2 April 2001 External T.I. 2001-0077975 - INCOME TAX RULINGS PROCESS - SPEECH

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

April 2, 2001
Denise Dalphy

TEXT OF A SPEECH PRESENTED BY DENISE DALPHY, LL.B., ON APRIL 3, 2001 TO CANADIAN BAR ASSOCIATION - ONTARIO IN TORONTO

NOTE: THE COMMENTS REFLECT THE OPINIONS OF THE AUTHOR. THEY DO NOT NECESSARILY REFLECT THE VIEWS OF THE CCRA

The Income Tax Rulings Process : From A to Z

Income Tax Rulings are sought for a variety of reasons, often where it is anticipated that the risk of a client being "red flagged" should the CCRA disagree with the tax practitioner's opinion on a transaction is less than the necessity for certainty. Or, often a ruling is necessary to provide a "clean bill of health" in a prospectus.

My main objective in speaking to you today is to advise you of a number of pitfalls in processing ruling requests so as to hopefully help to expedite the process.

Who are we?

Approximately 80 accountants of various professional designations and 10 lawyers work in the Income Tax Rulings Directorate. The Deputy Assistant Commissioner ("DAC"), Mr. Roy Shultis, runs the Directorate, and he has four Directors who operate "Divisions" and report to him. Many of us have more than 10 years experience in Rulings, and more than half (perhaps three-quarters) of the Rulings Officers have experience in working in a District Office.

Income Tax Rulings reorganized at the end of January 2001. Essentially, management of the Resources, Partnerships and International Sections has changed at the Director's level. In addition, there has been some rebalancing of workloads within several sections. For example, in the Partnerships Section, where I work, we still focus on partnership reorganizations, film limited partnerships, and R&D; however the CCA work has been reassigned and our section now handles medical expenses and education tax credits. The four Divisions are now called:

- Partnerships and Business (Marc Vanasse, Director)
- International and Trusts (Rick Biscaro, Director)
- Reorganizations and Resources (Mike Hiltz, Director)
- Financial Industries (Brian Darling, Director)

What do we do?

Our main function is to provide rulings to tax practitioners and to give technical interpretations to other areas in the CCRA and tax practitioners. Although we provide some "political" assistance (like Briefing Notes, drafting Question Period questions and answers, etc.), our first priority is income tax rulings, for which we receive a fee. Our fee is currently $100 for the first 10 hours, and $155 per hour thereafter.

Telephone Enquiries

In addition to working on rulings, Rulings Officers answer telephone enquiries from tax practitioners, people working in our Tax Services and other areas in the CCRA, as well as others.

Approximately one afternoon per week, depending upon the subject area in which a particular Rulings officer works, he or she will be responsible for answering telephone enquiries from tax practitioners, and sometimes from individual taxpayers. Our telephone policy is fully described in Technical News # 17 dated April 6, 1999. It is also described in Information Circular 70-6R4, dated January 29, 2001. Essentially the service is to provide information on opinions that the CCRA has previously given formally in technical interpretations and rulings. The total time to be spent per enquiry is not to exceed 30 minutes. The reason for this policy is to ensure that the issuance of advance income tax rulings is not unduly delayed and that representatives who take the time to write us to ask for our considered views on issues are given precedence over telephone enquiries. We want to provide a service, however our resources are finite and telephone enquiries takes away our ability to work on your ruling request.

We are frequently asked to take a new position on an issue. I want to caution that, although in some situations, because of the experience (or inexperience) of a particular Rulings Officer, he or she may give a "gut reaction" or mention areas of potential concern, and act as a sounding board, it is really important to know that these opinions are personal views, which may not necessarily be the opinion of the CCRA.

EXPEDITING RULINGS

What can you do to obtain an advance income tax ruling quickly?

Can you avoid these Committees / Departments?

Policy Review Committee

Together, the DAC and the Directors form the Policy Review Committee. A ruling request may be considered by this Committee if it is contentious. A file may also go to this committee if there is not agreement between the Director, Manager and/or Rulings Officer with respect to a technical interpretation of a provision in the Act.

GAAR Committee

Another important committee that is important for both tax practitioners and rulings officers is the GAAR Committee. This Committee is composed of Michael Hiltz, the Director of Reorganizations, Ted Harris, the Manager of one of the three Reorganization Sections in Income Tax Rulings, representatives from the Departments of Justice and Finance, Paul Lynch, a Manager from the Tax Avoidance area of the CCRA, as well as the Rulings Officer who is drafting the ruling and his or her Manager.

Although neither taxpayers nor their representatives may personally attend a GAAR meeting, the complete written submission of the taxpayer will be provided to all of the GAAR members.

One very important factor to consider when you are requesting a GAAR ruling is to try to resolve the issue at the Rulings Officer or Manager level. If you can successfully convince the Rulings Officer, and he or she can convince his or her Manger (and possibly Director), for example, that there is not tax benefit, or that the policy intent is clear, the issue may not go to the GAAR Committee. This can save two weeks or months in processing a ruling request.

Department of Justice

An opinion may formally or informally by requested. Issues that are often sent to Legal Services are those that may involve a change in our position, or where good arguments can be made for competing interpretations, and we wish to be advised as to what is the better view.

Department of Finance

If the law is ambiguous, we will consult with Finance to ascertain the tax policy underlying a provision. If the law is clear, but we have concerns about whether our interpretation fits with tax policy, we will advise the Department of Finance, so that they can consider whether they wish to recommend a change to the law.

Other Departments

In the context of rulings on mining, oil and gas, forestry, co-generation, we frequently consult with Natural Resources, Canada, and we are often in touch with our Industry Specialists in these areas.

ANY RULINGS THAT HAVE TO BE CONSIDERED BY ANY OF THE ABOVE COMMITTEES OR DEPARTMENTS WILL INVOLVE SOME TIME DELAYS.

Faxes

Sometimes a FAX authorization is missing and it really slows down the process.

Income Tax Rulings is located on three floors and all submissions, including those that come in by FAX, are scanned in our Administrative Unit before they are delivered to the rulings officer. If you are sending a FAX that is urgent, it helps to phone the rulings officer and let him or her know that it has been sent. Infrequently, a law or accounting firm may think that a FAX has gone out, but it is sitting in someone's in basket. Again, if we know the FAX is supposed to arrive at a particular time, but it does not, we can alert you to the problem.

Precision - in the Ruling Requested

A request that zeroes in on the precise issue of concern is easier to focus on.

Example

A partnership has been carried on for 10 years. The partnership will roll its assets using 85(2) to a Newco in exchange for shares in Newco. The partnership will distribute the Newco shares to the partners and will wind-up under 85(3). The partners will sell their Newco shares and want to claim the enhanced capital gains deduction for shares of small business corporations.

For example, a request for a ruling that "a share is a "qualified small business corporation share" or a request that "the partner may access the enhanced capital gains deduction on the disposition of the share" leaves a lot of ground uncovered.

However, an analysis of whether a share is a QSBSC or the CGEX is available would involve posing a series of more detailed questions, such as, for example:

1. The character (income or capital) of the Newco share in the hands of Partnership (section 54.2) on the disposition by Partnership of the Newco shares to Partners.

2. The character (income or capital) of the Newco shares in the hands of the individual Partners. [Will the disposition by Individual Partners of his or her share in Newco immediately after receiving that share from the Partnership preclude the Newco shares from being "capital property" of the Individual Partner?].

3. Whether the exception in clause (ii)(A) of subsection 110.6(14)(f) apply;

4. Whether subsection 110.6(14)(d) will apply to deem Partnership to be related to an Individual Partner for requisite period;

5. Whether anyone other than the individual Partner disposing of the Newco share or the Partnership owned the share in the requisite period [paragraph (b) of the definition of QSBCS];

6. Whether during the period that the Individual Partner owned the Newco share, Newco will satisfy the use test in paragraph (c) of the definition of QSBCS;

Complete and Timely Analysis of Each Ruling Requested

Not only does this help to get the ruling out the door faster, but it can save considerable time for the Rulings Officer to get back up to speed, and avoid duplication of work, which can happen if a ruling has been inactive for a month or two.

Example

On May 26, 2000, we received a request for an advance income tax ruling on a partnership reorganization using subsection 98(3) and then subsection 85(1) transfers. The ruling was issued one month later, on June 28, 2000. What happened?

Notwithstanding that the tax practitioner did not have a great deal of experience in requesting rulings, the rulings requested were precise, only 6 rulings were requested, the potential concern / reason why each ruling was provided, and an analysis of why each of the rulings should be granted was also provided.

When questions arose, the practitioner answered then in detail by telephone, including voicemail, and a detailed FAX would be received within 24-48 hours of the request.

GAAR was a concern especially since 98(3) and 85(1) were being used effectively to effect a subsection 98(5) roll to a sole proprietor. The practitioner provided an analysis of the tax result of using the various sections and was quickly able to demonstrate that there was no tax benefit. Further subsection 98(5) could not be used since there were valid business reasons why a subsidiary of the taxpayer who would have been the 98(5) sole proprietor ,and not the taxpayer, would be carrying on the business. Since the practitioner was adept at convincing me, I could do the same with respect to my Manager and Director and it was not necessary for the request to be considered by GAAR Committee. Finally, this Ruling request involved several other issues, but they were resolved quickly because we received precise and timely details and reasons.

Another advantage in getting information quickly is that the deal is still "fresh" when the materials arrive. If the materials come in a month or two after we request them, we will likely have to review certain aspects of the proposed transactions, since we may have put this request aside to work on other Requests where the information has been provided.

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