20 November 2017 CTF Annual Conference - CRA Panel on Issues in the Administration and Enforcement of the ITA

This is a summary of oral remarks made by CRA representatives during the Panel "A Potpourri of Issues in the Administration and Enforcement of the ITA." The Panel was held on the afternoon of November 20, 2017 in Toronto at the November 19-21 Annual Conference of the Canadian Tax Foundation. Questions (other than the audience question noted towards the bottom) were posed by John Sorensen (Gowling) and Adrienne Woodyard (DLA Piper) - who also provided their own remarks, which have not been summarized. The Panel was moderated by Jeffrey Trossman (Blakes), who synthesized some of the audience questions.

The CRA presenters were:

Ted Gallivan, Assistant Commissioner, International, Large Business and Investigations Branch

Alexandra MacLean, Acting Director General of the International and Large Business Directorate

For convenience, we have numbered the questions and, in some instances, made explicit what was an implicit question.

A- Proposed Changes to the Voluntary Disclosure Program

Q.1 Reasons for the changes

What was CRA’s thinking in narrowing the VDP?


Ted Gallivan: As background, tax authorities around the world are playing with their VDP regimes. Some of them “play possum,” trying to create artificial scarcity by saying the program is a limited time offer – “two VDPs for the price of 1,” that kind of approach.

That is not what the Canada Revenue Agency is trying to do. The important thing to understand is the significant investment in data and analytics that really underlie our comfort and desire to make the program much more restrictive. We have access to electronic fund transfers over $10,000. Starting in 2018, we will receive worldwide banking information on Canadians. For the big multinationals, we will have country-by-country reporting. We are also plugged into Dunn & Bradstreet data, and have an iteration of Watson as an appliance running in the background.

These advances have put us in a space where, today and in the near term, we are going to be comfortable with risk identification. There remain the possible audit and litigation components, of course – but holding those as a constant, the Agency is comfortable in its ability to identify at-risk or high-risk tax payers that we should be singling out for audit.

A second driver is public perception. The Finance Committee in the House of Commons told CRA to take a serious look at the voluntary disclosure program. Our role as civil servants is to translate that public angst into what, we think, is intelligent and reasonable policy. The draft Information Circular that you saw may be, in your view, worse than the status quo. And that is the comparator that tax professionals may have, although a lot of Parliamentarians and a lot of Canadians would have cancelled the VDP, as their comparator. In that light, looking at the latter as an option, I think that the refinements that we are putting forward through the revised Circular are perhaps a reasonable first step towards a tightening - and we will see where the future takes us.

Alexandra MacLean: One thing that was in the back of our minds, in thinking about the recommendations of the Offshore Compliance Advisory Committee and the House Finance Committee, was that the existing VDP had the potential to create an incentive for a taxpayer to conceal information, and then come forward and disclose it a number of years later. They might actually come out ahead that way, depending on their rate of return, by keeping their pre-tax profits offshore. That seemed like the wrong place to land – where we were treating VDP participants potentially more generously than taxpayers who had been complying by disclosing all their income throughout their careers.

Q.2 “Reasonable efforts”/expansion of discretion

The draft IC states that “Taxpayers must make reasonable efforts to estimate income for years where no documents are available.” What measurements would be in place for reasonable efforts, and what might constitute a reasonable effort?


Ted Gallivan: I think it is important to understand this in the history and context of the voluntary disclosure program. For a number of years, the Agency made a decision towards efficiency and timeliness, and transferred the responsibility and handling of these to an area that has more of a service-orientation.

There were a number of impacts from that, one of which was that many of you practitioners lost contact with experienced senior auditors. That is part of what we are fixing with these changes. We are going to recreate a team of very senior AU auditors who can be your first point of contact for discussing possible voluntary disclosures on a no-names basis, which we will get into more shortly.

We are also reasserting the Minister’s discretion. We are returning to the concept of the VDP as an application – not a submission that will merely be processed by a processing centre as submitted, but something that will get a bit of analysis upfront that will be considered on its facts. Consistently with the idea of Ministerial discretion, it may or may not be accepted, based on its facts.

Q.3 Elimination of no-names disclosure

Regarding no-name disclosures, one of the most notable changes is essentially the elimination of no-name disclosure. While CRA will engage in preliminary discussions on a no-name basis, the taxpayer is not considered protected until their identity is revealed. Taxpayers may need more time to assess the scope of the omissions and the financial implications of the disclosure.

Was there some mischief at play with the no-names disclosure process that the CRA is attempting to remedy?


Alexandra MacLean: Yes there was.

The mischief is difficult to prove because, of course, we did not have the names of the particular taxpayers involved in the potential abuse, but our strong sense was that some advisors and some taxpayers were perpetuating no-name disclosures to keep that effective date of disclosure period alive and to basically keep audit at bay without actually ever coming forward disclosing their circumstances and cleaning things up.

That works poorly from an administrator’s perspective. If we lack the important facts, how can CRA be confident that it has the full story?

We definitely see some scope to have informal discussions, to get a sense of how this is likely to work based on the experience of CRA officials involved in the program. However, until the taxpayer discloses its identity, and CRA has had a chance to assess the application, there is no deal.

Q.4 Large corporations losing VDP access

Under the new proposals, corporations with gross revenues over $250,000,000 are no longer able to participate in the VDP. The new Circular states these large corporations should follow normal procedures in correcting their tax findings. Why is the CRA refusing to allow large corporations to participate in the program?


Ted Gallivan: This really has to do with the intent of the policy, and which “door” the taxpayer uses. We would of course continue to want to hear from corporations about their errors and work with them to fix it, but we feel the VDP door, as advertised, explained to the public, and administered, is not the right door for multi-nationals to come through.

Alexandra MacLean: The VDP is operated under s. 220(3.1) of the Income Tax Act, which provides the Minister with the discretion to waive or cancel interest or penalties.

The VDP is the most famous CRA program to operate under that provision, but it is not exhaustive of the Minister’s discretion under s. 220(3.1). The Minister (and delegated authorities) still have discretion to consider situations and waive or cancel penalties and interest.

Q.5 Extraordinary circumstances

The draft circular indicates that a payment arrangement may be possible under “extraordinary circumstances.” What might constitute extraordinary circumstances, for example, financial hardship?


Ted Gallivan: CRA has an extensive policy on hardship. You need to think about the upper limits. Obviously, if you are going to have to realize upon securities before your target price, that will not be a legitimate reason to plead financial hardship – if you are waiting for Apple to hit $600 and we force you to cash in at $550, that is clearly ineligible. Situations such as bankruptcy, the loss of your primary residence, or your inability to pay for your children’s education, would of course be seen by the Agency as financial hardship.

In working with the taxpayer, we want to resolve the issue in all aspects. That is also why we ask for a waiver of objection or appeal. We are concerned with really locking down the file and having closure on both sides.

Q.6 Pursuit of aggressive tax advisors

The new rules provide that the name of the advisor would ordinarily be disclosed. Is this a signal that the CRA intends to focus on aggressive advisors?


Ted Gallivan: I think we can agree that there are professional advisors who deserve significant focus.

With some of our new investments in recent budgets, we have created a promoter centre that is trying to stop some of these schemes in their tracks before they can become widespread.

I would also bring up our aforementioned data analytics. One of the pieces of software we use is the same tool that Homeland Security uses. It focuses on relationships. They back-tested that to 9/11 to figure out, asking “how could we have detected that those 19 people were associated,” and the software works. It goes through associations and patterns. As the Agency gets more data, particularly data from third parties and not just the information from taxpayers, we have learned to mine it.

Knowing the identity of an egregious practitioner is important because we can then go back and find out who their former clients were. That changes our view of the risk portrait of everything that individual touches. The key takeaway around the tightening of the VDP is our increasing focus on risk.

Having said that, risk does not equal non-compliance. We are going to have to be very careful as a community about that distinction – but, increasingly, we are confident in our ability to identify risk, and initiate conversations with those people who we consider to be high risk.

Q.7 Potential for increased judicial review

The description of the limited program criteria has been very vague. Do you anticipate that there will be more judicial reviews as a result of this ambiguity?


Alexandra MacLean: To address the second point first, we do anticipate that there may be more judicial reviews and we are prepared to take those on.

That does not mean that we are not planning to act reasonably, which gets back to the “vagueness.” Reading the list of criteria, we can get the sense that there are innocent mistakes on one end, and planned conduct on the other. The middle-ground will be vague and murky, which brings us back to s. 220(3.1).

This is a discretionary program which means we are in the world of administrative law. Administrative law tells us that the Minister, and by extension CRA officials, cannot fetter their own discretion. They have to be flexible and they have to consider things on a case-by-case basis. The cases also say that we have to act reasonably and, in order to show that we are acting reasonably, it is helpful to have guidelines to apply consistently.

There is therefore an inherent tension in the jurisprudence on discretionary relief. You want to provide some direction and be consistent, but you also want to have flexibility. In other words, the vagueness is intentional, and flows from our understanding of the jurisprudence.

Ted Gallivan: If we had zero judicial review, because the Agency was never exercising the Minister’s discretion, that is hardly an ideal way to get there. Therefore, we may pass through a period where there is judicial review but also a commitment from the Agency to adjust and react to such review through updates and clarifications and procedures.

Q.8 Further changes or termination of VDP

Do you foresee a scenario where the VDP may be wound up entirely?


Ted Gallivan: Absolutely not in the near future.

I think at the two year or three year mark it would make sense to the Agency to take a step back and to review and to make further adjustments. I think you can expect a two- to three-year period. Some of that feedback was around the coming into force date, which is currently scheduled for January 1st of 2018 for the changes.

I do not want to remove the Minister’s discretion to choose the date, but the dates the Agency are recommending are June or October. We envisage a delay from the January 2018 date until summer at least as highly likely.

Q.9 Grandfathering of transitional disclosures

Suppose that a taxpayer that comes forward and initiates a disclosure and doesn’t complete it and it overlaps the old program and the new program. What will be the treatment of those taxpayers? Will they be grandfathered? Will they participate in the old system, or will they be forced into the new system?


Alexandra MacLean: There should be a clear effective date once the dust settles on this. If you get your application in before that date, you would benefit from the prior guideline.

B - Statute-barred refunds

Q.10 S. 221.2 reappropriation

The courts have used some very strong and unequivocal language to criticize the confiscation of statute-barred refunds. The Federal Court has twice this year (in Cybernius Medical and Pomeroy’s Masonry) sent the denied reappropriation requests back to the CRA for reconsideration. Is the CRA amenable to revisiting T2 reappropriation?


Ted Gallivan: Yes. Let me start with quoting CPA Canada’s submission in this regard. They cited a CRA executive who said “the Agency isn’t in the business of keeping other people’s money for no good reason.” That may be a bit of a surprise to some of you, but I think that both Alex and I would agree with that proposition.

The Agency became alive to s. 221.2. There was significant internal debate in 2011, and decision was made that, yes, we need to give voice to that provision and the Agency would need to accept applications. It seems that the people who were uncomfortable with that decision were the ones given authority to write the procedures, and it is obvious that the day-to-day status quo continued to lean towards the prior situation in which those funds could not be re-appropriated.

I think we would ignore the increasingly pointed comments from the bench at our own peril. The Agency has already started deliberations around a solution. We agree that the status quo is unacceptable (where, in practice, there is no viable route forward) when, in terms of policy, we say that there is. I cannot commit to the direction of that decision, but I can promise that there will be clarity in 2018 on this issue.

C - Audit powers and access to taxpayer information

Q.11 Tax Accrual Working Papers

What is the CRA’s policy on tax accrual working papers and its response to BP Canada?


Alexandra MacLean: In the spring, CRA announced that it is reviewing its 2004 policy on tax accrual working papers. The 2010 statements are also under review as a result of the BP Canada decision.

The main point I should make is that CRA needs to know what taxpayers have done – that is part of our mandate to administer and enforce the Act. Really, my message is “tell us what you’ve done.” The audit process should not be a game of hide-and-seek. That is the spirit under which we are reviewing it.

Legislation should be administered on a reasonable basis, but we also want to keep taxpayers away from a practice of concealment. We are going to have to get there, somehow. That may involve some more jurisprudence, or legislation, but CRA is going to continue to seek information where necessary.

We will try to be targeted in our approach. If you are getting unreasonable requests that are really burdensome and seem unlikely to accomplish a lot, do pick up the phone and call your large case manager and try to work out an approach. On the other hand, if the approach you have committed to is dragging your feet and trying to run down the statute-barring clock, that will probably result in more interlocutory applications.

Ted Gallivan: I should explain our thinking a bit in not appealing BP Canada. Over time, we were left with a choice where we really would be going to the Supreme Court of Canada seeking an absolute right to seeking information just because we had a right to it, and a number of us were uncomfortable with that.

You could look at this as the CRA saying, yes, we do have to have a reason that we require the information, we have to be ready to meet the scrutiny of court proceedings and, to do that, we are set up a committee and we’re revising the procedures.

The commitment from us will be to request only the information that we believe we require, but doing so, in terms of consistency and documentation and justification, at the level that will withstand the ever more frequent court scrutiny. That is a reasonable standard for us to meet, and we are ready to meet it, and I know our teams are up to it.

Of course, with 10,000 auditors across the country, results could vary, and that is where Alex is saying you should speak to the more senior large case file managers, the assistant directors of your TSO, and so forth, because we do know that unreasonable requests can seep in on occasion.

Q.12 Cameco and the relationship between audits and discovery

In Cameco, the Court dismissed CRA’s application to question 25 corporate employees in the course of an audit, noting that this would essentially amount to a discovery process without the procedural safeguards built into ordinary discovery.

What do you think of that concept? Should an audit be narrower or broader than discovery in tax litigation?


Alexandra MacLean: I think courts expect that taxpayers and the CRA will try to narrow the issues in dispute before getting to the discovery stage, whereas an audit is an exercise in seeking to determine what the taxpayer has done, and what are the resulting tax consequences. Therefore, the audit process is necessarily and generally a broader process than the discovery process. Often, the issues in dispute end up being a small subset, or even none, at the end of the audit process. In other words, I disagree with equating oral interviews on audit with oral interviews on discovery.

Another important point in this case is, what is conventional? How do transfer pricing audits work – how do they work in Canada, and how do they work internationally? And there is a lot of paper involved, there are a lot of discussions, and a lot of meetings. Taxpayers sometimes want us to talk to 30 or 40 people. In that context, 25 does not sound so unreasoanble. It is unclear whether Court had that sort of context to go on.

Cameco is under appeal.

Ted Gallivan: You have to look at this on the basis that taxpayers are shareholders in Canada.

Billions of dollars are at stake, and what the CRA is trying to do is get the information needed to come up with an accurate assessment of tax. At the human level, as lawyers or auditors, if the other party is not transparent, that tends to erode any trust that exists in the relationship. I think that is unhealthy for the regime.

In the case of CRA auditors overreaching, it is always open to the taxpayer to propose a reasonable alternative, and many of you do. And in this case, 25 seems like a lot, so they could have offered 5, or 10. Again, when you look at the billions of dollars at stake on transfer pricing cases, I think it is important for our auditors to talk to people to really understand where the economic value is being created.

Q.12A Conciliatory alternative

Section 231.1 really seems like a one-size-fits-all provision. It does not necessarily accord with all types of audit practice. Overly aggressive audit practices may be part of the reason for push-back from taxpayers. What are your thoughts on whether clients and their advisors would be better served by a more conciliatory or more compromise-oriented approach?


Ted Gallivan: We definitely have a certainty and a consequence agenda in the large business space. And the certainty agenda would involve rulings, advanced pricing arrangements, joint audits in the US and other countries, and meetings where CRA talks to taxpayers about what our control framework is.

Then there is the more difficult and contentious route. In my experience, an interest based approach is usually better than the legal one. But the Agency, recognizing that this is increasingly litigious, is going to equip itself so that all of our actions will withstand that test.

D - Audience questions

Q.13 Guidance for multinationals

You spoke about which door multinationals are going in. S. 220(3.1) still applies. Is there any expectation that some sort of Circular or other guidance will be provided on how that discretion would be exercised?


Alexandra MacLean: I think we may well end up there. We have other workloads, of course, but there may be room for that down the road.

Q.14 Quebec vs. federal practice

In Quebec there is a practice where the earliest identified balance gets taxed. Was that a practice that the CRA considered in the policies?


Ted Gallivan: This is an oversimplification, but I think the government of Quebec still looks at voluntary disclosures as a revenue-leader whereas we are looking at the VDP as a behaviour-influencer.

We are saying that the VDP is narrow now, and will be narrower in the future, so factor that into your risk-tolerance. The government of Quebec has made a different choice – they have a revenue focus and I think we have a behaviour-modification focus.

Q.15 No-names comfort as to track

Can comfort be provided on a no-names basis as to which track one will follow – the limited or general program?


Ted Gallivan: Alex told me not to commit to that. What I will say is that, when I talk about three or four individuals that people will be able to talk to on a no-names basis, my commitment is that those individuals would earn your trust. We have not thought through the specific question of, do we open a file, and create a name and that kind of thing.

Our commitment is that those people will earn your trust over time as being those practitioners who do a heavy business in VDP. The program cannot work without that – it is something we lost, and we need to put it back in the system.

Q.16 Potential changes in draft Circular

Given all the submissions, is there reason to expect the draft Circular to evolve in a significant way?


Alexandra MacLean: It depends on the definition of significant.

We definitely read all the comments we received. We have been spending the fall on revisions, and are many versions past the version that came out in the summer. There are going to be some directional changes, but I think it is fair to describe the revised draft as similar to the summer version.