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Withholding Its Assessment:

The Federal Court Of Appeal Clarifies The Narrow Limits On Judicial Review In The Tax Context

Article by Ronald Podolny

McCarthy Tétrault LLP

The Federal Court of Appeal has issued its decision in The Minister of National Revenue and Canada Revenue Agency v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250. The case concerns the scope of administrative law remedies and the essence of an administrative “decision.”

Background

The case arose out of a “withholding tax” assessment by the Minister of National Revenue of JP Morgan (Canada) Inc. (“JP Morgan”) for fees paid by JP Morgan to a private Hong Kong corporation, its client. JP Morgan challenged the assessment by applying to the Federal Court for judicial review. The Crown moved to strike JP Morgan’s application. It was unsuccessful before the Prothonotary and the Federal Court. The Crown appealed to the Federal Court of Appeal.

The Federal Court of Appeal observed that the Minister is a “federal board, commission or other tribunal” within the meaning of the Federal Courts Rules, and in appropriate circumstances, her decisions can be judicially reviewed. Nevertheless, the Court bemoaned the “flow of unmeritorious applications for judicial review in the area of tax” which are struck out “time and time again.”

Indeed, the Federal Court is precluded from dealing with matters that can be appealed to the Tax Court by virtue of Rule 18.5 of the Federal Courts Rules. Further, the application for judicial review, to be valid, must state a ground of review cognizable at law, such as jurisdiction, procedural unacceptability, substantive unacceptability or abuse of discretion.

The Court noted that all claims of abuse of ministerial discretion in the tax context to date have been struck, because in this context the Minister has no discretion to exercise, and thus to abuse. Where the facts indicate a tax liability, the Minister must issue an assessment.

A further principle that restricts the availability of judicial review of Ministerial decisions is that a judicial review brought in the face of adequate, effective recourse elsewhere cannot be entertained. This principle is justified by the perception of judicial review remedies as remedies of last resort, as well as the unwillingness of the Courts to upset specialized schemes set up by Parliament for the appellate review of administrative decisions.

Finally, the Federal Court will strike out a notice of application for judicial review if it cannot grant the relief sought. For example, in the tax context, the Court cannot vary, set aside or vacate tax assessment.

Conversely, there are areas where judicial review may potentially be available in tax matters. These include discretionary Ministerial decisions under the fairness provisions, assessments that are purely discretionary and conduct during collection matters that is not acceptable o defensible. For instance, aggressive methods of investigation against the members of a particular political party would be judicially reviewable. The list is not exhaustive, and may be expanded on a case-by-case basis, with the above principles in mind.

In the case at hand, the Federal Court of Appeal found three reasons to strike out JP Morgan’s notice of application. Firstly, the Court was unaware of any authority that the Minister’s alleged failure to follow her own policies could constitute an abuse of discretion. Secondly, because the Tax Court could consider the same question on appeal, the application for judicial review was barred by Rule 18.5 of the Federal Courts Rules. Finally, the Federal Court cannot set aside tax assessments – only the Tax Court has the power to grant this relief.

The appeal was therefore allowed, and JP Morgan’s application for judicial review was dismissed.

Significance of the Decision

The decision clarifies the principles of judicial review of administrative action. It restates the principles of the availability of judicial review, the nature of decisions that can be reviewed and the remedies available. Its primary significance will be for tax practitioners, who have obtained further guidance as to the (very narrow) grounds upon which a Ministerial decision in the tax context can be judicially reviewed. The broader impact of this decision is in its restatement of general principles concerning judicial review of Ministerial action, which will be of interest to the practitioners of administrative law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Defining Value: What Is Fair Market Value?

Last Updated: September 26 2013

Article by Neil de Gray

Campbell Valuation Partners Limited

In a business valuation context, the term value can have many different meanings. Terms such as fair market value, fair value and price are often used synonymously to describe “value”; however, each of these terms has a different meaning and interpretation. The purpose of this article is to define fair market value.

FAIR MARKET VALUE

In the absence of an open market transaction, where an informed buyer and an informed seller negotiate a transaction price, business value must be determined in a notional market context. Notional market valuations are required for a variety of reasons including family law proceedings, commercial litigation, shareholder oppression proceedings and income tax and estate planning.

In a notional business valuation, the most common definition of value that is adopted is fair market value. The definition of fair market value generally accepted by Canadian courts is:

In a notional business valuation, the most common definition of value that is adopted is fair market value. The definition of fair market value generally accepted by Canadian courts is:

“The highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash.”

In determining fair market value, the valuator must consider each of the components of the fair market value definition.

Components of Fair Market Value

  • Highest price available
  • Open and unrestricted market
  • Between informed and prudent parties
  • Acting at arm’s length
  • Under no compulsion to act
  • Expressed in terms of cash

Highest Price Available

In a notional market context, the highest price available must be determined without exposing the business interest to the open market. Determining the highest price available on a notional basis is difficult and requires professional judgment and experience. It is important to identify that price, as determined in an open market transaction and fair market value, as determined in a notional context may not be equal (we identify some of the reasons for this at the end of this article).

Consider that conceptually, a buyer and a vendor will only transact at a price and upon terms to which they both agree based on their own motivations and self interest. This transaction price is the price at which the vendor’s interest, being to maximize the selling price and the buyer’s interest, being to minimize the purchase price, are in equilibrium. In general, when provided two different purchase offers, a vendor will transact at the higher price.

The purchase price arrived at through open market negotiation often includes the consideration of “special interest purchasers”. A special interest purchaser is a purchaser that is willing to pay a premium over intrinsic value because they will receive additional value from the combination of the acquired business with their own (“synergies”).

Special interest purchasers may receive additional benefit from economies of scale, from cross selling opportunities or from the elimination of a competitor.

For example, Google may purchase a start up technology company for a premium in order to acquire access to technology that can be implemented with existing Google capabilities thereby expanding on existing products or services. On a standalone basis the start up technology company’s product may have a limited application, but when combined with other Google products the range of applications and customers expands.

It is difficult to quantify the premium that a special interest purchaser may be willing to pay for the perceived synergies they expect to receive. From a practical standpoint, the special interest purchaser will only pay a premium up to the level that they require to secure the acquisition. Given the difficulty in ascribing value to post-acquisition synergies, valuations in a notional context are typically based on a stand-alone or intrinsic value, without the consideration of post-acquisition synergies. In specific cases where post-acquisition synergies can be evaluated and special interest purchasers are readily identifiable, the value of post-acquisition synergies may be quantified.

Open and Unrestricted Market

An open market implies that no potential purchasers are excluded from the notional market valuation. It is a fundamental assumption that all potential buyers with the will and resources to transact are included in the valuators considerations.

An unrestricted market refers to the assumption that any statutory, contractual, or other restrictions that may influence the marketability of a business are temporarily lifted for the purpose of determining value in a notional context. For example, a shareholders’ agreement may restrict the transfer of shares; such limitations are assumed to be lifted for the purpose of determining fair market value.

However, prevailing case law indicates that the assumption of an unrestricted market does not completely disregard restrictions on a hypothetical sale of a business. For example, in practice, any restrictions are generally reflected by discounting the value that has otherwise been determined by applying a marketability discount.

Informed and Prudent Parties

The fair market value definition assumes that both the vendor and the purchaser are informed with respect to all material facts important to the value determination. In an open market transaction, the vendor often has greater knowledge of the business and its operations, while the buyer has greater knowledge of the potential post-acquisition synergies and future plans for the business.

Canadian case law supports the assumption of full and open disclosure of all relevant information that was known or ought to have been known at the valuation date. All information that would or should have been available at the valuation date is assumed to have been available in the notional market value determination. It is generally accepted that hindsight information is not considered in the fair market value determination. This is consistent with an open market transaction whereby the price negotiated between a buyer and a seller is based on the information available at that time without the benefit of knowledge of future events.

In addition, it is assumed that both the purchaser and seller perform a reasonable level of due diligence and exercise a reasonable level of care and judgment when consummating a transaction.

Acting at Arm’s Length

Acting at arm’s length relates to the assumption that the buyer and seller are opposing parties in the negotiation of the terms of purchase and sale. It is assumed that arm’s length parties will act in their own best interest, whereby the seller will work to negotiate the highest selling price and the buyer will work to negotiate the lowest purchase price.

Under No Compulsion to Act

The fair market value definition assumes that neither party is forced or compelled to transact. In reality this may not always be the case as a business owner may be compelled to sell their ownership interest for a variety of reasons including personal health or financial difficulty. A buyer who is aware of a seller’s compulsion to sell may be able to take advantage and transact at a lower price. The fair market value definition assumes that each of the buyer and the seller are willing to transact at a price that is deemed to be fair.

Expressed in Terms of Cash

A notional market valuation is expressed on a cash equivalent basis and assumes the transfer of the rights and risks associated with the business at the valuation date. This is often in contrast to open market transactions which are frequently consummated based on non-cash consideration such as the transfer of shares. Similarly, open market transactions often involve a conditional price or earn-outs that are based on the future performance of the acquired company. By adopting a cash equivalent value and immediate transfer of the risks and opportunities of the business, the notional market context avoids the interpretation of value based on non-cash terms and conditions that would otherwise complicate the valuation process.

Open Market Price versus Fair Market Value

Having consideration for the foregoing, differences may exist between fair market value determined in a notional market context and price as determined in an open market transaction. These differences may arise as a result of:

  • the presence of special interest purchasers. As discussed above, special interest purchasers may drive a price as determined in an open market transaction higher than the fair market value as determined in a notional context;
  • differences in the information available to each of the parties to an open market transaction. Generally open market transactions are negotiated between parties with varying degrees of knowledge and as such the consummated price may be higher or lower than the ‘highest price available’ determined in a notional market context. For example, the vendor generally has more detailed knowledge of the historical results of the business and the buyer has more information with regard to the potential perceived synergies;
  • imprudent decisions by either the purchaser or vendor that are contrary to the fair market value assumption that a transaction occurs between prudent parties. Human emotion can impact the price consummated in an open market transaction or vendors may not want to deal with certain parties;
  • non-cash or other consideration. Open market transactions often involve non-cash consideration or other forms of compensation including earn-outs, management contracts etc that impact the price paid. This contrasts with the cash equivalent basis assumed in a notional market context; and
  • forced transactions in an open market context whereby a purchaser or vendor is compelled to act perhaps as a result of personal health or financial reasons.
CONCLUSION

Understanding which definition of value is adopted is critical to interpreting a value conclusion. The definition of value utilized should be clearly defined and understood. In practice, the definition of value generally adopted is fair market value. As outlined above, fair market value has a generally accepted meaning and interpretation. Comprehending this meaning is critical to appropriately interpreting the value conclusion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Withholding Its Assessment:

The Federal Court Of Appeal Clarifies The Narrow Limits On Judicial Review In The Tax Context

Article by Ronald Podolny

McCarthy Tétrault LLP

The Federal Court of Appeal has issued its decision in The Minister of National Revenue and Canada Revenue Agency v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250. The case concerns the scope of administrative law remedies and the essence of an administrative “decision.”

Background

The case arose out of a “withholding tax” assessment by the Minister of National Revenue of JP Morgan (Canada) Inc. (“JP Morgan”) for fees paid by JP Morgan to a private Hong Kong corporation, its client. JP Morgan challenged the assessment by applying to the Federal Court for judicial review. The Crown moved to strike JP Morgan’s application. It was unsuccessful before the Prothonotary and the Federal Court. The Crown appealed to the Federal Court of Appeal.

The Federal Court of Appeal observed that the Minister is a “federal board, commission or other tribunal” within the meaning of the Federal Courts Rules, and in appropriate circumstances, her decisions can be judicially reviewed. Nevertheless, the Court bemoaned the “flow of unmeritorious applications for judicial review in the area of tax” which are struck out “time and time again.”

Indeed, the Federal Court is precluded from dealing with matters that can be appealed to the Tax Court by virtue of Rule 18.5 of the Federal Courts Rules. Further, the application for judicial review, to be valid, must state a ground of review cognizable at law, such as jurisdiction, procedural unacceptability, substantive unacceptability or abuse of discretion.

The Court noted that all claims of abuse of ministerial discretion in the tax context to date have been struck, because in this context the Minister has no discretion to exercise, and thus to abuse. Where the facts indicate a tax liability, the Minister must issue an assessment.

A further principle that restricts the availability of judicial review of Ministerial decisions is that a judicial review brought in the face of adequate, effective recourse elsewhere cannot be entertained. This principle is justified by the perception of judicial review remedies as remedies of last resort, as well as the unwillingness of the Courts to upset specialized schemes set up by Parliament for the appellate review of administrative decisions.

Finally, the Federal Court will strike out a notice of application for judicial review if it cannot grant the relief sought. For example, in the tax context, the Court cannot vary, set aside or vacate tax assessment.

Conversely, there are areas where judicial review may potentially be available in tax matters. These include discretionary Ministerial decisions under the fairness provisions, assessments that are purely discretionary and conduct during collection matters that is not acceptable o defensible. For instance, aggressive methods of investigation against the members of a particular political party would be judicially reviewable. The list is not exhaustive, and may be expanded on a case-by-case basis, with the above principles in mind.

In the case at hand, the Federal Court of Appeal found three reasons to strike out JP Morgan’s notice of application. Firstly, the Court was unaware of any authority that the Minister’s alleged failure to follow her own policies could constitute an abuse of discretion. Secondly, because the Tax Court could consider the same question on appeal, the application for judicial review was barred by Rule 18.5 of the Federal Courts Rules. Finally, the Federal Court cannot set aside tax assessments – only the Tax Court has the power to grant this relief.

The appeal was therefore allowed, and JP Morgan’s application for judicial review was dismissed.

Significance of the Decision

The decision clarifies the principles of judicial review of administrative action. It restates the principles of the availability of judicial review, the nature of decisions that can be reviewed and the remedies available. Its primary significance will be for tax practitioners, who have obtained further guidance as to the (very narrow) grounds upon which a Ministerial decision in the tax context can be judicially reviewed. The broader impact of this decision is in its restatement of general principles concerning judicial review of Ministerial action, which will be of interest to the practitioners of administrative law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Top Ten CRA Audit Flags

Article by Stevan Novoselac and John Sorensen

Gowling Lafleur Henderson LLP

Taxpayers often ask why the CRA commenced an audit or whether taking a particular step might target them for a future audit. These are reasonable concerns, since the CRA’s approach to audit selection is generally not random, but rather based on risk assessment.

Research comparing the effectiveness of random versus targeted audits was conducted under the CRA’s Small and Medium Enterprises Research Audit Program (formerly the Core Audit Program), which utilized random auditing.1 According to the 2010-2011 CRA Report, in that year random auditing detected significant non-compliance in only 12.2% of audits, while targeted auditing based on risk assessment detected significant non-compliance in 46.7% of cases. Therefore, targeted auditing based on risk assessment has become the CRA’s preferred approach. In the 2012-13 year, the CRA commenced fewer audits than in the prior year, in part because of a strategic decision to focus resources on auditing high-risk taxpayers.2 This resulted in the CRA exceeding two of its important performance indicators, adjusting a higher percentage of tax returns audited (79%, well above the CRA’s target of 75%) and generating a higher fiscal impact per auditor ($423,000 per full-time equivalent, well above the CRA’s target of $350,000).3

Going forward the CRA may pursue audits even more aggressively: Budget 2013 stated that the CRA would make significant changes to its compliance programs to target high-risk areas of tax non-compliance, with the objective of raising additional revenues of up to $550 million per year by 2014–15.4

Here is a summary of ten common audit triggers or risks for getting or staying on the CRA’s “radar”.

Inconsistencies between third party information and taxpayer’s filing position: The CRA’s “matching” program compares information from third parties, employers, financial institutions and other sources with taxpayer’s filing positions to confirm filing accuracy. The CRA’s ability to match this information has significantly improved in recent years, enhancing this type of risk assessment.

Employer compliance: The CRA continues to aggressively pursue a range of issues pertaining to employer compliance, including the timely remittance of source deductions, the status of workers as either independent contractors or employees, taxable benefits and relocation costs.

Enquiries often arise when an independent contractor seeks employment insurance benefits, triggering a CRA ruling on the worker’s status. While an enquiry pertaining to a single worker would not trigger significant financial exposure, it can lead to rulings for similarly categorized workers and result in significant assessments for premiums under the Employment Insurance Act and the Canada Pension Plan. Payroll audits may also include enquiries into taxable benefits received by workers, including personal use of employer assets, allowances, free parking, interest-free or low-interest loans, stock options, incentives/gifts/prizes, relocation expenses, retiring allowances, termination payments and tuition fee assistance. Payroll audits may also reveal the presence of non-resident workers in Canada temporarily. Beware the disgruntled former independent contractor.

Not complying with CRA requests for information: This is not only damaging to a taxpayer’s position for a year being audited, it also likely flags the taxpayer for future audit enquiries. The CRA appears to be

downloading greater responsibility to taxpayers in the course of audits, by making more comprehensive demands for documents and information to be supplied to the CRA, rather than scheduling time for field audits at a taxpayer’s place of business. Supplying information to the CRA should be carefully managed, to ensure that the CRA’s requirements are fulfilled without over-disclosing information, including protecting documents and information that would be subject to privilege.

Similarly, if there were issues with a previous audit, the taxpayer would be more likely to be “on the radar” and subject to future audits.

Requests to amend income tax or GST/HST returns: While amendments to returns or account closures may be necessary or desirable, these steps may attract audit scrutiny. Certain tax strategies that the CRA may challenge involve re-filing returns for past taxation years to take advantage of significant loss-carrybacks which may not be supportable.

Unusual or notable changes in deductions or credits: The CRA compiles information about deductions and credits claimed by taxpayers over multiple years and significant changes from one year to another may attract CRA enquiries. Taxpayers with a viable explanation for significant changes need not worry. However, taxpayers who become involved in aggressive tax strategies may be flagged for audit.

This criterion for risk assessment considers the year-to-year consistency of a range of deductions including management fees, interest on debt to non-residents and amounts paid in respect of intellectual property that has been “offshored”. Disallowance of management fees and interest payments may give risk to the severe result of double taxation, by which the amount is taxable in the hands of the recipient, but non-deductible to the payor.

Contemporaneous and comprehensive documentation supporting these types of payments is essential to establish their underlying business purpose and commercial reasonableness, particularly for transactions between related parties or closely held groups of entities.

Participating in aggressive or high risk tax strategies: The CRA has dedicated audit resources to detecting and reassessing a number of issues, including: artificial capital losses; loss trading transactions; surplus stripping; offshore investment accounts; donation arrangements; withholding tax; section 85 rollover transactions; permanent establishment/residency issues; interest deductibility; RRSP appropriations; and tax free savings accounts.

Discrepancies between tax filing position and filing positions for similarly situated taxpayers or private corporations: The CRA may compare: corporate tax returns amongst similar businesses; the relationship of purchases, sales and GST/HST remitted to other businesses in the same industry to ascertain whether remittances are reasonable; and tax returns of shareholders of a private corporation to the corporation’s tax filings. Therefore, filing positions which are not consonant with expectations for an industry, or which are not consonant amongst shareholders and their private corporations, may attract an audit.

Reported income low compared to residents in same neighbourhood: This suggests that an individual may have unreported income. Unreasonably low reported income is not only an audit trigger, but may cause the CRA to initiate a so-called “net worth” or arbitrary assessment, whereby various tools are deployed by the CRA to impute income to the taxpayer.

Not using fair market value for residential real estate rentals: Where real estate rentals yield no income or losses, the CRA may suspect that the property is being rented for less than market-value rent to a non-arm’s length person. The CRA may rely on property tax and interest expense information to ascertain the value and market rent for a property.

Referrals: The CRA may commence an audit based on information obtained during the audit of a third party, or because of a referral from another CRA department, other government organizations or informants. Sometimes estranged family members share information with the CRA, including estranged spouses seeking leverage in a family law dispute.

We help manage audits and recommend that counsel be engaged from the outset. Early engagement enables counsel to immediately begin managing critical issues pertaining to document disclosure, legal privilege, risks arising from any potential criminal proceedings and to ensure taxing provisions are correctly applied by auditors.

Footnotes

  1. See the CRA’s 2010-2011 Annual Report to Parliament (“2010-2011 CRA Report”), at p. 39.
  2. See the CRA’s 2012-2013 Annual Report to Parliament, at p. 43.
  3. Ibid.
  4. See Chapter 4.1 of Budget 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Canadian SnowBirds Beware! 2014 Border Crossing Rules Increase Stakes For “Day Count”

Article by Roy Berg

Moodys Gartner Tax Law LLP

Virtually all Canadian snowbirds know they must keep track of how many days they are in the US and outside of Canada because “bad” tax and non-tax surprises await those who are in or out of either country too long. Given the importance of “day count,” why do so few travellers (relatively speaking) trigger an examination based on the amount of time they have spent in either country?

The answer may come as a shock to most (and I would guess nearly all) snowbirds: prior to 2014 neither the US nor Canada knew how many days someone had been within its borders. That will change in 2014 as new rules go into effect. All snowbirds need to know how this change will affect them.

The “Entry/Exit Initiative:” Changes in 2014 every Canadian snowbird needs to know

Beginning June 30, 2014, both Canada and the US will implement the final phase of the Entry/Exit Initiative of the Perimeter Security and Economic Competitiveness Action Plan in which both countries will share information on people entering and leaving the respective country.

In other words both countries will, for the first time, be able to independently determine the number of days spent in each country. What this means for Canadian snowbirds is that they must be much more vigilant than they have in the past about counting and reporting their days in and out of each country. Starting next year, both Canada and the US will both know, in real time, which country snowbirds have been in and for how long.

The Entry/Exit Initiative and the Perimeter Security and Economic Competitiveness Action Plan is part of a larger cooperative effort between Canada and the US called Beyond the Border: A shared Vision for Perimeter Security and Economic Competitiveness announced on February 4, 2011. The stated purpose of the effort is to promote security and economic competitiveness through various means. A full description of the action plan can be found here.

The “good old days” of lax enforcement of “day count” will end in 2014

Before the implementation of Phase IV of the Entry/Exit Initiative, each country counted individuals’ day presence only when they entered the country, and not when they left the country. Further, this information was rarely shared between the two countries. Consequently, typically neither country knew how long someone had been present within its borders.

In the good old days, if an individual wanted to obtain an accurate accounting of the days in (or out) of both countries, he would have to contact both the US Customs and Border Protection (“USCBP”) and the Canadian Border Services Agency (“CBSA”) and request border entry data (click here for a day count request form from the US and here for a day count request form for Canada). Only after receiving both reports and cross-referencing such data could an individual be sure of how many days they were present in Canada or the US.

When requesting the entry report from either USCBP or CBSA, it is best to plan ahead – far ahead. It typically takes thirty days to receive the report from CBSA and two months for USCBP. This can cause a substantial hardship when trying to comply with IRS and CRA filing deadlines.

“Bad” tax and non-tax surprises that can result from being in or out of the country for too longThere are generally five bad surprises that can result from being in the US or out of Canada for too long. We’ve discussed these consequences in several other articles (a more complete analysis of the following may be found here), so I will not address them in detail.

All of the following “bad” tax and non-tax surprises hinge on whether an individual is “resident” or not. Those who expect consistency and logic in law (whether it be tax, immigration, or health services) will be disappointed, though probably not surprised, to learn the definition of “resident” is different in each of the following examples.

The following are the highlights (or “lowlights” as it were):

Banned from travel to US if unlawfully present. Perhaps the most draconian consequence to spending too much time in the US is to fall into the “unlawful presence” rules. Canadians who remain in the US for more than 180 days in a rolling twelve month period risk being deemed unlawfully present, the consequences of which are: a) a 3-year travel ban if unlawfully present for between 180 and 365 days; and b) a 10-year travel ban if unlawfully present for more than 365 days.

Liability for US income tax on worldwide income. The US taxes US citizens and “US residents” on their worldwide income. If the snowbird is present in the US for too many days he risks becoming deemed a US resident and therefore subject to tax on his worldwide income.

Liability for US estate tax on fair market value of worldwide assets. The US also taxes US citizens and “US residents” on the fair market value of their worldwide assets at death. Unfortunately the definition of “US resident” for estate tax is fundamentally different than the definition for US income tax purposes (see the prior link for a more complete analysis). The result is that the heirs of the uninformed snowbird can find their inheritance subject to the US estate tax.

Liability for Canadian departure tax. Canada taxes its residents on their worldwide income. Once a Canadian resident is no longer resident he is deemed to have disposed all of his assets (subject to exceptions), recognize the gain on those assets, and pay tax on that gain. Whether an individual is no longer resident is a facts and circumstances test; however, a big factor in that analysis is day count. Therefore, the snowbird who spends too much time in the US risks a nasty Canadian tax surprise.

Loss of provincial health care. Canadian residents are entitled to participate in provincial health services. Once an individual is no longer resident of the particular province, he loses this entitlement. Of course, the rules for “residency” in the health care context are different than those discussed above.

CONCLUSION

In light of the fact that neither the US nor Canada has historically known an individual’s day count, it is not surprising that day count has not usually been a triggered IRS or CRA examination. We have all been required to self-report our days and residence status to the appropriate authorities. It is as though we have all been lulled into the quotidian task of grading our own homework and have been generously giving ourselves high marks, regardless of whether we deserve them or even completed the assignment at all. In 2014, the teacher will begin to grade our homework… and she knows the answers.

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients’ special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Bitcoins: More Guidance From The CRA

Article by Timothy Fitzsimmons

Dentons LLP

Tax authorities around the world continue to wrestle with the tax issues arising from the use and sale of Bitcoin currency. Sweden recently announced that it will treat Bitcoin as an asset, and Finland has stated that it will treat Bitcoin as a commodity. China has placed restrictions on the use of Bitcoin. Generally, the price fluctuations and uncertainties around the use and sale of Bitcoins seemed to have generated more questions than answers.

In Canada, the use of Bitcoin currency appears to be gaining popularity – Bitcoin ATMs have popped up in several cities, and various retailers and even some charities are accepting Bitcoins for payments or donations. However, the Canadian government apparently does not consider it a currency. The Canadian tax implications of Bitcoin transactions have been consider by the CRA and tax professionals, and now the CRA has published some additional guidance on the subject.

In CRA Document No. 2013-0514701I7 “Bitcoins” (December 23, 2013), the CRA summarized its views on how certain transactions involving the use or sale of Bitcoins may be taxed under the Income Tax Act and Excise Tax Act.

Buying and Selling Goods or Services in Exchange for Bitcoins

The CRA stated that the use of Bitcoins to purchase goods or services would be treated as a form of barter transaction (see, for example, Interpretation Bulletin IT-490 “Barter Transactions” (July 5, 1992)). The CRA’s view is that each party to a barter transaction has received something that is equal to the value of whatever is given up. For Canadian tax purposes, if a business sells goods or services in exchange for Bitcoins, that business must report its income from the transaction in Canadian dollars (i.e., the fair market value of the Bitcoins at the time of the sale). GST/HST would be applicable on the fair market value of the Bitcoins that were used to pay for the goods or services.

Donation of Bitcoins

The CRA stated that, if Bitcoins are transferred to a qualified donee, the fair market value of the Bitcoins at the time of the donation must be used in determining the value of the gift for tax purposes (see also CRA Pamphlet P113 “Gifts and Income Tax”). The determination of the fair market value is a question of fact.

Buying and Selling Bitcoins

The CRA stated that the trading or sale of Bitcoins like a commodity (i.e., speculating on the changes in the value of Bitcoins) may result in a gain or loss on account of income or capital. This determination can only be made on a case-by-case basis and on the specifics facts of each situation (see, for example, Interpretation Bulletin IT-479R “Transactions in Securities” (February 29, 1984)). Generally, the income tax consequences relating to the tax treatment of gains or losses arising from the purchase and sale of Bitcoins would be the same as for transactions involving other types of commodities.

For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com

About Dentons

Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.

Dentons is built on the solid foundations of three highly regarded law firms. Each built its outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities.

Now clients benefit from more than 2,500 lawyers and professionals in 79 locations in 52 countries across Africa, Asia Pacific, Canada, Central Asia, Europe, the Middle East, Russia and the CIS, the UK and the US who are committed to challenging the status quo to offer creative, actionable business and legal solutions.

Learn more at www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

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Is Your Tax Refund Too High? Reducing Your Tax Deductions At Source

Article by C. Alice Madolciu

Crowe Soberman LLP

You’re an employee. Your employer diligently withholds tax, Canada Pension Plan (CPP) and Employment Insurance (EI), and remits these to the Canada Revenue Agency (CRA) on your behalf throughout the year, as required. You have just completed filing your taxes for the previous year, and success; you are getting a refund!

But hold the excitement; perhaps it’s time to stop and consider the facts. A tax refund could simply mean that you have overpaid your taxes for the year, and are effectively loaning money, interest-free, to the CRA. Then at tax time, the CRA repays this money to you under the disguise of a “tax refund”!

How did you let this happen? Well, you likely claimed tax credits and deductions on your tax return which your employer did not know about when your taxes were withheld at source. These credits and deductions decreased your taxes payable so that when you filed your tax return, the amount owing was less than what was remitted, resulting in a refund.

So, how does your employer decide how much tax to deduct from your pay cheque in the first place? When you begin employment, you complete Form TD1, Personal Tax Credits Return. Form TD1 assists your employer in calculating the amount of tax to deduct from your pay cheque based on your declaration of the non-refundable tax credits (tuition and education amounts, caregiver amount, spousal amount, amount for dependent children, etc.) to which you are entitled.

Invariably however, your personal circumstances will change. Important life events like getting married or having a baby may increase your credit entitlement, and hence, the amount of tax required to be withheld from your pay can in fact be lower than when you first began your employment. You should always complete a new Form TD1 (within seven days) whenever your personal circumstances change such that you are entitled to additional credits, or are no longer eligible for certain credits (I.e. your child reaches the age of 18 and you are no longer entitled to the amount for dependent children.) In fact, not doing so can result in a penalty of $25 for each day the form is late, with a minimum penalty of $100, and a maximum penalty of $2,500.

If you know you are going to have significant deductions from your income in a certain year: RRSP contributions, child care expenses, rental losses, support payments, employment expenses, carrying charges, charitable donations, etc., you can complete and submit to the CRA Form T1213, Request to Reduce Tax Deductions at Source. This form requests permission from the CRA for your employer to use the deductions you will be entitled to, in order to reduce your tax withholdings in that particular year. If approved, the CRA will provide a Letter of Authority (typically within four to six weeks of submitting Form T1213) that would be provided to your employer as confirmation to reduce tax withholdings. You can also use Form T1213 to request a reduction in tax deductions at source for certain non-refundable tax credits that are not part of Form TD1, such as foreign tax credits, which Form T1213 does not provide implicitly for. Note that the CRA will not usually issue a Letter of Authority if you have a tax balance owing or have not filed outstanding income tax returns.

Reducing your tax withholdings at source effectively increases your net amount of pay, so you get to take home more money every pay cheque throughout the year, when you’ve earned the money, and not at tax time, after the CRA has held this money on your behalf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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CRA Considers Tax Treatment Of Crowdfunding

Article by Timothy Fitzsimmons

Dentons LLP

Hot on the heels of the CRA’s recent publication of a “fact sheet” on its views on the tax treatment of Bitcoin currency (which has been in the news recently – see articles here and here), the CRA has published two technical interpretations on the tax treatment of “crowdfunding”.

In CRA Document No. 2013-0508971E5 (October 25, 2013) and CRA Document No. 2013-0509101E5 “Crowdfunding” (October 29, 2013) the CRA was asked about the tax treatment of amounts received by taxpayers through a crowdfunding arrangement.

The CRA stated that it understood crowdfunding to be a way of raising funds for a broad range of purposes, using the internet, where conventional forms of fundraising funds might not be possible (and which may or may not involve the issuance of securities).

The CRA stated that, depending on the specific circumstances, crowdfunding amounts received by the taxpayer could represent a loan, capital contribution, gift, income or a combination thereof. The CRA noted its position described in Interpretation Bulletin IT-334R2 “Miscellaneous Receipts” (February 21, 1992) that voluntary payments received by virtue of a taxpayer’s profession or carrying on of a business are considered taxable receipts. The CRA also noted that, on the other hand, a non-taxable windfall may exist where the taxpayer made no organized effort to receive the payment and neither sought nor solicited the payment. The CRA’s view is that a business has commenced where the taxpayer has started some significant activity that is a regular part of the business or that is necessary to get the business going (see Interpretation Bulletin IT-364 “Commencement of Business Operations” (March 14, 1977)). Conversely, a gift may exist where the donor transfers property with no right, privilege, material benefit or advantage conferred in return.

These two recent technical interpretations follow an earlier publication ( CRA Document No. 2013-0484941E5 “Crowdfunding” (August 13, 2013)), in which the CRA stated that amounts received by a taxpayer from crowdfunding activities would generally be included in the taxpayer’s income pursuant to subsection 9(1) of the Income Tax Act as income from carrying on a business (and that certain expenses may be deductible).

These views from the CRA are helpful guidance for those who have undertaken or are considering crowdfunding. We agree that a taxpayer’s specific circumstances will be determinative of the tax treatment of the crowdfunded amounts (i.e., on a case-by-case basis). However, because of the various activities for which crowdfunding may be sought, and the ease with which crowdfunding may be accessed, it is less clear when a taxpayer’s activities (including seeking crowdfunding and any other associated activities) will result in the conclusion that a taxpayer has commenced carrying on business.

Accordingly, 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.

For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com

About Dentons

Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.

Dentons is built on the solid foundations of three highly regarded law firms. Each built its outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities.

Now clients benefit from more than 2,500 lawyers and professionals in 79 locations in 52 countries across Africa, Asia Pacific, Canada, Central Asia, Europe, the Middle East, Russia and the CIS, the UK and the US who are committed to challenging the status quo to offer creative, actionable business and legal solutions.

Learn more at www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

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NFP Q&A: CRA’s Requirements On Keeping Records

Article by Camille Jordaan

Borden Ladner Gervais LLP

With the end of a calendar or fiscal year, organizations may be tempted to throw away some of their documents. Wait! Before doing so, organizations need to consider record-keeping requirements. I asked my colleague Camille Jordaan to provide a reminder on some of these record-keeping rules in terms of records of interest to the Canada Revenue Agency (“CRA”).

Question: Why should organizations not start shredding their paper documents or deleting their electronic documents?

Camille: Organizations are required by law to keep certain records. For example, the Income Tax Act (Canada) generally requires records and supporting documents required to determine one’s tax obligations and entitlements to be kept for a period of at least six years from the end of the taxation year to which the records and documents relate. There could be penalties or other consequences for failing to keep adequate records.

Question: What records need to be kept by not-for-profit and charitable organizations?

Camille: According to the CRA, for its purposes, it generally does not provide an exhaustive list of the records that need to be kept. It does require that the records be reliable and complete, provide correct information to assist in fulfilling tax obligations and to calculate credits, be substantiated by supporting documents to verify the information in the records, and include other documents that assist in determining obligations and entitlements (e.g., income tax returns, and scientific research and experimental development vouchers and records). Also, if an organization created a document electronically, it will need to retain it in electronic format. It cannot keep a paper record of it instead.

For all registered charities and registered Canadian amateur athletic associations, the CRA has indicated that records that need to be kept include those that verify revenues including all charitable donations received, that resources are spent on charitable programs and that the charity’s purposes and activities continue to be charitable; minutes of meetings of executives and members; and a duplicate of each receipt containing prescribed information for each donation received.

For other qualified donees, such as municipalities and low-cost housing corporations for seniors, they also must keep records confirming they meet the requirements for qualified donee status under the Income Tax Act (Canada). The records must allow the CRA to verify all donations donors can claim tax credits or deductions for, and a duplicate of each receipt containing prescribed information for each donation received.

Question: For how long do organizations need to keep records?

Camille: It depends on the type of record. As mentioned above, the general rule is six years from the end of the taxation year to which the record or document relates. However, certain records containing important details about an organization, such as minutes of the meetings of the directors or members, as well as all governing documents and by-laws, must be kept by a registered charity for at least two years after the date on which the registration of the charity is revoked. For that reason, it is recommended that such documents be retained permanently by an organization. For organizations for whom record-keeping is onerous or burdensome, note that it is possible to request permission from the CRA to destroy such records earlier, though there is no guarantee such a request will be granted.

Question: What happens if an organization does not maintain adequate records?

Camille: At the outset, it is important to remember that the CRA does have the power to require an organization to provide information or documents it requests. If an organization is found to have failed to maintain adequate books and records, or does not provide information or documents requested by the CRA, it can be prosecuted, which can result in a fine of $1,000 or more. The CRA can also ask for a court order, under which a judge would order an organization to provide any access, assistance or document requested by the CRA. For a registered charity, the failure to keep adequate books and records may also result in revocation of the charity’s registered status, though keep in mind that the Federal Court of Appeal has recently said that the CRA must clearly identify the information the charity has failed to keep and explain why such failure justifies revocation before a charity’s registration can be revoked on this basis.

Question: Anything else organizations need to keep in mind before paper documents are shredded or electronic documents deleted?

Camille: Record-keeping obligations are very specific to the type of record and the type of organization keeping the records. So organizations will need to review their obligations on a case-by-case basis. The review may involve more than a review of the Income Tax Act, as other laws may impose additional requirements. Whether an organization maintains its records or a third party (e.g., accountant) does, the organization is responsible for keeping, maintaining, retaining and safeguarding the records.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Tax Predictions For 2014 According To “Carnac The Magnificent” : CRA SOTW

Article by Kim G. C Moody and Roy Berg

Moodys Gartner Tax Law LLP

Toward the end of the year, tax practitioners tend to flood the blogosphere with “last minute tax tips”. We prefer to take a different approach because good tax planning shouldn’t be “last minute”… it should be done year round. Furthermore, those able to anticipate tax changes are favourably positioned to plan their affairs accordingly, and in a proactive manner. Before Jay Leno introduced his “Headlines” comedy bit and before David Letterman introduced the “Top Ten List”, Johnny Carson appeared on stage in an outrageous costume and used his mystical powers of premonition as Carnac the Magnificent. In an ode to the King of Late Night, and with apologies to Ed McMahon, we give you “Carnac the Magnificent” and an assembly of the following tax predictions for 2014.

  1. Canada will implement a tax preparer registration system
  2. The Canada Revenue Agency (“CRA”) has been musing about bringing a tax preparer system to Canada for some time now. It would appear that its objective is to try to weed out the unsavoury tax preparer and to protect the public. We’ve written about this before and believe that it is about time for its introduction in Canada. Other countries, such as the United States, have had tax preparer registration systems for quite some time. While the US registration system is currently being challenged in the Courts, most commentators believe that such challenge is only a short term hiccup. What remains unknown is exactly how and when Canada will introduce its registration system. Will tax preparers need to complete exams to be able to get initially registered? Will there be ongoing professional development requirements? This appears to be a closely guarded secret but our prediction is that Canada’s registration system will be introduced in concept in 2014. We also predict that Canada’s registration system will not be modelled like that of the US. We believe it will initially be simpler. Stay tuned.

  3. Canada will execute an intergovernmental agreement with the US to administer the US’s Foreign Account Tax Compliance Act (“FATCA”)
  4. Canada is home to many US citizens. Such people have very laborious tax filing requirements given the fact that the US is only one of two countries in the world that taxes on a citizenship basis. Can you guess the other one? If you guessed Eritrea, you guessed right! For those of you who need a brush up on Eritrea, more information can be obtained from the font of all knowledge, Wikipedia. Many US citizens resident in Canada have only in recent years become aware of their filing requirements. Accordingly, the prudent non-tax compliant US citizen has been diligent about getting their tax filings caught up. The US has introduced a number of voluntary disclosure programs and a “streamlined” filing procedure in an effort to encourage such people to get back into the system. However, there are also many non-tax compliant US citizens who are “playing ostrich”, purposely not filing or doing ” quiet disclosures”.

    That’s what FATCA is about. It is a massively broad piece of US legislation that became law a few years ago. Overly simplified, it imposes US filing obligations on foreign financial institutions and non-financial foreign enterprises. In Canada, there have been a lot of complaints and open musings about whether or not Canada should or can comply (privacy and constitutional issues). However, let’s not kid each other… Canada will comply with FATCA. The Department of Finance is currently negotiating an intergovernmental agreement with the US regarding how Canada will comply with FATCA. Expect such agreement to be completed soon with implementing legislation to be introduced to Parliament shortly thereafter.

    Regardless of what you think about FATCA, all right-minded people will agree on two things: First, Canada must implement an intergovernmental agreement with the US because without doing so, Canadian banks and other businesses will be placed in the unenviable position of being forced to deal directly with the IRS on its implementation.

    Second, Canada can’t afford to be exempted from FATCA’s reach. One of the purposes of FATCA is to force transparency in the banking system and, ostensibly, catch bad actors. If the US were to exempt Canada from FATCA (which it would never do) all the bad actors FATCA was designed to catch would flock to Canadian banks and businesses.

    FATCA is scheduled to become effective July 1, 2014 although there have been a lot of people requesting that the US delay the implementation date to 2015 or later. Our prediction is that FATCA will not be delayed. Accordingly, time is running out for the non-compliant US citizen. In fact, the IRS openly mused recently that once FATCA is implemented that perhaps their voluntary disclosure programs may be redundant. Wow… non-tax compliant US citizens and their advisors need to be ready.

  5. A tax designation is coming to Canada
  6. Some countries around the world offer a credible and recognized tax designation for certain qualified persons who specialize in advising on tax matters. For example, the UK (and now a number of other countries) offer the Chartered Tax Advisor (“CTA”) designation through the Chartered Institute of Taxation. Last week, the Canadian Tax Foundation sent a note out to its members giving them advanced notice that in early January 2014 it would be polling its members to get their views on whether or not a specialized tax designation has a place in Canada. This is not a new topic. For example, the Canadian Institute of Chartered Accountants studied such a topic approximately 12 years ago but ultimately abandoned it. A lot has happened in the last 12 years though, and it appears that some stakeholders are studying it again. With the pending merger of the accounting profession into one body under the Chartered Professional Accountant (“CPA”) brand, this also adds an interesting element. For Canadian tax specialists who believe that a separate designation has more pros than cons, 2014 will be an interesting year.

  7. Intellectually disingenuous debate on the morality of tax avoidance will linger
  8. Our firm recently wrote about this issue and therefore more ink will not be spilled on this topic again here. However, suffice it to say that we believe that this issue is likely not going away anytime soon. Hopefully politicians, journalists, academics, tax administrators and others who believe that tax avoidance is immoral will be open to a more well-rounded debate in 2014 rather than simply relying on the logically non-attackable position that people should pay their “fair share”. Of course people should pay their “fair share” but what is “fair” is in the eye of the beholder.

    However, the continued desire for tax transparency by tax administrators around the world will likely cause tax return preparation and planning to become much more laborious than it already is. For example, Canada’s introduction of its revisedT1135 form to report certain foreign property has caused fits amongst accountants who are preparing to file tax returns for their clients for the 2013 tax year. Our prediction is that complicated filings to “improve tax transparency” will continue to be introduced during 2014.

  9. The 2014 Federal Budget will be the most interesting on record as parliament seeks to close tax loopholes
  10. It’s a little early to start speculating on what will be in 2014 Canadian Federal Budget (likely to be introduced in March 2014). However, it is likely that the “closing tax loopholes” theme will continue. We’ll speculate in a little more detail once the “leaks” start to occur in the next few months. The Standing Committee on Finance released its report The Future We Want: Recommendations For the 2014 Budget earlier this month and it is worth a read to get some hints of possibly what is to come.

  11. Tax simplification will occur ONLY when modern economies become less complex, which will not be next year
  12. Tax simplification has received a lot of press recently. In addition, certain countries have responded to calls for tax simplification by introducing formal offices. For example, the UK has introduced an Office of Tax Simplification. While we believe that certain provisions of the Income Tax Act in Canada could be abolished, amended or streamlined in a way that simplifies it for a certain tax audience (like very small business owners), the idea that the Income Tax Act could be reduced to a small number of pages like it was in its infancy is fantasy.

    The simple truth is that society in general, and modern economies in particular, have become very complex and tax legislation is responsive to such complexity. Indeed, as mentioned above, as Parliament seeks to eliminate loopholes the Act becomes more complex. We don’t believe that life will become simpler anytime soon and thus tax legislation will continue to respond with unfortunate complexity. Notwithstanding, anytime a system can reduce unnecessary complexity or redundancy then that is positive. Watch for tax simplification to become a more hot button topic in 2014.

    While Carnac the Magnificent would end his prognostications with a well-timed curse (“May you be forced to visit a near-sighted proctologist”), we’ll instead end with best wishes and hope for a tax-positive 2014!

    Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients’ special circumstances.

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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The 2014 Federal Budget – The Top Five Tax Matters To Watch For

Last Updated: January 29 2014

Article by Kim G. C Moody

Moodys Gartner Tax Law LLP

On January 27, 2014, the Department of Finance of the Government of Canada announced that the 2014 Federal Budget would be released on February 11, 2014. Budgets of late have typically been released in March. No doubt, the Department must have been very busy getting ready for February 11. While the rest of Canada will be cheering for our athletes in the Sochi Olympics, tax geeks like us will be “cheering” or “booing” at the release of the Budget.

The release of the Federal Budget is like a Las Vegas buffet… too much to consume in one sitting, some good, some bad and some just plain bizarre! Accordingly, here are our top five tax matters to watch for on February 11:

  1. Foreign Account Tax Compliance Act (“FATCA”) and the intergovernmental agreement between Canada and the US
  2. As predicted in our 2014 Tax Predictions blog, our firm believes that the Department of Finance will use the 2014 Federal Budget to announce the status of the intergovernmental agreement that it has been negotiating with the US to administer the US’s FATCA law. FATCA is scheduled to come into force July 1, 2014 and time is running out for Canada to get ready. As mentioned, we expect the Department of Finance to make an announcement on February 11, 2014 regarding the status of such agreement and the pending implementation of legislation that will need to be introduced to Parliament shortly thereafter.

  3. A continued focus on international tax avoidance and evasion
  4. There has been no shortage of focus on this area in the last 12 months and we expect Canada will continue to introduce tax measures that make it tougher for bad characters to evade tax. We believe that Canada will also introduce measures to make tax avoidance more transparent in the upcoming Budget. Such measures could include, for example, additional reporting about non-arm’s length transactions (currently done on prescribed form T106 pursuant to section 233.1 of the Income Tax Act), additional disclosures regarding beneficial interests in or transfers to / from non-resident trusts (currently done on prescribed forms T1141 and T1142 pursuant to sections 233.2 and 233.6 of the Income Tax Act), additional reporting regarding foreign affiliates (currently done on prescribed form T1134 and Schedule 25 of the T2 corporate income tax return) and other reportings. In light of the OECD’s focus on base erosion and profit shifting, might we also see legislative proposals to try and deal with some of the concerns of the OECD? Perhaps. We’ll see.

  5. Charitable donations
  6. The area of charitable donations has been the subject of significant abuse in the last decade or so. There has been no shortage of charitable tax shelters that attempt to use government tax dollars to help finance the “donor’s gift”. The bottom line is that most of these tax shelters are scams and we have written prolifically about our dislike of charitable tax shelters. Notwithstanding, promoters and their “donors” continue to clutter the CRA and the Courts with appeals of their reassessments. The 2013 Federal Budget introduced measures to make it more difficult for “donors” to appeal their reassessments by requiring such persons to pay 50 percent of the disputed amount in advance of their appeal moving forward. Charitable tax shelters continue to be marketed heavily. Will more legislative proposals be tabled to effectively kill charitable shelters? We’ll see.

    The 2013 Federal Budget also introduced a First-Time Donor’s Super Charitable Credit for certain first time donors. This credit has been criticized for being too narrow for most Canadians to take advantage of. Could we see an expansion of this program or perhaps the introduction of a stretch credit that has long been pushed for by the charitable community? Again, we’ll see but it would not surprise us if the Government continues to tinker with charitable tax credits.

  7. Changes to the taxation of testamentary trusts
  8. The 2013 Federal Budget announced that the Government was studying the taxation treatment of testamentary trusts and specifically whether such trusts should be subject to graduated tax rates. The announcement was accompanied by a consultation paper prepared by the Department of Finance and invited interested parties to submit their comments on the consultation paper. Our firm commented on the consultation paper and participated significantly in the submission by The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada’s submission to the Department of Finance. We expect that the Department of Finance will provide an update or perhaps even introduce legislative proposals regarding this matter.

  9. Continued tinkering of personal tax credits
  10. Over the last 10 years or so, there has been no shortage of new personal tax credits. Remember the children’s fitness, children’s art, transit pass and home renovation (during the 2009 financial meltdown) credits? Will we see some additional personal credits introduced? Let’s hope not. While the social policy intent may be admirable, it is highly debatable whether or not the tax system is the right method to achieve such objectives and whether the introduction of such personal credits are worth it in the end considering all of the administration necessary to recover such credits.

    Our firm will have a representative in Ottawa on February 11, 2014 during the media and tax practitioner lock-up (like other firms). We look forward to providing you a post-meal update after the dishes have been cleared and Alka-Seltzer consumed!

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients’ special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Don’t Pay Your Taxes And You May Pay The Price

February 3 2014

Article by Anna Abbott and Glen Jennings

Gowling Lafleur Henderson LLP

A number of Ontario taxpayers recently felt the brunt of the taxman, receiving jail time and significant fines following convictions for tax fraud and evasion.

When taxpayers are convicted of tax evasion, they may be liable for the full amount of taxes owing, plus interest and any penalties that may be assessed by the CRA In addition, the court may levy a fine of up to 200% of the taxes evaded and impose a jail term of up to five years.

Recent Cases

  • Not so charitable:A tax preparer, David Ajise, and a charity director, Eto Ekpenyong Eto, were convicted of fraud when they participated in a scheme that generated over $5 million in fraudulent charitable donations for the 2003 to 2005 tax years. The scheme involved preparing fraudulent charitable donation receipts for individuals to claim on their tax returns. The fraudulent receipts resulted in taxes evaded totalling $1,413,166. At sentencing, the tax preparer received a 30 month jail term. The charity director was given a conditional sentence of two (2) years less a day following a guilty plea.
  • Payroll profiteers: Deborah Dieckmann was sentenced to four years in jail and fined $1.3 million for tax fraud for failure to remit collected CRA payroll deductions and income tax deductions. Her father, George Salmon, who was also involved in the scheme and knowingly used her payroll services to avoid the proper remittances, was sentenced to two years less a day and fined $397,758. During the years in question (2003 to 2006) approximately $5.8 million was not properly remitted to the CRA. Dieckmann and Salmon will receive an additional five and three years in jail, respectively, if they fail to pay their ordered fines within one year of their release from jail.
  • Cross-border shopping: Najam Mahmood, the owner of a company that provided courses on foreign currency exchange trading, was found guilty of four counts of evading personal income tax and four counts of failing to remit GST. He was sentenced to one year in jail and a fine of $687,000 for having evaded federal income taxes of $475,000. Mahmood transferred more than $200,000 to his U.S. bank account and directed his students to wire payments to the same account. Mahmood did not file returns for the years from 2003 to 2006 and failed to report $3.1 million of income, thus evading $358,600 in income taxes. He also failed to register his business for the purpose of collecting GST. He collected $116,412 in GST from clients and never remitted any of the funds to the CRA.

Information on other convictions can be found on the CRA website at www.cra.gc.ca/convictions.

Voluntary Disclosure

If you or your corporation, partnership or trust has: omitted to file required income tax or information returns; incorrectly reported taxable income; obtained or claimed inappropriate refunds or credits; or otherwise failed to comply with your tax obligations, you can still come forward voluntarily to correct your tax affairs. Taxpayers who voluntarily come forward to report non-compliance, before the CRA commences any enforcement action against them or related persons, may be eligible for relief under the CRA’s voluntary disclosures (“VD”) program. Taxpayers whose VDs are accepted by the CRA must pay the tax and a potentially reduced amount of interest, while avoiding being subjected to onerous civil penalties and potential prosecution.

In light of the CRA’s new initiatives to crack down on international tax evasion and aggressive tax avoidance, including the recently implemented “offshore tax informant program”, the risk of detection is greater than ever. As a result, there is no time like the present for non-compliant taxpayers to proactively come forward under the CRA’s VD program to avoid the risk of serious penalties and prosecution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Are Damages Awarded To A Terminated Employee Taxable?

Last Updated: February 3 2014

Article by Héloïse Renucci

Davis LLP

As an employer, it is sometimes difficult to determine which awarded damages are taxable after an employee is terminated. In general, damages awarded are taxable as income from such employment or as a “retiring allowance.” Certain damages discussed below, however, are non-taxable.

“Retiring allowance” is broadly defined in the Income Tax Act (“ITA”) to include all amounts received in respect of a loss of an office or employment, whether or not received as damages or pursuant to an order or judgment of a competent tribunal. This definition is much broader than payments received as a result of retirement. Retiring allowances are specifically excluded from the definition of “salary or wages” in the ITA but they still are taxable income to the employee (i.e. they have to be reported by the employee in the year they are received and are subject to deductions at source as discussed below).

The courts have set out a two-part test to determine whether there is a connection between the loss of employment and the receipt of the amount. Such a connection would mean the amount is a retiring allowance and is therefore taxable income to the employee, The two questions that should be asked are:

  1. Would the amount have been received if there was no loss of employment?
  2. Was the purpose of the payment to compensate a loss of employment?

If the answer to the first question is negative and the answer to the second question is positive, the amount received will be considered a retiring allowance and thus taxable.

Special as well as general damages related to one’s termination of employment and received for mental anguish, hurt feelings, etc. (types of damages generally awarded in employment termination cases) will be taxed as a retiring allowance and tax should be withheld at source.

However, where damages are received on account of personal injuries including harassment or defamation, such damages may be considered as being unrelated to the loss of employment and therefore non-taxable. This is also the case for damages relating to a violation of human rights. A reasonable allocation will have to be made if such damages are awarded as part of a settlement and not directly by a human rights tribunal.

In order for the retiring allowance paid by the employer to be a deductible expense for the employer, it must be reasonable considering the length of service and remuneration received during employment.

Tax has to be withheld on a retiring allowance, but the employer may not be required to deduct tax at source on the portion of retiring allowance transferred directly to the employee’s RPP or RRSP, if certain conditions are met.

Particular attention should be paid to the wording of settlement agreements concluded upon termination of employment and a clear allocation of the amounts agreed on should be made. If this is not done, the tax authorities or the courts may be called upon to determine the intention of the parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Crowdfunding Proceeds May Be Taxable

Last Updated: October 8 2013

Article by Ted Citrome, Cassels Brock

Crowdfunding has been defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet”. Crowdfunding has been used to support various activities, ranging from disaster relief and political campaigns to commercial enterprises such as motion picture promotion and start-up company funding. In a recent technical interpretation (CRA document number 2013-0484941E5), the Canada Revenue Agency (“CRA”) was asked for its view on the tax treatment of funds received by a taxpayer via crowdfunding.

It appears that the CRA’s comments are intended to apply to a specific scenario where a person who contributes funds to a commercial venture, such as producing a musical recording, may receive a free product or promotional item, but would not receive any equity and would not be entitled to a share of the profits from the venture. The CRA stated that it generally considers crowdfunding proceeds to be taxable as business income, and would not constitute a tax-free “windfall”. This treatment is consistent with the CRA’s position in Interpretation Bulletin IT-334R2 Miscellaneous Payments, that voluntary payments received by virtue of a profession or by virtue of carrying on a business are taxable receipts. The CRA also stated that certain expenses, such as the cost of producing promotional items given to donors and the cost of financing activities, may be deductible if the requirements for deductibility in the Income Tax Act are otherwise met.

The CRA’s position will raise the after-tax cost of crowdfunding, which may significantly impact independent artists and start-up businesses that cannot access capital from more traditional sources. The technical interpretation does not address the tax treatment of crowdfunding proceeds used for a non-business purpose, such as humanitarian aid. Based on the reasons set out in the technical interpretation, taxpayers receiving crowdsourced funds should not be subject to tax where no business is carried on. The tax treatment of crowdfunding proceeds would also presumably be different if contributors received equity in the venture. In Ontario, equity crowdfunding is generally prohibited; however the Ontario Securities Commission recently issued an exemptive relief order to permit Social Venture Connection, the non-profit part of the MaRS Discovery District in Toronto, to sell securities over the internet to accredited investors, as described in greater detail in an article by my colleague Brian Koscak, available here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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A Guilty Plea To Tax Evasion? Beware The Civil Consequences

Last Updated: November 5 2013

Article by Greg DelBigio Thorsteinssons LLP

It is almost always the case that criminal charges for tax evasion are accompanied by a civil assessment or reassessment of taxes. Often, the fact situation is straightforward. The person earned more income than was declared. The failure to declare the income is the basis of the tax evasion charge and the Minister reassesses taxes based upon the undeclared income and imposes gross negligence penalties.

Several recent cases have illustrated the importance of being forward looking when providing advice on whether a client who is charged with tax evasion should plead guilty. For example, in Harvey v. The Queen, 2013 TCC 298, the Minister imposed gross negligence penalties for taxation years 2003 and 2004 and the appellant appealed. The appellant had previously pleaded guilty to a s.239(1)(a) ITA criminal offence in relation to 2003.

In finding that the respondent had proven that the appellant had been grossly negligent, the court noted that the appellant “does not dispute that the unreported revenue in respect of which he pled guilty is the same unreported revenue in respect of which the penalties have been applied.”

In Raposo v. The Queen, 2013 TCC 265, the court held that a “criminal conviction is admissible as prima facie evidence of the material facts underlying the conviction…Even greater weight may be accorded to a prior criminal conviction where there has been a full trial.”

Citing Raposo, the court in Harvey held that the appellant’s guilty plea constituted prima facie proof that the appellant had been grossly negligent in failing to fully report his 2003 revenue and, therefore, “[i]f Mr. Harvey wishes to avoid the penalties, he will have to introduce sufficient evidence to overcome that prima facie proof.”

Raposo was decided on 26 August 2013. Several weeks later, on 16 September 2013 in the case of Lee v. The Queen, 2013 TCC 289 the court once again considered the effect of a criminal conviction upon a reassessment that included gross negligence penalties. In Lee, Crown argued that the conviction was prima facie proof that income had been falsely reported. The court stated: “I am not clear why the Crown took this position because the authority that counsel relied on concluded that a criminal conviction may be dispositive and not merely prima facie proof.”

There are many reasons why a client might choose to plead guilty to a criminal offence. However, when advising a client who is charged with tax evasion, it is essential that the client understand that the consequences of a guilty plea might include that the plea stands as either prima facie or dispositive proof of facts relevant to a reassessment.

For this reason, it is also essential for counsel who is representing a person who is pleading guilty, or for an adviser assisting a person who has been reassessed, to understand that a guilty plea is “an admission of the essential elements of the offence” and the submissions that Crown and defence might make to a court during sentencing proceedings are related to but distinct from the “essential elements”.

At times, Crown and defence will have an agreement with respect to the relevant facts for sentencing. At other times, facts may be in dispute and party wishing to rely upon a disputed fact must prove it. For example, a person might agree that he or she evaded taxes in a particular year but disagree as to the amount. Needless to say, defence counsel in the criminal proceedings must exercise great care in determining what the facts that might be agreed to, and the adviser in the civil proceedings must carefully assess precisely what the guilty plea stands for and what it does not.

Published by Greg DelBigio, Thorsteinssons LLP, on October 15th, 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Defining Value: What Is Fair Market Value?

Last Updated: September 26 2013

Article by Neil de Gray

Campbell Valuation Partners Limited

In a business valuation context, the term value can have many different meanings. Terms such as fair market value, fair value and price are often used synonymously to describe “value”; however, each of these terms has a different meaning and interpretation. The purpose of this article is to define fair market value.

FAIR MARKET VALUE

In the absence of an open market transaction, where an informed buyer and an informed seller negotiate a transaction price, business value must be determined in a notional market context. Notional market valuations are required for a variety of reasons including family law proceedings, commercial litigation, shareholder oppression proceedings and income tax and estate planning.

In a notional business valuation, the most common definition of value that is adopted is fair market value. The definition of fair market value generally accepted by Canadian courts is:

“The highest price available in an open and unrestricted market between informed and prudent parties, acting at arm’s length and under no compulsion to act, expressed in terms of cash.”

In determining fair market value, the valuator must consider each of the components of the fair market value definition.

Components of Fair Market Value

  • Highest price available
  • Open and unrestricted market
  • Between informed and prudent parties
  • Acting at arm’s length
  • Under no compulsion to act
  • Expressed in terms of cash

Highest Price Available

In a notional market context, the highest price available must be determined without exposing the business interest to the open market. Determining the highest price available on a notional basis is difficult and requires professional judgment and experience. It is important to identify that price, as determined in an open market transaction and fair market value, as determined in a notional context may not be equal (we identify some of the reasons for this at the end of this article).

Consider that conceptually, a buyer and a vendor will only transact at a price and upon terms to which they both agree based on their own motivations and self interest. This transaction price is the price at which the vendor’s interest, being to maximize the selling price and the buyer’s interest, being to minimize the purchase price, are in equilibrium. In general, when provided two different purchase offers, a vendor will transact at the higher price.

The purchase price arrived at through open market negotiation often includes the consideration of “special interest purchasers”. A special interest purchaser is a purchaser that is willing to pay a premium over intrinsic value because they will receive additional value from the combination of the acquired business with their own (“synergies”).

Special interest purchasers may receive additional benefit from economies of scale, from cross selling opportunities or from the elimination of a competitor.

For example, Google may purchase a start up technology company for a premium in order to acquire access to technology that can be implemented with existing Google capabilities thereby expanding on existing products or services. On a standalone basis the start up technology company’s product may have a limited application, but when combined with other Google products the range of applications and customers expands.

It is difficult to quantify the premium that a special interest purchaser may be willing to pay for the perceived synergies they expect to receive. From a practical standpoint, the special interest purchaser will only pay a premium up to the level that they require to secure the acquisition. Given the difficulty in ascribing value to post-acquisition synergies, valuations in a notional context are typically based on a stand-alone or intrinsic value, without the consideration of post-acquisition synergies. In specific cases where post-acquisition synergies can be evaluated and special interest purchasers are readily identifiable, the value of post-acquisition synergies may be quantified.

Open and Unrestricted Market

An open market implies that no potential purchasers are excluded from the notional market valuation. It is a fundamental assumption that all potential buyers with the will and resources to transact are included in the valuators considerations.

An unrestricted market refers to the assumption that any statutory, contractual, or other restrictions that may influence the marketability of a business are temporarily lifted for the purpose of determining value in a notional context. For example, a shareholders’ agreement may restrict the transfer of shares; such limitations are assumed to be lifted for the purpose of determining fair market value.

However, prevailing case law indicates that the assumption of an unrestricted market does not completely disregard restrictions on a hypothetical sale of a business. For example, in practice, any restrictions are generally reflected by discounting the value that has otherwise been determined by applying a marketability discount.

Informed and Prudent Parties

The fair market value definition assumes that both the vendor and the purchaser are informed with respect to all material facts important to the value determination. In an open market transaction, the vendor often has greater knowledge of the business and its operations, while the buyer has greater knowledge of the potential post-acquisition synergies and future plans for the business.

Canadian case law supports the assumption of full and open disclosure of all relevant information that was known or ought to have been known at the valuation date. All information that would or should have been available at the valuation date is assumed to have been available in the notional market value determination. It is generally accepted that hindsight information is not considered in the fair market value determination. This is consistent with an open market transaction whereby the price negotiated between a buyer and a seller is based on the information available at that time without the benefit of knowledge of future events.

In addition, it is assumed that both the purchaser and seller perform a reasonable level of due diligence and exercise a reasonable level of care and judgment when consummating a transaction.

Acting at Arm’s Length

Acting at arm’s length relates to the assumption that the buyer and seller are opposing parties in the negotiation of the terms of purchase and sale. It is assumed that arm’s length parties will act in their own best interest, whereby the seller will work to negotiate the highest selling price and the buyer will work to negotiate the lowest purchase price.

Under No Compulsion to Act

The fair market value definition assumes that neither party is forced or compelled to transact. In reality this may not always be the case as a business owner may be compelled to sell their ownership interest for a variety of reasons including personal health or financial difficulty. A buyer who is aware of a seller’s compulsion to sell may be able to take advantage and transact at a lower price. The fair market value definition assumes that each of the buyer and the seller are willing to transact at a price that is deemed to be fair.

Expressed in Terms of Cash

A notional market valuation is expressed on a cash equivalent basis and assumes the transfer of the rights and risks associated with the business at the valuation date. This is often in contrast to open market transactions which are frequently consummated based on non-cash consideration such as the transfer of shares. Similarly, open market transactions often involve a conditional price or earn-outs that are based on the future performance of the acquired company. By adopting a cash equivalent value and immediate transfer of the risks and opportunities of the business, the notional market context avoids the interpretation of value based on non-cash terms and conditions that would otherwise complicate the valuation process.

Open Market Price versus Fair Market Value

Having consideration for the foregoing, differences may exist between fair market value determined in a notional market context and price as determined in an open market transaction. These differences may arise as a result of:

  • the presence of special interest purchasers. As discussed above, special interest purchasers may drive a price as determined in an open market transaction higher than the fair market value as determined in a notional context;
  • differences in the information available to each of the parties to an open market transaction. Generally open market transactions are negotiated between parties with varying degrees of knowledge and as such the consummated price may be higher or lower than the ‘highest price available’ determined in a notional market context. For example, the vendor generally has more detailed knowledge of the historical results of the business and the buyer has more information with regard to the potential perceived synergies;
  • imprudent decisions by either the purchaser or vendor that are contrary to the fair market value assumption that a transaction occurs between prudent parties. Human emotion can impact the price consummated in an open market transaction or vendors may not want to deal with certain parties;
  • non-cash or other consideration. Open market transactions often involve non-cash consideration or other forms of compensation including earn-outs, management contracts etc that impact the price paid. This contrasts with the cash equivalent basis assumed in a notional market context; and
  • forced transactions in an open market context whereby a purchaser or vendor is compelled to act perhaps as a result of personal health or financial reasons.
CONCLUSION

Understanding which definition of value is adopted is critical to interpreting a value conclusion. The definition of value utilized should be clearly defined and understood. In practice, the definition of value generally adopted is fair market value. As outlined above, fair market value has a generally accepted meaning and interpretation. Comprehending this meaning is critical to appropriately interpreting the value conclusion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Unhappy Returns? The CRA Interprets Subsection 220(3) Of The Income Tax Act

Last Updated: September 26 2013

Article by Timothy Fitzsimmons

Dentons

In CRA Document No. 2013-0487181I7 “Extension of the reassessment period” (July 12, 2013), the CRA was asked to provide its views on the operation of subsection 220(3) of the Income Tax Act.

Subsection 220(3) of the Act states,

220(3)

The Minister may at any timeextend the time for making a return under this Act. [emphasis added]

A corporate taxpayer failed to file a T2 return of income for a year. The CRA issued an arbitrary assessment pursuant to subsection 152(7) of the Act. Three years later, the taxpayer filed its T2 return, but the CRA refused to reassess as the “normal reassessment period” had expired (see subsection 152(4) of the Act).

In its technical interpretation, the CRA stated,

“Subsection 220(3) provides the Minister with the discretion to extend the time for making a return under the Act. However, such discretion must be exercised for a taxation year that has not become statute-barred.”

The CRA may be correct about the result in this particular case, but a few points should be clarified.

It is clear that the Minister’s discretion under subsection 220(3) is not subject to any limitation.

Practically, however, if the Minister exercises her discretion under subsection 220(3), certain other provisions relating to the Minister’s ability to assess the taxpayer’s return could be engaged. For example, the normal reassessment period does not run until the CRA issues an initial assessment. Or, the nature of the taxpayer could impact the CRA’s ability to reassess: Subsection 152(4.2) of the Act allows the Minister to reassess tax, interest and penalties for a taxation year at any time after the end of the normal reassessment period if the taxpayer makes a request for a reassessment within 10 years after the end of that taxation year. However, subsection 152(4.2) applies only to individuals and testamentary trusts.

In the present case, while the CRA could, pursuant to subsection 220(3), extend the time for filing a T2 return, the CRA could not reassess the return because the normal reassessment period had expired and another relieving provision – such as subsection 152(4.2) – did not apply.

In another case, the result could be different.

About Dentons

Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.

Learn more at www.dentons.com

For more information, visit our Canadian Tax Litigation blog at

www.canadiantaxlitigation.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

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Canada’s Taxpayer Ombudsman Addresses Fear Of Reprisal

Last Updated: September 6 2013

Article by Timothy Fitzsimmons

Dentons

In the August 2013 edition of

Perspectives, Taxpayer Ombudsman J. Paul Dubé highlighted the recent addition of Article 16 to the Taxpayers’ Bill of Rights protecting taxpayers against any possibility of reprisals by the CRA.

Previously, in June 2013, Gail Shea, then-Minister of National Revenue, and Mr. Dubé announced the addition of Article 16 to the Taxpayers’ Bill of Rights:

  1. You have the right to lodge a service complaint and request a formal review without fear of reprisal.

In the newsletter, Mr. Dube states,

This right means that if you lodge a service complaint and request a formal review of a CRA decision, you can be confident that the CRA will treat you impartially, and that you will receive the benefits, credits, and refunds to which you are entitled, and pay no more and no less than what is required by law. You should not fear reprisal.

For more information, visit our Canadian Tax Litigation blog at

www.canadiantaxlitigation.com

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Waiving Rights Of Objection And Appeal: SCC Declines To Hear The Taxpayer’s Appeal In Taylor V. The Queen

Last Updated: August 28 2013Article by Shaira Nanji

Dentons

On August 15, 2013, the Supreme Court of Canada dismissed the application for leave to appeal in Terry E.Taylor v. Her Majesty the Queen (2012 FCA 148).

In Taylor, the issue was whether a signed settlement agreement under which the taxpayer waived his right to appeal was binding. In that case, the taxpayer was assessed for income tax and GST, as well as gross negligence penalties and interest. He signed a settlement agreement under which the Minister of National Revenue would vacate the gross negligence penalties and, in exchange, he would waive his right to object or appeal in accordance with subsections 165(1.2) and 169(2.2) of the Income Tax Act and subsections 301(1.6) and 206.1(2) of the Excise Tax Act. The taxpayer, who did not have counsel advising him at the time, later claimed that he was under duress when he signed the agreement. Having already disposed of the penalties, he went to Tax Court to challenge the amount of tax assessed.

Justice Judith Woods held that the taxpayer’s testimony that he was “scared” and pressured into signing the agreement lacked credibility given his qualifications as a Certified Management Accountant and his extensive business and financial experience. He had ample time to consult with counsel prior to meeting with the CRA. The Tax Court held that the settlement agreement was “freely made” and signed without “undue pressure.” The Tax Court dismissed the taxpayer’s appeal (2010 TCC 246) and the Federal Court of Appeal affirmed at 2012 FCA 148. As noted above, the Supreme Court of Canada has declined to hear Mr. Taylor’s appeal.

Taylor

adds to an existing body of case law on the question of whether, and under what circumstances, settlement agreements between taxpayers and the CRA can be set aside. The Tax Court has held that in certain limited circumstances a settlement agreement may not be binding. For example, in

1390758 Ontario Corporation v. The Queen (2010 TCC 572) and Huppe v. the Queen (2010 TCC 644), agreements were held to be binding so long as they were made on a “principled” basis (see, for example, Daniel Sandler and Colin Campbell, “Catch-22: A Principled Basis for the Settlement of Tax Appeals”, Canadian Tax Journal(2009), Vol. 57, No. 4, 762-86).

Given that a significant portion of tax disputes are settled and never reach the courtroom, professional advisors should ensure that taxpayers understand the implications of signing settlement agreements under which they relinquish rights of objection or appeal.

For more information, visit our Canadian Tax Litigation blog at

www.canadiantaxlitigation.com

About Dentons

Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.

Learn more at www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

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I’m A Professional Athlete, How Am I Taxed?

Last Updated: August 20 2013

Article by Adam Scherer and Jeffrey Steinberg

Crowe Soberman LLP

Question:
Why is there a question about my residence? Is that not just about where I live?

Answer
No, it’s not that simple. Like most athletes today, you’ll be competing across North America and maybe around the world. Figuring out an athlete’s residency might seem simple but it’s not, and we need to look at each case individually. This is important, because your country of residence is what governs your global tax liability, and if it’s not planned properly there can be significant tax consequences to you. And you need to address this shortly after you sign a contract with a new team – not in April when it could be too late for proper planning and teams are busy with playoffs and new seasons. Besides, your residency can also affect plans for your signing bonus.

Question:
But isn’t it just a matter of paying taxes wherever I live?

Answer:
No. You’ll have income tax obligations to different countries, provinces, states, or even cities, depending on where you compete. Nobody likes to pay tax anywhere of course, but it’s important that when you do pay tax, you only pay it to one place.

Question:
So I really do need professional advice?

Answer:
Yes. Your needs as a professional athlete are unique to you, so it’s important that you work with a professional who has the experience to satisfy those needs. Canada has tax treaties with many countries throughout the world, and at Crowe Soberman we have experience in dealing with them all. Over 100 athletes and coaches are our clients, and as well as the athletes themselves, we work with a wide range of contacts such as investment advisors, team personnel, agents, business advisors, bankers, and governmental agencies. So we can guide you through the entire process, keeping it as simple as possible for you — so that you can concentrate on your game.

Originally published on 10 Jul 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances