20 May 2011 Roundtable, 2011-0398351C6 - CLHIA 2011 - Update on various initiatives

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: See Q&A

Position: See Q&A

Reasons: See Q&A

CLHIA Roundtable - May 20, 2011

Question 1 - Update on various initiatives

Would the CRA provide an update with respect to the status of the following initiatives?

a) Review of Retirement Compensation Arrangements (RCAs).

CRA Response:

The number of RCAs registered in recent years has increased significantly. The refundable tax creates an enormous liability for the government that must be managed. Reviews of these trust arrangements are identifying issues that are of concern to the CRA, including whether a bona fide RCA even exists (versus a salary deferral arrangement for example). The CRA will continue to audit RCAs and any positions taken will be based on the facts of each case.

b) Status of revisions to the Information Circular 00-1R2 dealing with the Voluntary Disclosure Program.

CRA Response:

A revised Information Circular will be forthcoming and will clarify a number of issues brought to the CRA's attention since the last Information Circular revision in 2007. Once it is ready, it will be made available to the public through the CRA's website.

c) Audits of family trusts.

CRA Response:

The CRA has had a regular domestic trust audit program for several years. In its 2005 report, the Office of the Auditor General (OAG) expressed a number of concerns about the CRA's reviews of tax returns of domestic trusts. The OAG was concerned that tax officials were auditing a smaller portion of inter vivos trusts, as compared with testamentary trusts, and that most of the testamentary trusts selected were trusts which had requested a clearance certificate.

At that time, the CRA responded that, given the dynamic and evolving nature of trusts, the CRA was reviewing its approach to verifying domestic trust income tax, including its audit coverage of inter vivos trusts.

Audit activities in relation to the taxpayer base are designed in part to identify cases of non-compliance, ensure fairness in the self-assessment system, and maintain the integrity of the tax system. Trusts, as taxpayers, are also subjected to these audit activities. Areas of review in regards to trusts include whether the trust was properly constituted, its residency, whether income is properly reported and whether deductions claimed were deductible pursuant to the provisions of the Income Tax Act. This is no different than other taxpayers such as individuals or corporations.

The growing use of trusts as part of tax minimization or avoidance strategies has raised concerns about their impact on both federal and provincial tax bases. As a result, the CRA has increased its audit activities in this area to ensure that their use and the results achieved comply with the provisions of the Income Tax Act.

The CRA will continue to be vigilant in this area and will challenge the use of trusts in abusive tax avoidance schemes through the use of all available tools, including the application of the federal and/or provincial general anti-avoidance provisions. The Garron (2010 FCA 309) and Antle (2010 FCA 280) decisions do not, in our view, provide new tools to challenge these arrangements but rather, simply provide clarification as to the application of the residency of a trust or the validity of a trust argument.

Overall, the CRA intends to continue its focus on inter vivos trusts since results achieved to date indicate that there are significant compliance risks associated with the use of trusts.

d) Risk assessments of various groups (e.g., high net worth individual or families who may have multiple holding in various entities).

CRA Response:

The Organisation for Economic Co-operation and Development (OECD) formed a 14 country focus group to study the size and environment of high net worth individuals. This study produced a number of conclusions and recommendations on how a tax administration might deal with this segment of the population.

The CRA has a program to examine high net worth individuals and their related entities. The population that is under review includes:

• Individuals who together with related economic entities have a net worth of about $50 million or more;
• The number of entities in the group is approximately 30 or more; and
• The entities in the group are not already part of our Large Files program.

The CRA's approach to high net worth individuals has been to reinforce our risk assessment by conducting a comprehensive review of the entities in the related group. We previously tended to examine the entities on a one-by-one basis.

Groups that are risk-assessed and deemed to be "high risk" are referred for audit by our Large Files program. This initiative is ongoing.

Robert Demeter
2011-039835