This morning's release of six severed letters from the Income Tax Rulings Directorate is now available for your viewing.

Comments made by Alexandra MacLean (DG, ILBD) at a recent CTF transfer-pricing seminar included:

• CRA’s focus respecting when it will consider a downward transfer-pricing adjustment under s. 247(10) to be “appropriate in the circumstances” is on whether there is good evidence that there will be a corresponding upward adjustment in the other jurisdiction (that respects the arm’s length principles), so as to not result in double non-taxation. The International Tax or Audit Division will forward the requested downward adjustment to the Competent Authority Services Division where there is a treaty country on the other side of the transactions.
• Recharacterization under s. 247(2)(d) entails a three-step process.
  • First, audit staff make a submission to the Transfer Pricing Review Committee. If accepted, the taxpayer is notified.
  • The audit team then conducts additional research, and makes a second submission to the TPRC, and a second review by it determines whether the auditor is permitted to propose an adjustment under ss. 247(2)(b) and (d). The taxpayer is then notified and allowed to make a submission..
  • At the third stage, the TPRC meets, along with representatives from Justice, Abusive Tax Avoidance, and Finance, to make a final recommendation.

• BP is not a complete bar to access tax accrual working papers, as indicated by Atlas. The Communiqué on “Obtaining Information for Audit Purposes” contemplates reasonableness and restraint, as the focus is on determining the facts and purpose of the transaction, with CRA then making its own determination of the transaction’s legal effects.

• The threshold for the Audit File Resolution Committee to look at a proposed adjustment is $100 million.

Neal Armstrong. Summaries of 27 March 2019 CTF Seminar - Transfer Pricing under s. 247(10), s. 247(2)(d), s. 233.8(3) and s. 231.1(1)(a).

CRA has published its Communiqué on “Obtaining Information for Audit Purposes” including tax accrual working papers and CRA’s interpretation of BP.

It was drafted before the Cameco decision was affirmed in the FCA. CRA states that “Pending a final decision in this case, CRA officials can continue to … request that individuals be interviewed.”

CRA considers that tax accrual working papers, “particularly the list of uncertain tax positions,” can be requested “where CRA officials determine there is a higher risk of non-compliance” – and the Communiqué states that “A taxpayer with large unexplained tax reserves may be considered to be at a higher risk of non-compliance.”

CRA also states:

The taxpayer’s list of uncertain tax positions that relates to the tax reserve in their financial statements is not a privileged document. …

Provided all the relevant facts of the transactions are disclosed, including the taxpayer's purpose or purposes in undertaking a transaction or series of transactions, exclusions of their advisors’ analysis of the legal and tax effects of the transactions may be accommodated.

The CRA’s position is that taxpayers are required to disclose sufficient detail regarding their business and tax transactions for the CRA to fulfill its mandate of assessing taxes owing. Where the criteria outlined in the communiqué are met, the CRA considers that it retains the right to request tax accrual working papers, including a list of uncertain tax positions. A request for the taxpayer’s list of uncertain tax positions in these circumstances is not a request that the taxpayer self-audit.

Neal Armstrong. Summary of AD-19-02 Obtaining Information for Audit Purposes 2019-03-21 under s. 231.1(1)(a).

A survivor benefit under a registered pension plan (“RPP”) is paid in a taxation year to the Quebec Unclaimed Property Directorate pursuant to the Quebec Unclaimed Property Act because the person entitled thereto (the “right-holder”) has not been determined. That person, when subsequently identified, receives from the Directorate the net amount that the Directorate, in turn, had received from the RPP (i.e., the survivor benefit payable under the RPP (as reduced by income tax source deductions) is paid by the Directorate to the right-holder, as further reduced by its administration fee.

CRA indicated that the amount to be included under s. 56(1)(a)(i) in the right-holder’s income is the gross amount of the survivor benefit payable under the RPP, as indicated in the T4A slip issued by the RPP administrator, which should be included for the taxation year in which the Directorate transferred that amount to the right-holder. Its reasoning was that the amount could not be considered to be “received” as a pension benefit in the year of payment by the RPP administrator to the Directorate because the right-holder had not yet been identified – whereas in the subsequent year of payment over by the Directorate to the right-holder, that right-holder is receiving that amount under s. 56(1)(a)(i) as being “in lieu of” a superannuation or pension benefit.

CRA also indicated that where the right-holder is an estate, it should include the survivor benefit under s. 56(1)(a)(i) in computing its income for the year of receipt – but with a deduction to it and an inclusion to its beneficiaries being applicable where those amounts are distributed in accordance with the usual ss. 104(6), (13) and (24) rules. However, where the administration of the estate has been completed prior to the Directorate being in a position to pay the amount, CRA accepts that an estate beneficiary directly includes the amount under subparagraph 56(1)(a)(i) in computing his or her income.

Neal Armstrong. Summaries of 2 April 2019 Internal T.I. 2016-0649821I7 F under s. 56(1)(a)(i) and General Concepts – Payment and Receipt.