On June 6, 2013, at the Toronto Centre CRA & Professionals Breakfast Seminar, the Canada Revenue Agency discussed (a) recent developments at the Income Tax Rulings Directorate and (b) the process through which the General Anti-Avoidance Rule in section 245 of the Income Tax Act may be applied in the course of an audit.
Income Tax Rulings Directorate Update
Mickey Sarazin, Director General of the CRA’s Income Tax Rulings Directorate in Ottawa, presented on recent developments at Rulings. A brief overview of the issues he discussed is as follows:
Rulings continues its efforts to reduce “red tape”. Specifically, Rulings is seeking to:
- make its tax information accessible and clear,
- update its technology,
- provide a “Tell us once” service standard,
- reduce reporting requirements,
- increase timeliness of its rulings.
- Rulings will be unveiling pre-ruling consultations, which will allow taxpayers to meet with Rulings to discuss potential transactions before a formal ruling application is filed.
- Rulings has started internal cross-country education sessions to raise awareness about its centres of expertise and certain subject areas.
- By Fall 2013, Rulings will have added 26 new employees.
Hot issues by Division include:
- Reorganizations and Resources Division – What transactions may be included in a “series of transactions” under subsection 55(2) of the Act.
- Business/Personal Division – Whether certain arrangements are qualifying private health services plans.
- International Division – Foreign affiliate dumping rules, upstream loans, and foreign entity classification.
- Financial Institutions and Trusts Division – Real estate investment trusts and the prohibited investment rules.
The GAAR Process
Yves Moreno, Manager, Income Tax Rulings Directorate, and Suzanne Saydeh, Manager, GAAR and Technical Support Section at the Aggressive Tax Planning Division of the International and Large Business Directorate and member of the CRA’s GAAR Committee, presented on the process regarding the application (or potential application) of the GAAR.
- Typically, an auditor in a local Tax Services Office will identify a transaction (or series of transactions) to which the GAAR may apply. In addition, the Aggressive Tax Planning Division may identify potential transactions/facts in the course of a review of applications for clearance certificates, rollover transactions, or foreign reporting information. The Aggressive Tax Planning Division may also review certain aggressive transactions with a view to identifying other similarly-situated taxpayers who may have undertaken similar transactions.
- The auditor will collect the relevant facts surrounding the transaction (or series of transactions). The auditor will draft a proposal letter that will include a detailed analysis of the potential application of the GAAR. The auditor will invite the taxpayer to provide a response to the proposal letter.
- Once the auditor receives the taxpayer’s representations, the auditor will make a referral to the Aggressive Tax Planning Division. The referral will include the auditor’s proposal letter, the taxpayer’s representations, the auditor’s response (if any), and any other information that may be relevant to the file (i.e., statute-barred years, etc.).
- Where the GAAR would be the primary basis of the assessment and there is a “new issue”, the referral is made before the proposal letter is issued to the taxpayer. Where the GAAR would be a secondary basis of the assessment, the referral is made before issuing the assessment.
- The Aggressive Tax Planning Division is the “gatekeeper” that seeks to ensure the consistent application of the GAAR. It does not “rubber stamp” the referrals, but performs its own analysis in consultation with other CRA Divisions, the Department of Finance, and the Department of Justice. Once its analysis is complete, the Aggressive Tax Planning Division determines whether the matter should be referred to the GAAR Committee.
- If the Aggressive Tax Planning Division’s view is that the GAAR may apply, the file is referred to the GAAR Committee. If the Aggressive Tax Planning Division’s view is that the GAAR does not apply, it will provide that view to the auditor without referral to the GAAR Committee.
- For files referred to the GAAR Committee, if there is a “new issue”, the Aggressive Tax Planning Division will draft a referral. If there are no “new issues”, the Aggressive Tax Planning Division will provide a recommendation to the GAAR Committee.
- The referral to the GAAR committee includes the auditor’s views, the taxpayer’s representations, and the Aggressive Tax Planning Division’s views.
- The GAAR Committee comprises members from the CRA, Department of Finance and Department of Justice. The GAAR Committee meets periodically to consider the referrals. The Committee members consider the file beforehand, and the meetings allow the committee members to discuss and develop a view on the matter.
- (As an aside, the CRA stated that it does not believe that the materials and deliberations of the GAAR Committee are subject to disclosure under the Access to Information Act (see, in particular, sections 21 and 24 of that Act)).
- The GAAR Committee will provide a recommendation on the application of the GAAR in a particular case.
The CRA also provided the following statistics:
- Since 1988, 1,125 files have been referred to the GAAR Committee. Of those files, the GAAR Committee has recommended that the GAAR be applied in 865 files. Of those files, the GAAR was the primary basis of assessment in 378 files, and a secondary basis of assessment in 487 files.
- 52 files have been litigated. Of these cases, the Crown and the taxpayer have each won 26 cases.
- 75 percent of the cases that have been litigated focused on whether there was misuse or abuse of the Act (or another statute).
- Since the Supreme Court’s decision Canada Trustco Mortage Co. v. The Queen (2005 SCC 54), the Crown has been successful in 18 cases, and the taxpayer has been successful in 13 cases. The CRA attributes this to its better understanding of the interpretation and application of the GAAR.