The government of Canada’s recent report responding to the Finance Committee Report “The Canada Revenue Agency, Tax Avoidance and Tax Evasion: Recommended Actions” in turn recommended a number of actions affecting tax enforcement and dispute resolution.
Voluntary Disclosures and Audit Settlements
Recommendation: “The Canada Revenue Agency conduct a comprehensive review of its Voluntary Disclosures Program. As well, it should review the guidelines that are used to determine whether to pursue litigation or to seek a settlement with individuals or organizations that have engaged in tax avoidance or tax evasion.”
Response regarding Voluntary Disclosures (VD): The government will review the VD program taking into account the report of the Offshore Compliance Advisory Committee issued in December, 2016. The government expects the review will result in changes that “tighten” the criteria for VD program acceptance, but that proposed changes will first be put to the community for comments.
Analysis: It is always challenging to tailor any statutory regime or administrative policy to achieve intended results without being over or under inclusive. In my view, the majority of taxpayers who get relief under the VD program made honest mistakes and come forward with good intentions. Nonetheless, Canada’s VD program is amongst one of the most forgiving compared with other jurisdictions and there is a policy tension: wilfully non-compliant taxpayers who make VDs may be perceived as unfairly advantaged, compared to those who report accurately and pay on time. It is therefore not surprising that the government wishes to review and refine its policy.
The VD program guidance relied on by taxpayers and advisors has not been overhauled since 2007. Much has changed since then, especially the government’s ability to obtain information on non-compliant taxpayers, including those who have unreported assets and income outside Canada. While a review of the VD program is not unexpected, we hope any changes will be finely tuned and that they remain fair to taxpayers who were unknowingly non-compliant. Further, in my view any changes to the VD program should include changes favourable to taxpayers. For example:
- The CRA’s responses to initial no-names letters should be binding on the CRA, assuming the facts in the ultimate named disclosure are consistent with the no-names position.
- Where a taxpayer desires certainty for a filing position on a no-names disclosure and a ruling cannot be obtained before the deadline for providing the taxpayer’s identity expires, the no-names period should be extended, which relief is not currently available.
- VD guidance should make it clear that returns showing no taxes owing may be accepted if the failure to file could result in penalties (for example, penalties under ss. 162(7) of the Income Tax Act (Canada) (“ITA”)).
- Cashless treatment without full filing compliance in appropriate circumstances. Addressing Regulation 102 non-compliance is vexing: the VD program expects full remittance and filing compliance, even where the income in issue is treaty-protected. Thus, a VD for Regulation 102 compliance involving treaty-protected income needlessly consumes the resources of the CRA and affected taxpayers who have to cycle cash through the system while filing nil tax returns. The legislative authority for waiving filing requirements is in ITA ss. 220(2.1). Regrettably, the CRA and the Courts tend to interpret ITA ss. 220(1) as requiring the Minister of National Revenue (“Minister”) to strictly apply the ITA. Thus, while it may be argued that the Minister’s power to administer and enforce the ITA under ss. 220(1) may allow for efficient and pragmatic administration (including cashless VDs where justified), that interpretation would require a seismic shift in the interpretation of ITA ss. 220(1).
Response regarding Audit Settlements: The report stated the long-standing position that tax disputes may only be resolved on a principled basis in accordance with the facts and law of a taxpayer’s case. The government appreciates that the CRA must be transparent about the process for negotiated settlements and the CRA will review its guidelines.
Analysis: There is nothing new about the “principled basis” for settlement here. Likely these sentiments are being expressed in response to an extremely favourable settlement offer made to taxpayers who participated in a marketed offshore structure that generated significant media coverage in 2016. It is difficult to see how “greater transparency” could be practically achieved, since taxpayer confidentiality provisions are strong.
Of greater importance is the quality of auditing generally. The Fall 2016 Report of the Auditor General recommended that auditors be given feedback when their assessing positions are overturned by the CRA’s appeals branch or the Courts and the CRA agreed that feedback would be implemented in the 2016/17 fiscal year. That is a step in the right direction towards improving auditing practice.
Registering Tax Products
Recommendation: “The Minister of National Revenue require tax advisors operating in Canada to register all of their tax products with the Canada Revenue Agency.”
Response: While the government of Canada supported the recommendation, the report observed that Canada already requires tax products that meet the statutory definition of “tax shelter” to be registered and that the “reportable transactions” regime requires transactions meeting certain criteria to be reported. However, further consideration will be given to whether changes may be made to ensure disclosure of high risk transactions.
Analysis: It is unclear what further measures the government may be able to implement and the original recommendation may have been made without significant knowledge of the current reporting regime for tax products. Anecdotally, the view in the tax community is that the “reportable transactions” regime was ineffective, with relatively few taxpayers filing information returns. Of course, the CRA’s disclosure of information is guarded and our attempt to obtain information under the Access to Information Act on the aggregate number of returns filed was rejected by the CRA.
Technology and Human Resources to Address Aggressive Planning
Recommendation: “The Canada Revenue Agency enhance its technical, human resource and other capabilities in respect of —and knowledge about—domestic and international aggressive tax planning.”
Response: The government confirmed support for this recommendation and the CRA will broaden its skills by increasing its employee complement with legal, economics and statistics training.
Analysis: The CRA’s “business intelligence strategy” was set out in a 2014 report highlighting, at a high level, initiatives including developing an advanced analytics unit, a behaviour economics unit and advanced risk-based approaches to audit selection and debt management. Assigning risk scores to taxpayers is expected to focus resources on audits with the highest likelihood of tax adjustments and reduce the number of “no change” audits. The CRA strategy document is available here.
Domestic and International Co-Operation
Recommendation: “The federal government take steps to improve coordination between the Canada Revenue Agency, which investigates situations of possible tax evasion, and the Department of Justice, which prosecutes cases of tax evasion.”
Recommendation: “The Minister of National Revenue address offshore non-compliance with tax laws through greater collaboration with other jurisdictions, including through enhanced joint audits with tax treaty partners.”
Responses: The government of Canada predictably supported these recommendations.
Analysis: Whether there was previously a lack of coordination between the CRA and prosecutors is an open question. However, the recommendation and response are indicative of an increasing appetite not only to enforce the ITA, but for the government to been seen to be aggressively enforcing. In my view, the CRA and prosecutors selectively choose criminal prosecutions and have a very high success rate on chosen files. This suggests an appropriate, cautious approach, given the cost and stigma associated with criminal proceedings. It would be regrettable if the government began to favour “show trials” to seek to make examples of taxpayers or even their advisors to enhance the perception of the government being tough on tax enforcement.
In response to the recommendation that Canada collaborate with other jurisdictions through joint audits, the report cited the Multilateral Competent Authority Agreement and Country by Country Reporting, as well as global initiatives including the OECD’s Forum on Tax Administration, the Financial Action Tax Force, the Global Forum on Transparency and Exchange of Information for Tax Purposes and the Taskforce on Tax Crimes and Other Crimes. The cumulative effect of initiatives remains uncertain, but it is reasonable to assume that cross-border structures and transfer pricing arrangements will be under greater-than-ever scrutiny and we will see more administrative disputes and Court appeals in these domains going forward.