11 September 2006 Roundtable, 2006-0185642C6 - 2006 STEP Questions 7,8,10,11, & 12

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.

Principal Issues: 7-8: Administrative issues relating to the delays in obtaining a 116 certificate of compliance.

10-12: Administrative issues relating to foreign reporting requirements

2006 STEP Round Table
Q7. Delays in obtaining a Certificate of Compliance under Section 116

It seems that there is a significant delay in processing and issuing Section 116 Clearance Certificates. Can you please provide details as to the current time frame for obtaining a Section 116 Clearance Certificate.

Response

We recognize that there are delays in the processing of requests for Certificates of Compliance pursuant to section 116 of the Act. The definition of "taxable Canadian property" encompasses a broad variety of properties and the disposition of these properties sometimes involves very sophisticated transactions. Since the inventory of requests is handled on a "first-in, first-out" basis and the volume of requests has been increasing over the past few years, delays may be experienced. The requests for Certificates of Compliance are reviewed and processed in the order in which they are received at the Tax Services Office where the property is located. Due to regional variances, the time frames may differ. As a result, an individual would have to contact the Tax Services Office that is processing the request in order to get a reasonable estimate of the time frame to process any particular request. One must remember that a Certificate of Compliance can only be issued once all the required information has been received and reviewed.

2006 STEP Round Table
Q8. Delays in obtaining a Certificate of Compliance under Section 116

In light of the delays, which we are told can be as much as 1 year, even for a routine certificate, what steps are being taken to deal with the back log? What can taxpayers do in the interim?

Response

Our International Tax Directorate has been working with CRA staff in the tax services offices and the Regional offices to develop a risk-based audit strategy in order to make better use of our resources which should reduce the delays for most requests. This requires an analysis of the types of property being disposed of and the type and quantum of adjustments that are made to the taxpayer representations as a result of our review. Unfortunately, this kind of analysis does not happen overnight but we are testing some hypotheses. In the interim, taxpayers should ensure that they provide all relevant information that pertains to the disposition of their taxable Canadian property. If any information is missing, it will create an additional delay in the issuance of the Certificate of Compliance. Where a disposition will occur at a future date, (i.e. a proposed disposition), the non-resident should submit the request for a Certificate of Compliance as early as possible with as much information as possible so that data can be entered into our database. Additional information can be submitted at a later date.

2006 STEP Round Table
Q10. Foreign Reporting Forms

Has the information provided from the foreign reporting forms (such as T1134, T1135, T1141 and T1142) proved useful? Is any consideration being given to changing either the forms or the requirements themselves?

Response

The foreign reporting forms provide the CRA with information about non-resident trusts, foreign affiliates, foreign accrual property income, and assets held outside Canada.

This information has helped to identify where Canadian tax may be at risk. Because audit resources are allocated to issues with the greatest risk of non-compliance, the foreign reporting information has resulted in improved file selection. Therefore, from a tax administration perspective, the foreign reporting regime has proved useful.

The proposed amendments for the taxation of non-resident trusts and foreign investment entities would include changes to the foreign reporting legislation. If these proposals are enacted, we presently expect that the resulting changes to the foreign reporting forms would be relatively minor. For example,

• The T1134 form will remove the references to a trust as a foreign affiliate because, under the legislative proposals, non-resident trusts would no longer be treated as foreign affiliates.
• The T1141 would also be revised to reflect the repeal of concepts such as "specified beneficiary", "specified foreign trust", and "non-arm's length indicator". These would be replaced with the new concepts and terminology under the proposals. In addition, the instructions would highlight that the form would apply both for contributions to (1) non-resident trusts not deemed resident in Canada and (2) other non-resident entities in respect of which foreign reporting does not otherwise apply.

2006 STEP Round Table
Q11. Late Filing of Foreign Reporting Forms

What is the current position on filing foreign reporting forms after their due date? Is CRA currently assessing penalties in this regard?

Response

In the context of foreign reporting obligations, the Act imposes a number of penalties in different circumstances involving failures to comply. The CRA website has a table summarizing these penalty provisions and what foreign reporting forms are subject to penalties.

Penalties under one of these provisions - subsection 162(7) of the Act - generally apply in the context of foreign reporting where the foreign reporting return is late or incomplete, including circumstances where documents have not been submitted with the return. For example, if a trust agreement has not been submitted with the first filing of the T1141, the return may be considered incomplete and, therefore, late.

In the past, an administrative policy was applied in the circumstances of first-time filers who voluntarily disclosed, before an audit had commenced, a failure to file foreign reporting forms. That policy allowed for the suspension of 162(7) penalties in the context of foreign information reporting. That policy has been revoked. Starting January 1, 2006, penalties are being applied to all late filed foreign reporting returns. Any future requests for relief from these penalties should be addressed to the Voluntary Disclosure program at the local TSO.

The relevant foreign reporting returns include:

T1134-A Information Return Relating to Foreign Affiliates That Are Not Controlled Foreign Affiliates;
T1134-B Information Return Relating to Controlled Foreign Affiliates;
T1135 Foreign Income Verification Statement;
T1141 Information Return in Respect of Transfers or Loans to a Non-Resident Trust;
T1142 Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust; and
T106 Information Return of Non-Arm's Length Transactions with Non-residents.

2006 STEP Round Table
Q12. T1141 Transfers or Loans to a Non-Resident Trust

The foreign reporting forms for non-resident trusts make particular reference to protectors. Why is the CRA particularly interested in this?

Response

The T1141 form does not use the term "protector". However, separate boxes on the form do request - in addition to the identity of the trustee - the names of any persons who have powers relating to the trust or with whom the trustee must consult before the trustee can exercise discretionary powers. While a person acting as "protector" may very well fall into one of these additional categories, the requested information is not limited to persons who may be "protectors".

This information assists in understanding the true nature of the arrangement involving the trust. This is relevant to ensuring the proper application of the Income Tax Act, including, for example, the determination of the residence of the trust and the application of attribution rules such as those in 75(2) of the Act.