that any reasonable costs related to the crowdfunding arrangements would likely be deductible in computing that income.

The CRA noted that, in Canada, crowdfunding activities typically do not involve the issuance of securities, but that some securities regulators may be considering changes to existing regulatory rules. The CRA will evaluate the income tax consequences if such regulatory changes take place.

Finally, the CRA noted that the subject of crowdfunding is briefly addressed in Folio S3-F9-C1 “Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime” (April 3, 2015) in respect of whether such amounts may be a gift by a donor. The CRA provided an example from the Folio:

Example 2

Assume a business uses crowdfunding as a method of raising funds for the development of a new product and the contributors do not receive any form of equity. The amounts received by the business would be included in its income pursuant to subsection 9(1). 

Taxpayers who seek and obtain crowdfunding (for business and non-business purposes) should be aware of the potential tax implications, particularly in light of fact-specific results and the CRA’s evolving views on the subject.

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Crowdfunding: Update From the CRA

TCC: Unpaid Dividend Refund Is Not a Refund

A pair of recent Tax Court of Canada judgments highlight the unsustainable position taken by the CRA that a statute-barred dividend refund that cannot be recovered by the taxpayer nonetheless reduces taxpayer’s “refundable dividend tax on hand” (“RDTOH”) balance.

We have written in this space before about the Tax Court’s strict interpretation of the three-year time limitation to receive a dividend refund under subsection 129(1) of the Income Tax Act. A consequence of this limitation is that where a taxpayer has missed the three-year filing deadline to obtain a dividend refund there can be “trapped” RDTOH which will require that the corporation pay a taxable dividend at some point in the future in order receive a dividend refund. The CRA, though, continues to take the position that the original taxable dividend reduces the RDTOH balance even where the dividend refund cannot be paid due to the three-year window being missed.

This issue was recently considered in two cases:  Presidential MSH Corporation v. The Queen (2015 TCC 61) and Nanica Holdings Limited v. The Queen (2015 TCC 85). In both cases, the issue was the same – whether the definition of “dividend refund” in subsection 129(3) refers to an amount that was paid or credited to the corporation or is merely a notional account that is automatically reduced notwithstanding that the corporation did not receive a refund. This latter position had been explicitly rejected by the Tax Court in Tawa Developments Inc. v. The Queen (2011 TCC 440). In Presidential and Nanica, the Tax Court held that an unpaid dividend refund is not a refund at all.

Yet the CRA apparently continues to enforce the Act as though the dividend refund is notional – no amount is required to be paid in order for the corporation to obtain a “dividend refund” and therefore the RDTOH balance is reduced without payment.

Fortunately, the Tax Court takes a more sensible interpretation in the recent decisions.

In Presidential, the Court undertook a textual, contextual and purposive analysis of the dividend refund concept, concluding that a payment was required before the RDTOH balance could be reduced. In rendering his judgement, however, Justice David Graham noted that the relevant provisions lack clarity and urged Parliament to take corrective measures to clear up the language in this area.

In Nanica, which was released after the decision in Presidential, Justice Valerie Miller reached the same conclusion, ultimately agreeing with the earlier decisions that “the phrase ‘dividend refund’ in section 129 is the refund of an amount”. There is no reduction of the RDTOH balance where the corporation does not receive a refund.

In light of these decisions, we hope the CRA will align its assessing position with the clear interpretation of the Tax Court.

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TCC: Unpaid Dividend Refund Is Not a Refund

Highlights from the Toronto Centre CRA & Professionals Group Breakfast Seminar – February 19, 2015

On February 19, 2015, at the Toronto Centre CRA & Professionals Group Breakfast Seminar CRA representatives provided an update on two topics: 1) online CRA e-services, and 2) Regulation 102 and Regulation 105 waivers for non-residents.

An Overview of E-Services for Tax Professionals and Businesses

Maxime Leger and Marc Boisseau, Senior Programs Officers at the Assessment and Benefit Services Branch, provided updates regarding CRA e-services under the My Account, My Business Account and Represent a Client portals. In general, these online portals allow taxpayers, or designated representatives, to submit documents, view and manage various tax accounts online.

My Account

  • Two levels are now required to login and access My Account. In level 1, the taxpayer is required provide personal information (social insurance number, date of birth, postal code, amounts entered on income tax and benefit return) to create a user ID and password. In level 2, the taxpayer receives the CRA security code.
  • After obtaining online access to My Account, Taxpayers can view Notice of Assessment and the status of tax returns. If the taxpayer registers to manage online mail, the CRA will no longer send paper copies. The taxpayer will receive email notifications to check My Account.
  • Taxpayers can register for online mail through NETFILE or EFILE software, by filing a T1 return, online using My Account service or by speaking with an agent.
  • Canadian resident individuals, corporations, and certain partnerships and trusts that, at any time during the year, own certain foreign property costing more than $100,000 are required to file Form T1135 Foreign Income Verification Statement. As of February 9, 2015, individual taxpayers are able to file this form electronically for the 2014 tax year. In the future, electronic filing will be extended to corporations and partnerships.

My Business Account

  • My Business Account has been expanded to allow taxpayers to file returns, Notices of Objection and refunds in regards to excise duties, excise taxes, air travelers security charges and softwood lumber products export charges.
  • This account also permits additional GST/HST elections i.e. GST20-1 Notice of Revocation of an Election for GST/HST Reporting Period by a Listed Financial Institution and RC7220 Election for GST/HST and QST Reporting Period for a Selected Listed Financial Institution
  • Updated options such as payment searches for payments made but not credited to the account and requests to transfer misallocated credits have been added to the Payroll Accounts.
  • Taxpayers can now authorize the CRA to withdraw pre-authorized debits from bank accounts. Taxpayers and designated representatives may manage direct deposits directly through My Business Account.

Represent a Client

  • The CRA noted that business authorization requests can be submitted online and will be reviewed and processed within five business days.
  • A non-resident representative living in the U.S. who wants to access the Represent a Client portal can obtain a non-resident representative number (NRRN) by completing the RC391 Application for a CRA NRRN.
  • Additional changes are expected in April 2015 to permit representatives to register new businesses and add program accounts on behalf of taxpayers.
  • The Tax Data Delivery Service allows authorized representatives to electronically receive information to help client income tax and benefit returns. It delivers tax information including T4 slips (i.e., T4A, T4E, T4A(OAS), T4A(P)), Home Buyers’ Plan, tuition carryover amounts.
  • To use this service, representatives must be a registered electronic filer, registered in Represent a Client, use an EFILE certified product and have a valid Form T1030 Authorizing or Cancelling a Representative.

Mobile Apps

  • In addition to the updated services provided in the online portals, the CRA also introduced new mobile apps.
  • In August 2014, the CRA Business Tax Reminder was released for small and medium sized enterprises with annual revenues of $20 million or less and less than 500 employees. This app allows taxpayers to create reminders and alerts for key dates related to instalment payments, returns, and remittances. See our post here.
  • More recently, on February 9, 2015, the CRA released MyCRA. This new app allows individual taxpayers to view Notices of Assessment, tax return status, and RRSP and TFSA contribution room. In the future it will permit taxpayers to update contact information and enroll for direct deposit.

Non-Resident Taxation in Canada – Regulation 102/105

Claudio DiRienzo, Policy and Technical Advisor at the Specialty Audit Division Compliance Programs Branch, provided an update on issues pertaining to Regulations 102 and 105. In general, these regulations require payors of non-residents rendering services in Canada to withhold and remit tax on the payments subject to treaty-based waivers.

Reduce Red Tape

  • The CRA acknowledged current frustrations among taxpayers and representatives with the cumbersome Regulation 105 and 102 processes and noted that the CRA continues to consult with stakeholders and tax professionals to reduce red tape. However, the CRA emphasized that certain processes were required to comply with existing legislation. The CRA suggested that amendments be made to the current legislation to help streamline the waiver process.
  • Centres of Expertise have been established for the waivers to ensure consistency among waiver requests. To shorten processing times, the CRA advised that comprehensive information be provided and a Business Number (BN) or Individual Tax Number (ITN) be applied for in advance.
  • CRA Document No. IC 75-6R2 states that approximately 30 days are required to review waiver applications. However, the CRA noted in reality the wait time varies on inventory and workload.

R102J and R102R Waivers

  • The CRA commented on the difference between R102J and R102R waivers. Both are treaty-based waivers used by non-residents to reduce the amount of withholding. The R102J is a joint employer and employee waiver and applies only to amounts less than $5,000 if the other country has a tax treaty with Canada or amounts less than $10,000 if the other country is the US. The waiver is effective for a year. To accommodate employers, the waiver is retroactive for 60 days prior to the date granted and an ITN or SIN can be provided at the end of the year.
  • In contrast, the R102R does not have the 60-day retroactive concession and requires a SIN or ITN at the time the waiver is granted.

Short Waivers Granted

  • The CRA acknowledged concerns that Regulation 102R waivers were being issued for short time periods (i.e., six months). As a result, taxpayers were required to reapply for waivers for the remainder of the taxation year. The CRA explained that this arose out of concerns that the employee would constitute a permanent establishment of the employer under Article XV, the Dependent Personal Services provision of the Canada-U.S. Tax Treaty.
  • The CRA representatives responsible for processing waivers do not make determinations in regards to a permanent establishment at the time of the waiver. This determination is made at the time of filing.
  • The CRA noted that it has now revised its position. If the applicant provides the approximate number of days he or she will be in Canada and approximate remuneration amounts, the waiver applies for a full calendar year.

Secondments

  • The CRA also commented on the use of secondment arrangements to manage Regulation 102 and 105 issues. A secondment is the temporary assignment of loan of an employee between two entities. The CRA noted that whether withholding is required under a secondment arrangement is a question of fact. In order to waive withholding a genuine employer-employee relationship must exist.
  • No Regulation 105 withholding is required for reasonable reimbursements under a secondment. CRA Document No. IC 75-6R2, which provides guidelines on secondment arrangements, states that administrative overhead of $250 per month per employee constitutes a reasonable reimbursement.

Updates in Case Law and Administrative Policy

  • The CRA noted that it accepts the Weyerhaeuser Company Limited v. The Queen (2007 TCC 65) decision, which generally held that not all payments to non-residents are subject to withholding tax. However, the CRA noted that they would only apply Regulation 105 consistently with this decision if the taxpayer’s information is documented at the time the payment is made.
  • The CRA is currently in the process of developing a set of guidelines and policy directions for Regulation 102 and Regulation 105 and updating CRA Document No. IC 75-6R2. An online portal for waivers is expected to be launched in 2016.

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Highlights from the Toronto Centre CRA & Professionals Group Breakfast Seminar – February 19, 2015

CRA: Financial Tools for Canadian Startup Companies

On November 26, 2014, the Canadian Government partnered with Startup Canada to convene Startup Canada Day on the Hill.

Minister of National Revenue Kerry-Lynne Findlay spoke at the event and highlighted the strategies the CRA has implemented to assist startup companies across the country.

Startups have bright, innovative founder teams, but many lack the financial expertise, time, and money required to maintain adequate financial records. This may seem insignificant in the short-term, but this will become increasingly important when attracting investors and in dealing with the CRA.

Minister Findlay stated that, with this reality in mind, the CRA has worked toward reducing the red tape associated with starting and running a business in Canada. In November 2012, 52 small business owners and 91 small business service representatives and bookkeepers participated in meetings across the country to identify issues stemming from federal rules and regulations.

How is the CRA helping Startups?

  1. Through the operation of a secure online self-service portal, available 24/7 through which many different kinds of transactions can be completed, including managing banking information and filing tax returns replacing the need to keep track of copious amounts of paper;
  2. Through the development of the Small Business Checklist which includes user-friendly and detailed information on starting, maintaining and winding up a business;
  3. Through the Business Tax Reminders App, created in consultation with small and medium-sized business owners, which allows businesses to create reminders for when their various financial payments are due; and
  4. Through the Liaison Officer Initiative which provides in – person support to businesses at key stages in their growth cycle in an effort to avoid common tax pitfalls, among other things, that would cost them in the future.

Minister Findlay stated that, in the CRA’s view, these tools provide a solid starting point for tax compliance so company founders can focus on what’s most important to them – making their business grow.

As part of the Government’s commitment to consult with businesses every two years, the CRA recently completed another red tape reduction consultation process in November. Results should be available in the Spring 2015.

A version of this post was originally published on Dentons’ Tech Startup Centre blog

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CRA: Financial Tools for Canadian Startup Companies

CRA Announces Collaboration with CPA Canada

As expected, the CRA has formally announced the details of its collaborative efforts with CPA Canada.

The CRA recently spoke about this collaboration at the Toronto Centre CRA-Tax Professionals breakfast seminar.

The CRA news release, which is titled “Harper Government solidifies partnership with Canada’s Professional Accountants”, states,

The new Canada Revenue Agency (CRA)-Chartered Professional Accountants of Canada (CPA Canada) Framework Agreement was formally signed by Andrew Treusch, Commissioner of Revenue and Chief Executive Officer of the CRA, and Kevin Dancey, President and CEO of the CPA, during the Financial Management Institute’s Professional Development Week, being held in Ottawa from November 25 to 28. The Framework Agreement recognizes the important relationship between the CRA and CPA Canada in the successful administration of Canada’s tax system, and promotes regular dialogue between the two organizations on tax-related matters of common interest. It will also ensure that input from Canada’s accounting professionals is considered as the CRA moves forward with its change agenda.

A central part of the Framework Agreement includes the creation of seven committees, each co-chaired by a senior representative from both the CRA and CPA Canada, to focus on seven priority areas:

  • Services;
  • Compliance;
  • Tax Administration;
  • Scientific Research and Experimental Development;
  • Commodity Tax;
  • Red Tape Reduction; and
  • Training

The agreement is a key element in the CRA’s efforts to build strong relationships with the Canadian accounting community and tax service providers so that Canada continues to have a well-functioning and world-class tax system that benefits all Canadians.

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CRA Announces Collaboration with CPA Canada