Update on Current Tax Issues and Trends, November 3, 2011

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An Update on Current Tax Issues and Trends in Canada, delivered November 3, 2011

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Update on Current Tax Issues and Trends, November 3, 2011

  1. 1. An Update on Current Tax Issues and Trends Thursday, November 3, 2011MONTRÉAL OTTAWA TORONTO CALGARY VANCOUVER NEW YORK CHICAGO LONDON BAHRAIN AL-KHOBAR* BEIJING SHANGHAI* blakes.com*Associated Office Blake,Cassels & Graydon LLP
  2. 2. SEMINAR INDEX AN UPDATE ON CURRENT TAX ISSUES AND TRENDS Thursday, November 3, 2011 TABPresentation Slides .................................................................................................... 1 Dealing with the Canada Revenue Agency Ed Kroft, Q.C. and Deborah Toaze Tax Shelter Rules Kathleen Penny Tax Risk Management, Corporate Strategy and Reputational Risk Chris Van LoanSpeakers Profiles ....................................................................................................... 2Blakes Tax Group Profile........................................................................................... 3Tax Bulletin and Article ............................................................................................. 4 “Recent Developments in CRA’s Reach for Information – Questions You Want Answered”, October 2011 “Proposed Foreign Affiliate Amendments Require Review of Current and Past Transactions”, August 2011 “Procedural Disputes in Canadian Transfer Pricing and Tax Avoidance Cases – Are You Prepared?”, January 2011
  3. 3. Tab 1
  4. 4. An Update on Current Tax Issues and Trends Ed Kroft, Q.C. Kathleen Penny Deborah Toaze Chris Van Loan November 3, 2011 Dealing with the Canada Revenue Agency Ed Kroft, Q.C. Deborah Toaze Current CRA Mindset• Desire to “win” – “winning isn’t everything – it’s the only thing” attitude – fights about penalties, extending limitation periods – absence of proportionality• Increased demands for information – domestic – foreign-based including exchanges of information with other tax authorities 1
  5. 5. Current CRA Mindset (cont’d)• Move to risk-based audits of large corporations• Collaborative audits both domestically and internationally• Possible use of ADR mechanisms especially in transfer pricing disputes? CRA Hot Buttons• Tax “avoidance”/aggressive tax planning – GAAR (surplus stripping, cross-border arrangements/FAPI, foreign tax credits) – use of partnerships and trusts – high net worth individual audits – transfer pricing (intangibles, fees, documentation) – valuation issues• Income vs. capital (revenue and expense side) CRA Hot Buttons (cont’d)• Financial institutions – offshore account reviews• Industry focus – pharmaceuticals – financial institutions – automotive – oil and gas 2
  6. 6. When Does CRA Require Information? • Audit • CRA appeals • Competent Authority (MAP) or APA proceedings • Court CRA’s Sources of Information • Taxpayer, including taxpayer’s website, annual reports, marketing materials, publications • Third parties • Internet search engines • Newspapers, magazines, journals Commonly-Used CRA Information – Gathering Powers• Section 231.1 – Inspection Powers• Section 231.2 – Domestic Requirement• Section 231.6 – Foreign-based Requirement• Section 231.7 – Compliance Order• Tax treaty information exchange provisions 3
  7. 7. CRA Inspection Powers• Section 231.1 – Inspection Powers – to whom does the provision apply? • taxpayer? • third parties? – what powers are available to CRA? – what may be examined? – to what extent must a person comply? CRA Requirements• Sections 231.2 and 231.6 – who may require the provision of documents and information? – what documents and information may be demanded? – who can be required to provide documents and information and when? – what are the time frames for complying? CRA Requirements (cont’d)• Sections 231.2 and 231.6 – trends in case law • eBay – abolition of “Richardson” doctrine – 2007? 4
  8. 8. CRA Requirements (cont’d)• Sections 231.2 and 231.6 – more frequent use of foreign-based requirements • key cases – Saipem – 1144020 Ontario Ltd. – when does a requirement constitute a “fishing expedition”?Federal Court Compliance Orders – Section 231.7• Increase in number of CRA threats to seek a compliance order where taxpayer does not provide all requested information• Basis for compliance order – affidavit evidence• Taxpayer defences: – previous compliance – privilege• Should court provide further relief – redaction? limited disclosure?Treaty-Based Information Requests• CRA can request information from other revenue authorities under: – exchange of information articles in tax treaties (e.g., Canada-U.S. Treaty Article XXVII) – exchange of information agreements (TIEA) with non-treaty countries (Bermuda) 5
  9. 9. Fight/Comply Considerations• Is the request for information a “proper request”? – done in compliance with the law – properly served• How important is it to win the skirmish?• Cost? Fight/Comply Considerations (cont’d)• Risk of compliance order?• Real risk of prosecution?• Subsection 231.6(8) consequences (no use of information in court) – a real risk? Fight/Comply Considerations (cont’d)• Sections 231.2 and 231.6 strategies – comply? is there any downside? – try to negotiate compliance with CRA with respect to information that is not privileged – fight compliance through judicial review 6
  10. 10. Privilege Claims in Respect of Tax and Non-Tax Materials• Make a privilege claim if appropriate – court may be required to make a determination• Types of privilege – solicitor-client – litigation or “solicitor’s brief” privilege – common interest• Joint retainers and common interest retainers – differences?• How is privilege claimed in a tax context? 7
  11. 11. Tax Shelter Rules Kathleen Penny What Is a “Tax Shelter”?• Irrelevant whether or not any tax avoidance motive and whether or not investment primarily tax motivated• Only question is whether reasonable to consider mathematical formula in section 237.1 of the Income Tax Act would be satisfied, having regard to “statements or representations” The “Tax Shelter” FormulaTotal tax Cost of Prescribeddeductions/losses/ > – property benefitscredits in first 4 years• If an asset being purchased or sold meets this formula, “tax shelter” issue must be fully evaluated• “Prescribed benefit” includes most limited recourse or demand debt 1
  12. 12. Consequences of “Tax Shelter” Status• Registration requirements• Penalties for seller, “promoters”• Denial of tax deductions/losses/credits• Substantive tax impact even if registered, due to “tax shelter investment” rules in section 143.2 of Income Tax Act• Reputation issues• Failed business deals/investment products Sale of Partnership Interest• Sale of partnership interest can be sale of “tax shelter” even if legitimate business/investment transaction• Statement regarding availability of tax deductions such as accelerated CCA or resource expenditures• Financial model showing taxable income/loss projections Sale of Partnership Interest (cont’d)• Legal representations in agreement of purchase and sale• Common issue in energy and infrastructure sectors 2
  13. 13. Example: Wind Farm Project Sale Failure• Limited partnership with general partner and one related limited partner owns recently completed wind farm• Long-term project financing in place (>10 years) with limited partnership as borrower, determined to be “prescribed benefit” Example: Wind Farm Project Sale Failure (cont’d)• Materials provided by seller to prospective buyers (on a private and confidential basis) indicate expected CRA claims and interest expense deductions• Mathematical formula clearly met; only issue is whether based on “statements or representations” Example: Wind Farm Project Sale Failure (cont’d)• CRA refused to issue advance ruling or provide other comfort• Tax shelter registration would not solve all tax issues due to section 143.2 rules 3
  14. 14. “Tax Shelter” from Interest Expense• Statements or representations about interest expense deductibility can cause sale of an investment to be a “tax shelter”• In current interest rate environment, total interest expense over 4 years likely not greater than cash property“Tax Shelter” from Interest Expense (cont’d)• However, if combined with “prescribed benefit” of limited recourse debt (including ordinary demand debt!), more likely to meet “tax shelter” formula Sale of Shares of Corporation• Purchaser of shares does not itself become entitled to tax losses/deductions/credits of target corporation• Normally not a “tax shelter” issue• Take care if target corporation has tax shelter that purchaser can access by various means 4
  15. 15. Tax Risk Management, Corporate Strategy and Reputational Risk Chris Van Loan Tax Risk Management Today• No longer limited merely to corporate tax compliance• Increased sophistication in corporate structures, financing arrangements and hedging arrangements• Tax planning and compliance has a much higher profile Tax Risk Management Today (cont’d)• Greater interest of regulators and the public in tax positions taken by companies• Growth in the volume of cross-border activity necessarily increases complexity, risks and opportunities• An increase in the scrutiny, co-ordination and enforcement activities by tax authorities• Changes in tax accounting standards 1
  16. 16. Types of Tax Risk• Transactional risk – the level of reassessment risk from entering into specific transactions• Operational risk – tax risks arising from ordinary business operations• Compliance risk – the filing of returns and other compliance procedures Types of Tax Risk (cont’d)• Accounting risk – reporting tax costs and benefits in the financial statements of the organization• Concentration risk – aggregating the tax risk from different transactions and business operations• Reputational risk – wider concept that concerns the wider public arena (e.g., shareholders, customers, regulators, suppliers) Tax Risk Management and Corporate Profile• A business entity must turn its mind to how tax issues fit within its overall business strategy• Tax is a cost of business, and a corporation and its board owe a duty to shareholders to minimize costs, including taxes 2
  17. 17. Tax Risk Management and Corporate Profile (cont’d)• An aggressive tax strategy may attract the attention of – tax authorities – regulators – analysts and investors – the public• A corporation’s reputation may be affected by its tax planning strategies and tax- related activities Tax Risk Management and Corporate Profile (cont’d)• Businesses such as financial institutions also have to consider their involvement in tax-related transactions with clients and how such involvement might affect the institution’s reputation Moving Goalposts and Tax-Related Risk• Incorporating reputational risk and other concerns that had not previously been viewed as part of tax review• Understanding management’s appetite for tax risk and also its reputational concerns 3
  18. 18. Moving Goalposts and Tax-Related Risk (cont’d)• Markets are increasingly expecting greater transparency from corporations as to the tax risks and the uncertainties that tax risks may create• Increasing attention being paid to a corporation’s tax planning and corporate responsibility Challenges Relating to Tax Risk Management• Increasingly sophisticated transactions• Increase in cross-border transactions/structures• Increasingly complex and changing legislation Challenges Relating to Tax Risk Management (cont’d)• Understanding where tax issues stand in the overall corporate strategy• Ensuring that information flows smoothly and completely among the tax department, management and the business units of the organization 4
  19. 19. Developing a Tax Risk Management Policy• Provides a framework and structure that can incorporate various sometimes conflicting objectives – tax minimization – corporate responsibility – tax risk identification – tax risk evaluation and measurement – compliance responsibilities Developing a Tax Risk Management Policy (cont’d)• Such a framework around tax issues ensures better corporate governance and decision-making – better tax risk measurement – managing the corporation’s relationships with tax authorities – safeguarding the corporation’s reputationCRA’s Risk Assessment Approach to Audit Selection• CRA will now select audit candidates that the agency considers more likely to pose a higher tax compliance risk• This risk-based selection approach will apply to large taxpayers• CRA is in the process of completing risk evaluation 5
  20. 20. CRA’s Risk Assessment Approach to Audit Selection (cont’d)• CRA’s new approach is part of a global move to more formal tax risk profiling by tax authorities• CRA will look at the guidelines and framework that a taxpayer has put in place to ensure tax compliance, the resources devoted to managing tax risk and how a taxpayer manages the evaluation of tax risks in major transactions in determining a taxpayer’s tax risk profile Increased Tax Authority Co-operation and Enforcement• Generally, an increase in the level of disclosure and tax reporting required by tax authorities• Greater co-operation and exchange of information among the tax authorities of different jurisdictions Increased Tax Authority Co-operation and Enforcement (cont’d)• The entering into of tax information exchange agreements, competent authority agreements• CRA is working together with the other countries through the Joint International Tax Shelter Information Centre• Greater co-ordination of tax authorities as evidenced by simultaneous tax audits and even joint tax audits by some jurisdictions 6
  21. 21. Increased Tax Authority Co-operation and Enforcement (cont’d) • CRA is also working with the OECD in targeting offshore and marketed tax structures • CRA has devoted more resources and expertise to international audit work in this regardTransactional Risk: What Are the RiskComponents Requiring Management? • Accuracy of technical analysis • Ensuring that the risk of reassessment is quantified and the rewards of entering into the transaction are justified by taking on such risk • Ensuring that such risk of reassessment is within the organization’s tax risk management objectivesTransactional Risk: What Are the RiskComponents Requiring Management?• Ensuring that procedures required to minimize tax risks are in place and monitored on a going-forward basis• Ensuring that the appropriate legal documentation is in place• Ensuring that the responsibility for required tax compliance measures, such as the filing of elections, is appropriately allocated and followed up 7
  22. 22. Transactional Risk: What Are the Risk Components Requiring Management? • Ensuring that the transaction is reflected in the books of the organization as contemplated and is accounted for appropriately • Does the transaction present reputational risks that must be evaluated?Identifying the Particular Components of Transactional Tax Risk Technical Analysis Issues • Have all the relevant issues relating to the transaction been identified? • What level of uncertainty is there with respect to the interpretation or application of the tax provisions to the particular transaction?Identifying the Particular Components of Transactional Tax Risk (cont’d) Technical Analysis Issues (cont’d) • What steps have been taken to ensure that no other technical issues are present? • What avoidance provisions might be applicable? 8
  23. 23. Assessing the Particular Components of Transactional Tax Risk• Given the magnitude of the tax risk and the size of the transaction, who must evaluate the tax risk created by the transaction?• Is the organization being appropriately rewarded for undertaking such risk?• How are business units being compensated?Assessing the Particular Components of Transactional Tax Risk (cont’d)• Have compliance and other costs been built into the model?• Is a provision relating to an uncertain tax result required?• Is the interpretation taken with respect to this transaction inconsistent with positions taken on other transactions?Assessing the Particular Components of Transactional Tax Risk (cont’d)• What sort of limitations will be put in place as to the size and/or number of transactions?• Who evaluates how the tax risk of this particular transaction fits into the pool of tax risks that the organization will face?• Does the resolution of a potential tax risk exposure have implications for tax consequences in another jurisdiction? 9
  24. 24. Monitoring the Particular Components of Transactional Tax Risk• Have responsibilities for ensuring that the steps necessary for ensuring the tax results desired been put in place?• Have sufficient resources and expertise been devoted to ensuring that such monitoring will be able to take place?Monitoring the Particular Components of Transactional Tax Risk (cont’d)• Have steps been taken to ensure that the information required by those monitoring will be provided by the relevant business unit?• What would be the ramifications of a change in law or a change in the administrative position of tax authorities?Monitoring the Particular Components of Transactional Tax Risk (cont’d)• Are those responsible for monitoring these tax risks feeding back their findings to management and the board?• What steps are being taken to ensure that any change in law or administrative position that could affect the transaction would be identified? 10
  25. 25. Monitoring the Particular Components of Transactional Tax Risk (cont’d)• What role will outside advisers and auditors play in the monitoring function?• If the transaction will have an impact upon the ability of the organization to enter into other transactions, have steps been taken to ensure that this restriction is known to the affected business units? Tax Risk Management: New Business or Transaction Review• What sort of taxation department review sign-off procedures are in place?• Is the internal expertise available, and what is the role of outside advisers?• Who has responsibility for ensuring that procedures and controls for the business line/transaction are in place and abided by? Tax Risk Management: NewBusiness or Transaction Review (cont’d)• Who is responsible for monitoring changes in law, administrative positions or material circumstances?• How are the level and type of tax risks aggregated with other tax risks of the organization?• What limits on the volume of transactions expected to be carried out have been set, and how will the volume affect ongoing monitoring procedures? 11
  26. 26. Tab 2
  27. 27. Edwin G. Kroft, Q.C. Partner Blake, Cassels & Graydon LLP Direct 416-863-2500 Facsimile 416-863-2653 ed.kroft@blakes.com Calgary Direct 403-260-9699 Facsimile 403-260-9700 Vancouver Direct 604-631-5200 Facsimile 604-631-3309ProfileEd Kroft is a Partner in the Tax Group and leader of our Tax Controversy & Litigation Group. He hasappeared on behalf of clients before the Supreme Court of Canada, the Tax Court of Canada, the FederalCourt of Canada, the Federal Court of Appeal and the Supreme Court of British Columbia and hasrepresented clients frequently in tax disputes involving Canada Revenue Agency (CRA) and other taxauthorities. He is involved in negotiations with "Competent Authority" in major transfer pricing disputes andhas been, and continues to be, involved in a number of tax cases for major Canadian and multinationalcorporations.The following reported cases listed alphabetically highlight some of Eds experience: Agazarian v. Her Majesty The Queen, 2003 TCC 952570; 2004 FCA 32 (limitation periods from loss carrybacks) Alberta Wheat Pool v. Her Majesty The Queen, 96 DTC 1795 (TCC), 99 DTC 5198 (FCA) (interest deductibility) Canadian Forest Products et al. v. The Minister of National Revenue, 96 DTC 6506 (FCTD) (demands for third party information) Collins v. Her Majesty The Queen, 1998 TCC 97648 (medical expense for tuition fees) HSBC Bank Canada v. Her Majesty The Queen, 2011 TCC 37 (transfer pricing) HSBC Bank Canada v. Her Majesty The Queen, 2010 TCC 462 (transfer pricing) HSBC Bank Canada v. Her Majesty The Queen, 2010 TCC 291 (transfer pricing) HSBC Bank Canada v. Her Majesty The Queen, 2007 TCC 307 (transfer pricing) Husky Oil Limited v. Her Majesty The Queen, 2010 FCA 125 (corporate reorganization-takeover bid) Earl Lipson v. Her Majesty The Queen, 2007 FCA 113, 2009 SCC 1 (GAAR)
  28. 28. MacKay et al v. Her Majesty The Queen, 2007 TCC 94, 2008 FCA 105 (GAAR) Markevich v. Canada, 2003 SCC 9 (SCC) (limitation periods for collection of tax debts) Perfect Fry Company Ltd. v. Her Majesty The Queen, 2007 TCC 133, 2008 FCA 218 (Crown appeal dismissed) (control for Canadian-controlled private corporations; appeal of SRED claims) Royal Trust v. Her Majesty The Queen, 2000 TCC 973757 (capital tax for financial institutions) Saskatchewan Wheat Pool v. Her Majesty The Queen (2008 TCC 8) (deductible losses following foreclosure) Similco Mines v. The Minister of Energy, Mines and Resources, 86 BCAC 63 (S.C.B.C. and B.C.C.A.) (B.C. mining tax) Southern Railway of British Columbia Ltd. v. Deputy Minister of National Revenue, 91 DTC 5081 (BCSC) (CRA demands for information - solicitor-client privilege) Stanfield v. Canada (Minister of National Revenue), 2004 FC 584; 2005 FC 1010; 2007 FC 542 (CRA demands for information) Stowe-Woodward Inc. v. Her Majesty The Queen, 52 F.I.R. 227 (FCTD) (M&P tax credit) Univar Canada Ltd. v. Her Majesty The Queen, 2005 TCC 723 (GAAR)Ed is a member of the Rules Committee of the Tax Court of Canada and the Canadian Bar Association(CBA) (B.C. Tax Section) - CRA Liaison Committee. He is a former governor of the Canadian TaxFoundation and a former chairperson for the Tax Subsection of the British Columbia branch of the CBA.Ed was also a research officer for the House of Commons Standing Committee on Finance and EconomicAffairs during the hearings on the income tax portion of the White Paper on Tax Reform in 1987.Ed has, for many years, been recognized as a leading lawyer in various surveys and, most recently, in thefollowing publications: Chambers Global: The Worlds Leading Lawyers for Business 2011 as a leading lawyer in the area of tax litigation International Tax Reviews World Tax 2011 in the area of tax litigation International Tax Reviews Tax Controversy Leaders 2011 Legal Media Groups Guide to the Worlds Leading Transfer Pricing Advisors 2011 The 2011 Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada in the areas of corporate tax and corporate tax litigation The 2011 Lexpert Guide to the Leading US/Canada Cross-border Corporate Lawyers in Canada in the areas of corporate tax and corporate tax litigation PLC Which Lawyer? 2011 in the area of tax litigation The Canadian Legal Lexpert Directory 2010, a guide to the leading law firms and practitioners in Canada, as a leading lawyer in the areas of corporate tax and corporate tax litigation
  29. 29. The 2010 Lexpert Guide to the Leading US/Canada Cross-border Litigation Lawyers in Canada in the area of corporate tax litigation The Best Lawyers in Canada 2012 in the area of tax law Legal Media Groups Guide to the Worlds Leading Tax Advisers 2010Ed was the 2006 recipient of the Canadian Institute of Chartered Accountants Award for Excellence inIncome Tax Practice and Education for outstanding contribution to the profession and the Canadian TaxCommunity. In 2002, he was awarded an honorary CGA designation by the Certified General AccountantsAssociation of British Columbia for outstanding contributions to the Association. He received a QueensCounsel designation in January 2009.Ed has written more than 60 articles and papers on taxation and corporate law subjects for the CanadianTax Foundation and other organizations. He has been an adjunct professor for over 20 years in the LawFaculty at the University of British Columbia (UBC). Since 2008, Ed has been the course director of taxadministration and litigation at Osgoode Hall Law School (LL.M. program). He was the 2006 recipient ofthe Adam Albright Award for Outstanding Teaching in the Law Faculty at UBC. For over 20 years, Ed hastaught tax courses for the Canadian Institute of Chartered Accountants, the Institute of CharteredAccountants of British Columbia and the Certified General Accountants Association of British Columbia.He is a member of the Trial Lawyers Association of British Columbia.EducationAdmitted to the Ontario Bar - 2010Admitted to the Alberta Bar - 2010Admitted to the British Columbia Bar - 1980LL.M, University of British Columbia - 1980J.D., Osgoode Hall Law School - 1978
  30. 30. Kathleen V. Penny Partner, Toronto Office Blake, Cassels & Graydon LLP Direct 416-863-3898 Facsimile 416-863-2653 kathleen.penny@blakes.comProfileKathleen Penny practises in the income tax field with the Tax Group. Kathleen is involved primarily indomestic and international corporate taxation, including mergers and acquisitions, corporatereorganizations, financings and restructurings, income funds and infrastructure projects. Cross-borderfinancing structures are a significant component of Kathleens practice, including securitization, lease anddebt financing and derivatives. In the mergers and acquisitions area, Kathleen is experienced withexchangeable share structures and advising on appropriate structures for inbound and outboundinvestments.Kathleens international client base involves her in transfer pricing matters, including establishment of tax-efficient structures for research and development, compliance with transfer-pricing documentationrequirements and dispute resolution. She also assists clients with the resolution of Canadian domestic taxaudits and disputes at all stages.Kathleen has written various articles and spoken at different venues regarding cross-border tax issues.She is a member of the Canadian Bar Association, the Canadian Tax Foundation and the tax section ofthe American Bar Association. According to World Tax 2009, a comprehensive guide to the worlds leadingtax firms, Kathleen is "well-known for cross-border structuring." She is also recognized as a leading taxpractitioner in Chambers Global: The Worlds Leading Lawyers for Business 2011 and PLC WhichLawyer? 2011. In the 2011 edition of The Best Lawyers in Canada, she was voted by peers as one of theleading tax lawyers in Canada.EducationAdmitted to the Ontario Bar - 1989LL.B., University of Toronto - 1987B.Sc., University of Toronto - 1984
  31. 31. Deborah Toaze Partner, Vancouver Office Blake, Cassels & Graydon LLP Direct 604-631-5210 Facsimile 604-631-3309 deborah.toaze@blakes.comProfileDeborah Toaze is a Partner in the Tax Group and the Tax Controversy & Litigation Group. Her practicefocuses on tax dispute resolution and transfer pricing. She represents taxpayers in tax disputes involvingthe Canada Revenue Agency (CRA) at the CRA audit and appeals stages and in Tax Court proceedings.Deborahs transfer pricing practice focuses on advising clients on the resolution of transfer pricing disputesand the impact of transfer pricing in the context of mergers and acquisitions. She also advises clients onthe avoidance of transfer pricing disputes.Deborah joined Blakes in June 2010 from another major national law firm. Deborah has extensiveexperience in the taxation of financial institutions and financial products. She previously held tax positionsin industry, including the position of vice-president of taxation at Scotiabank.Deborah regularly writes on tax matters and speaks at various tax conferences and seminars. She is achartered accountant and a member of the Canadian Bar Association and the Canadian Tax Foundation.EducationAdmitted to the British Columbia Bar - 2005J.D., University of Toronto - 2004LL.M., Osgoode Hall Law School - 2001M.B.A., McMaster University - 1976B.A., Queens University - 1974
  32. 32. Chris Van Loan Partner, Toronto Office Blake, Cassels & Graydon LLP Direct 416-863-2687 Facsimile 416-863-2653 chris.vanloan@blakes.comProfileChris Van Loan practises income taxation law and provides tax advice on a variety of domestic and cross-border transactions, including financings, corporate reorganizations, acquisitions and divestitures,particularly those involving foreign affiliates and outbound structures. He has also acted for numerousdomestic and foreign financial institutions with respect to a wide range of issues, including the taxation ofglobal trading, derivatives, securities lending and other capital market transactions.Chris has written numerous articles and spoken at various seminars and conferences concerning domesticand international tax issues. He is a member of the Canadian Bar Association, the Canadian TaxFoundation and the International Fiscal Association. He was noted in World Tax 2009, a comprehensiveguide to the worlds leading tax firms, for his skills in the taxation of capital market transactions andfinancial products. The Best Lawyers in Canada 2011 lists him as one of the leading tax lawyers inCanada. He is also ranked as a leading tax practitioner in Chambers Global: The Worlds Leading Lawyersfor Business 2010.Before joining Blakes, Chris held the position of executive director of corporate finance in the financialproducts division at CIBC World Markets. Prior to that, he was also senior in-house counsel in the taxationdivision of Canadian Imperial Bank of Commerce. In those roles, he structured various transactions andprovided tax advice concerning derivative products, corporate and structured finance transactions, foreignaffiliates and global trading activities.EducationAdmitted to the Ontario Bar - 1987LL.B., Osgoode Hall Law School - 1985
  33. 33. Tab 3
  34. 34. TaxOverview Caterpillar Financial Services Limited on its Fleet Leasing Receivables Trust in itsMembers of the Tax Group are national leaders filing of a base shelf prospectus in all of the C$363-million offering of asset-backed notesin all areas of tax, including corporate income provinces of Canada to renew its originated by PHH Vehicle Managementtax, international tax, restructuring, corporate C$1.5-billion medium term note program. Services Inc.finance, structured finance, taxation of Ford Credit Canada Limited on its successful Cliffs Natural Resources in itsinvestment funds, private equity and resource Québec Court challenge of C$1.2-billion of C$240-million contested acquisition oftaxation. The Blakes Commodity paid-up capital. Freewest Resources Canada Inc. and itsTax & Customs Group has unparalleled US$54-million contested acquisition of Spiderexpertise in customs, sales tax, and goods Telefonaktiebolaget LM Ericsson on its Resources Inc.and services tax legislation. The Blakes US$1.13-billion purchase of Nortel NetworksTax Controversy & Litigation Group has Corporation’s Code Division Multiple Access T&T Supermarkets Inc. and its shareholdersthe experience and expertise necessary to business and Longer Term Evolution Access on the acquisition of T&T by Loblaweffectively represent our clients’ interests assets. Companies Limited for C$225-million.opposite the tax authorities at all levels, Gateway Casinos & Entertainment Limited P Glatfelter Company on its .H.including in the courts. on its C$1-billion restructuring pursuant to US$234-million acquisition of ConcertBlakes represents numerous U.S. and a plan of arrangement under the Canada Industries Corp.other non-Canadian clients. The Firm’s tax Business Corporations Act. H&R Real Estate Investment Trust in itsexpertise has been instrumental in assisting TransCanada Pipelines Limited in its C$230-million public offering of debentures.both Canadian and international businesses US$1-billion at the interim stage formation ofas they operate in multiple jurisdictions. C&C Energia Ltd. on its C$211-million an interim project joint venture and relatedBlakes provides comprehensive advice in reorganization and the C$100-million initial agreements with Exxon.the most efficient manner to enable our public offering and secondary offering of itsclients to structure and finance their Canadian Genworth Financial Inc. on the initial public common shares.operations with regard to both domestic offering of its Canadian mortgage insurance Macquarie Long Term Care LP in itsand international tax considerations. We also business, under which Genworth Financial approximately C$190-million sale of therepresent multinationals with operations in sold a minority interest in the business for Leisureworld seniors housing business toCanada facing cross-border tax controversies C$945-million. Leisureworld Senior Care Corporation (LSCC)in their dealings with the Canadian revenue The syndicate of underwriters on each of the in connection with the initial public offering ofauthorities. US$750-million and US$700-million cross- LSCC. border offerings of notes by Teck Resources Premium Brands Income Fund in itsRepresentative Matters Limited. agreement with Premium Brands HoldingsSuncor Energy Inc. on its C$44-billion merger Progress Rail Services on its C$820-million Corporations pursuant to Premium Brands’with Petro-Canada. acquisition of Electro-Motive Diesel. conversion from an income trust structure to a corporation for C$175-million.ConocoPhillips Canada on the Randgold Resources Limited in itsC$4.65-biillion sale of its interest in the C$578-million acquisition of Moto Goldmines Roark Capital Group on its C$144-millionSyncrude oil sands joint venture to Sinopec. Limited. acquisition of Pet Valu, Inc. and Pet Valu Canada Inc.Nestlé S.A. on its US$3.7-billion acquisition of CI Financial Corp. on its C$550-million initialthe frozen pizza business from Kraft Foods. public offering of debentures. Mansef Group on its US$135-million disposition of substantially all of their assetsCiti Cards Canada Inc. in its C$2-billion sale Capital Power Corporation on its initial as well as the shares of Webexpansion Cyprusof its Canadian MasterCard business. public offering of C$500-million of common Ltd. and certain other affiliates to Virage Media shares to finance the privatization of the powerCitigroup Inc. on its sale of the Diners Club Group. generation business of EPCOR Utilities Inc.North American credit card business to Ceres Global Ag Corporation on itsBMO Financial Group. A consortium regarding the C$470-million US$132-million acquisition of common financing of the Centre Hospitalier deOntario Power Generation (OPG) on its shares of Whitebox Commodities Holdings l’Université de Montréal project.C$2.6-billion financing to redevelop existing Corporation.OPG hydroelectric generating assets on theLower Mattagami River in northern Ontario. Continued on reverse MONTRÉAL OTTAWA TORONTO CALGARY VANCOUVER NEW YORK CHICAGO LONDON BAHRAIN AL-KHOBAR* BEIJING SHANGHAI* blakes.com * Associated Office Blake, Cassels & Graydon LLP | November 2011
  35. 35. Blakes tax lawyers are recognized globally as instrumental advisers to Canadian and international businesses. With an emphasis on practical approaches to complex international tax problems, Blakes has developed a strong platform in all of Canada’s major business centres. From international tax planning and cross-border mergers and acquisitions to multi-jurisdictional reorganizations and cross-border tax controversies, Blakes provides ready access to top-tier international tax advice.Macquarie Power & Infrastructure Income North America Tax Directors Poll, International Canadian Association of Importers andFund on its C$130-million acquisition Tax Review, March and May 2011 - Exportersof SunPower Corp.’s 20-megawatt solar Canadian Finance & Leasing Associationphotovoltaic power project in Amherstburg, For the fourth consecutive year, Blakes was Canadian International Trade Tribunal BenchOntario. ranked in the top tier for both the transactional and Bar Committee work and tax planning surveys for Canada. Canadian Institute of Chartered AccountantsOakville Hydro Corporation on itsUS$130-million sale of Blink Communications The Best Lawyers in Canada 2011 - Nine Canadian Petroleum Tax SocietyInc. to Rogers Communications Inc. Blakes tax lawyers listed. Canadian Tax FoundationTalison Lithium Limited in connection with The 2011 Lexpert/American Lawyer Guideits C$47.9-million acquisition and related to the Leading 500 Lawyers in Canada – Committee on Taxation of Business Entities,C$40-million private placement of Salares Three Blakes tax lawyers named as leading New York City BarLithium Inc., and concurrent TSX listing, to practitioners. Federal Minister’s Advisory Committee on Taxform a C$327 .4-million TSX-listed lithium Administration Legal Media Group’s The Best of the Bestproducer. 2011 - Blakes tax lawyer listed in the area of International Bar AssociationGrowthworks Capital Ltd. on its proposed transfer pricing. International Fiscal Associationmerger with Seamark Asset Management to The Canadian Legal Lexpert Directory 2011 - Inter-Pacific Bar Associationcreate C$3-billion asset manager. For nine consecutive years, Blakes has beenJames Richardson & Sons Ltd. and recognized as a leading law firm in the area of Joint Committee on Taxation, CanadianRichardson Financial Group on its merger of corporate tax. Bar Association and Canadian Institute ofits wealth management business with Chartered Accountants PLC Which Lawyer? 2011 - Blakes Tax GroupGMP Capital and its related acquisition of National Association of Stock Plan has been endorsed as a leading law firm inGMP Capital public stock. Professionals the area of tax and tax litigation. Nine BlakesA consortium in a bid to finance, design and lawyers are listed in the area of tax. One National Tax Section, Canadian Bar Associationconstruct the new Glen Campus of the McGill Blakes tax lawyer is listed in the area of tax Quebec Tax Section, Canadian Bar AssociationUniversity Health Centre project. litigation. Ontario Business Advisory CouncilEarl Lipson v. Her Majesty The Queen. This International Tax Review’s Tax Controversycase dealt with the interpretation by the Leaders 2011 – Seven Blakes lawyers have Toronto Centre Canada Revenue Agency &Supreme Court of Canada of the general anti- been listed as leading tax dispute resolution Professionals Consultation Groupavoidance rule and the deductibility of interest lawyers. Tax Executives Instituteexpense. Law Business Research’s The International Taxation Section, Ontario Bar AssociationHusky Oil Limited v. Her Majesty The Queen. Who’s Who of Business Lawyers 2010 - ForThis case dealt with the application and the last six years, three Blakes lawyers have Contact Detailsinterpretation by the Federal Court of Appeal been selected as leaders in the area of tax.of certain rollover provisions of the Income Tax For more information on the Blakes Tax Group, Legal Media Group’s Guide to the World’sAct in connection with the Husky take-over bid please contact: Leading Tax Advisers 2010 - Five Blakes taxof Mohawk. lawyer listed. TORONTO Legal Media Group’s The Best of the Best Jeffrey TrossmanIndustry Recognition 2010 - Blakes tax lawyer listed in the area of Direct: 416-863-4290International Tax Review’s Americas Tax tax. jeffrey.trossman@blakes.comAwards 2010 - For the fourth consecutive year, Legal Media Group’s Women in Business Law MONTRÉALBlakes was named “Tax Firm of the Year” 2010 - Blakes tax lawyers listed.for Canada. Blakes was also named “North Jean GagnonAmerica Tax Disputes Firm of the Year” for the Legal Media Group’s Guide to the World’s Direct: 514-982-5025first time. Transfer Pricing Advisers 2009 - Two Blakes tax jean.gagnon@blakes.com lawyers listed.Chambers Global: The World’s Leading CALGARYLawyers for Business 2011 - The Blakes TaxGroup is ranked in Band 1 with 10 lawyers Professional Activities Edward Rowelisted. Direct: 403-260-9798 Members of the Tax Group have spoken at edward.rowe@blakes.comWorld Tax 2011, Supplement to the and held key leadership positions in variousInternational Tax Review - For the third organizations and committees in the Canadian VANCOUVERconsecutive year, Blakes Tax Group was and international tax field, including: Bruce Sinclairranked in Tier 1 for Canada. Direct: 604-631-3382 American Bar Association bruce.sinclair@blakes.com MONTRÉAL OTTAWA TORONTO CALGARY VANCOUVER NEW YORK CHICAGO LONDON BAHRAIN AL-KHOBAR* BEIJING SHANGHAI* blakes.com * Associated Office
  36. 36. Tab 4
  37. 37. RECENT DEVELOPMENTS IN CRA’S REACH FOR INFORMATION- QUESTIONS YOU WANT ANSWERED ED KROFT, Q.C. 416-863-2500 (Toronto) 403-260-9699 (Calgary) 604-631-5200 (Vancouver) ed.kroft@blakes.com
  38. 38. TABLE OF CONTENTS PageI. INTRODUCTION.............................................................................................................................1II. BOOKS AND RECORDS: WHAT QUALIFIES AND WHAT DOES NOT FOR STATUTORY PURPOSES? ...........................................................................................................1 A. General Comments ............................................................................................................1 B. Some Tips for Taxpayers Regarding What Can Be Kept and Discarded..........................2III. HOW BROAD IS THE SCOPE OF CRA POWERS TO OBTAIN DOMESTIC AND FOREIGN-BASED INFORMATION FOR INCOME TAX PURPOSES?.........................................3 A. Inspection - Section 231.1 .................................................................................................3 1. Introduction ...........................................................................................................3 2. Who May Enter The Premises? ............................................................................3 3. Where Is This Person Permitted To Enter? ..........................................................4 4. When May The Authorized Person Enter The Premises?....................................4 5. For What Reason May An Authorized Person Enter Premises?- Administration and Enforcement of the Act ..........................................................4 6. What Are The Powers Available To CRA Under Section 231.1? .........................5 7. What May Be Examined? .....................................................................................6 8. To What Extent Must a Person Comply?..............................................................6 B. Provision of Documents or Information - Sections 231.2 and 231.6 .................................7 1. Introduction ...........................................................................................................7 2. Who May Require the Provision of Documents and Information?........................7 3. What May Be Demanded?....................................................................................7 3.1 “Fishing Expeditions” and Ex-Parte Orders – Subsection 231.2(3) .................................................................................8 a. Criteria.........................................................................................8 b. Caselaw ......................................................................................9 c. Abolition of “Richardson” Doctrine -2007..................................10 4. Who Can Be Required to Provide Documents and Information? .......................11 5. How Must the Requirement be Made? ...............................................................11 6. To What Extent Must a Person Comply with the Requirement to Provide Documents or Information?.................................................................................11 7. Judicial Review of Section 231.6 Requirements.................................................12 8. More Frequent Use of Foreign-Based Requirements – Section 231.6...............12 8.1 Saipem ...................................................................................................12 8.2 1144020 Ontario Ltd ..............................................................................14 8.3 Will Anything be “Unreasonable” for Purposes of Subsection 231.6(5)?................................................................................................16 -i-
  39. 39. TABLE OF CONTENTS (continued) PageIV. RESISTING THE REACH: WHAT ARE SOME LIMITS ON THE EXERCISE BY CRA OF ITS POWERS (RELEVANCE, LEGAL PRIVILEGE, NON-COMPLIANCE WITH PROCEDURAL SAFEGUARDS, THE CHARTER)? ....................................................................17 A. Overview ..........................................................................................................................17 B. Statutory Limitations Within The Act ................................................................................18 1. Exemptions From Reporting and Records Destruction ......................................18 2. Solicitor-Client Privilege ......................................................................................18 C. Statutory Limitations Outside Of The Act - The Canadian Charter of Rights and Freedoms .........................................................................................................................18 D. Intervention By The Courts ..............................................................................................18 1. Strict Compliance With The Procedural Requirements of the Act ......................19 2. Protection of Privileged Communications ...........................................................19 3. Protection of Correspondence in Contemplation of Settlement – “Without Prejudice” Communications ................................................................................19 E. Solicitor-Client Privilege ...................................................................................................21 1. What Is Solicitor-Client Privilege?.......................................................................21 2. Legal Professional Privilege................................................................................22 3. Litigation Privilege (also sometimes called “Solicitor’s Brief” privilege) ..............22 3.1 Differences From Solicitor-Client Privilege ............................................22 3.2 What Does Litigation Privilege Cover? ..................................................22 4. Privilege And Confidentiality ...............................................................................23 5. Whose Privilege? ................................................................................................24 6. Where Can Privilege Be Claimed? .....................................................................24 7. Loss Of Privilege .................................................................................................24 8. Common Interest Privilege..................................................................................26 9. Types of Privileged Communications..................................................................28 10. Non-Privileged Communications.........................................................................29 11. How Is Solicitor-Client Privilege Claimed?..........................................................30 12. Precautions to Maintain Privilege........................................................................31V. HOW DO YOU FORMALLY CONTEST SEEMINGLY ABUSIVE/ILLEGAL REQUESTS/DEMANDS FOR INFORMATION? ..........................................................................32 A. Overview – Contest or Not?.............................................................................................32 B. Disclosure of Information to be Used in a Criminal Proceeding ......................................32VI. FACING THE INCREASED THREAT BY THE CRA TO SEEK COMPLIANCE ORDERS UNDER SUBSECTION 231.7 - WHAT ARE THE PRACTICAL WAYS TO HANDLE THIS? ............................................................................................................................................33 -ii-
  40. 40. TABLE OF CONTENTS (continued) Page A. Process ............................................................................................................................33 B. Some Defences?..............................................................................................................33VII. DEMANDS FOR THIRD PARTY INFORMATION FROM ACCOUNTANTS – WHAT CROSSES THE LINE? .................................................................................................................33 A. Request under Section 231.1 As Opposed to a Requirement Under Section 231.2 or 231.6 ..................................................................................................................33 B. Audit Working Paper Requests........................................................................................34 1. CICA Task Force.................................................................................................34 2. CRA Policy Statement – May 31, 2010 – “Acquiring Information From Taxpayers, Registrants and Third Parties” .........................................................35 3. CICA Response ..................................................................................................36 4. Court Challenges ................................................................................................37 C. Accountants And “Privilege”.............................................................................................37 1. The Common Law...............................................................................................37 2. The “Agent” Doctrine - Susan Hosiery and Southern Railway Decisions...........38VIII. IN WHAT CIRCUMSTANCES IS THE CRA ENTITLED TO REASSESS BEYOND THE NORMAL REASSESSMENT PERIOD AND STILL LAWFULLY ASK FOR INFORMATION? ...........................................................................................................................39 A. General Rule: Limited Right of Reassessment (Subsections 152(4), (4.01) and (5))....................................................................................................................................39 B. “Normal Reassessment Period”.......................................................................................40 C. Extraordinary Reassessment Periods..............................................................................40 1. Misrepresentation or Fraud: Forever ..................................................................40 1.1 Misrepresentation ..................................................................................41 1.2 Attributable to Neglect, Carelessness or Wilful Default .........................42 1.3 As a Defence, Can You Rely on Hiring Your Accountant to File the Tax Return? .....................................................................................44 1.4 Summary................................................................................................45 2. Six or Seven Years? ...........................................................................................46 3. Request by Taxpayer - Subsection 152(4.2) ......................................................47 4. Reassessment After The Filing or Resolution of An Appeal – Subsection 152(4.3)...............................................................................................................47 5. Waivers ...............................................................................................................47 5.1 Content...................................................................................................47 5.2 Signature................................................................................................48 5.3 Waivers and The Extended Reassessment Period ...............................48 -iii-
  41. 41. TABLE OF CONTENTS (continued) Page 5.4 Revocation of Waivers – Subsection 152(4.1).......................................48 5.5 Strategies Regarding Waivers ...............................................................48 6. Tax Shelter Assessments ...................................................................................49 7. Notification That No Tax is Payable - Any Limitation Period? ............................49 8. Reassessment During or Resulting From Objection/Appeal Process ................50 8.1 Reassessment After Objection – Subsection 165(3) .............................50 8.2 Reassessment and Settlement of an Appeal – Subsection 169(3) .......50 9. Continental Bank and Subsection 152(9) ...........................................................50 10. Treaty-Based Limitation Periods.........................................................................51 11. Increase of Tax By The Minister Upon Subsequent Reassessment ..................51 12. Loss Determination (Subsections 152(1.1) and (1.2)) ........................................51 13. Determinations of Refundable Investment Tax Credits (“ITCs”).........................52IX. IS THERE A LEGAL RIGHT TO RESIST THE PROVISION OF INFORMATION/DOCUMENTS RELATING TO PERIODS BEYOND THE OTHERWISE APPLICABLE LIMITATIONS PERIOD FOR REASSESSMENT? ................................................52 -iv-
  42. 42. RECENT DEVELOPMENTS IN CRA’S REACH FOR INFORMATION- QUESTIONS YOU WANT ANSWEREDI. INTRODUCTIONGovernments around the world need to finance public expenditures and accordingly need money.Therefore, more efficient and persistent pursuit of verification and enforcement of tax obligations isoccurring. Canada is no exception. The Canada Revenue Agency (“CRA”) wants information to assess orreassess and is using a variety of powers to obtain it, and will not hesitate to rely upon court orders tocompel the delivery of it.This paper addresses the scope of CRA’s powers, the limitations on their exercise and the trends in thisregard. The paper first reviews briefly the scope of “books and records” available to the CRA beforeproceeding to discuss the powers and respective limitations.This paper does not address the means by which information is compelled by the Crown during courtproceedings. Generally, this occurs through the discovery process in the Tax Court of Canada. As ageneral comment, one cannot assume that documents or information not obtained during a tax audit willremain free from compellability should the matter become the subject of Tax Court proceedings. ‘II. BOOKS AND RECORDS: WHAT QUALIFIES AND WHAT DOES NOT FOR STATUTORY PURPOSES?A. General CommentsTaxpayers are required under section 230 of the Income Tax Act (the “Act”) to keep “records” and “booksof account”. A taxpayer’s records and books of account must be in a form, and contain information, thatwill enable the taxes payable under the Act, or the taxes or other amounts that should have beendeducted, withheld or collected under the Act, to be determined. This is known as the “tax determinationpurpose”. Persons who are subject to these record-keeping requirements must keep books and records,together with supporting vouchers, for six years (unless a different retention period is specificallyprescribed). This retention obligation does not apply to all books and records, but only to those books andrecords that are “referred to in this section” (i.e. section 230). The CRA can require a person to keepspecified records and books of account, but only where it has otherwise failed to keep adequate records.Regulation 5800 and CRA Information Circulars 78-10R5 and 05-1R1, as well as case law to a limitedextent, have historically provided some guidance on the records that a taxpayer was expected to keepand retain.The expression, “Books of Account”, is considered by accountants to refer a book or record in which theoperations and transactions of the business are recorded in monetary terms and which forms part of anaccounting system. “Record” was not defined in the Act until June 18, 1998 (although “document” wasand is) but in one case it was held to be wide enough an expression to embrace “accounting records” asdefined by the CICA, i.e. “the formal books of account and supporting documentary evidence”. Thusbefore June 18, 1998, “record” historically included a broad range of documents which furnished detailedinformation about transactions, stated the terms of contracts, and served as evidence of the propriety ofaccounting entries. Most tax advisors would have excluded tax planning memos from the historical ambitof “records”.Legislation in force as of June 18, 1998 created a new statutory definition of a record which includes: anaccount, an agreement, a book, a chart or table, a diagram, a form, an image, an invoice, a letter, a map,a memorandum, a plan, a return, a statement, a telegram, a voucher, and any other thing containinginformation, whether in writing or in any other form. The new definition of “records” likely created anobligation to retain a greater volume of paper, including duplicate or redundant documentation. Thelegislation did not impose a positive obligation on taxpayers to create new documentation or require that
  43. 43. -2-tax planning analysis or memoranda be retained. Of significance to all stakeholders in the tax disputeresolution process is the extent to which documents can be “culled”, and when. This is discussed below.B. Some Tips for Taxpayers Regarding What Can Be Kept and DiscardedThe leading article on the subject of books and records and the related scope of CRA’s powers remainsthat of my friend and former partner Michael Quigley written in 1999. See Michael G. Quigley,“Controlling Tax Information: Limits to Record-Keeping and Disclosure Obligations,” (1999), vol. 47, no. 1Canadian Tax Journal, 1-48. I have borrowed from and revised some of his tips for taxpayers.If a taxpayer does not have a formal records retention policy it should establish one NOW, and ifestablished, the taxpayer should review it carefully and, if possible, control it centrally.The taxpayer should limit the number of people in its organization who get copies of potentially sensitivememoranda or documents to the real “need to know” group.Formal documentation that evidences agreements or implements transactions must be retained butprogressive drafts of documents need not be.It is the final documentation of agreements or transactions that shows what was done, and which enablesthe amount of tax owing to be determined. The taxpayer, and its accountants, lawyers, and otherprofessional advisors should undertake a formal post-closing records retention review, having regard tothe “records” definition, and discard all items that are not needed to meet the “tax determination” purpose.Internal tax analysis memoranda must be tested and purged against the “tax determination” purpose. Taxresults stand or fall on what was done, not on what someone may have thought was done, or theiranalysis or opinion of what the tax result should be. The taxpayer’s records retention obligation does notrequire that the taxpayer do CRA’s job, or let the CRA know what the strong and weak points in thetaxpayer’s position may be.If the taxpayer’s internal memoranda contain information that you conclude must be retained to meet the“tax determination” purpose, rather than deleting portions of an existing memo, create a new specificmemo to contain only the required information and exclude all non-required information. Taxpayersshould consider up front what records will need to be retained, and create specific items from the outsetwhich meet record retention obligations.Generic tax proposal promotional materials, of the type that many accounting, legal and investmentbanking firms generate, are not records that would generally meet the “tax determination” purpose, andshould not be retained in the file.Taxpayers should recognize that the ability to purge files of non-essential records will cease once CRAmakes any request for information in the course of an audit or issues “requirements”. Taxpayers canavoid that “death bed repentance” and clean files out as part of their “post-closing” routine.Taxpayers should work together with lawyers and accountants as much as possible to plan for themanner in which advice will be sought or received to avoid compellability and enable advice to be subjectto solicitor-client privilege.For those documents and records subject to solicitor-client privilege, a taxpayer, its accountants and itslawyers should protect the entitlement to confidentiality by ensuring that documentation likely to beembraced within the privilege, whether in the taxpayer’s files or those of the accountants or lawyers, isclearly marked as privileged and confidential and is segregated and held for safekeeping by thetaxpayer’s lawyers. Access to these documents should be restricted to authorized individuals only so asto maintain the privilege and protect against waiver.
  44. 44. -3-For additional discussion, see also Andrew Kalamut, “Record Retention Policies as a Strategy to LimitExposure on Audit”, McCarthy Tétrault on Tax Disputes, Report #58 (March, 2011: CCH); and RobertArkin, ““Don’t Shred the Minute Book” and Other Practical Tips for Tax-Compliant Corporate RecordManagement,” 2009 Atlantic Provinces Tax Conference, (Halifax: Canadian Tax Foundation, 2009),6B:1-18.III. HOW BROAD IS THE SCOPE OF CRA POWERS TO OBTAIN DOMESTIC AND FOREIGN- BASED INFORMATION FOR INCOME TAX PURPOSES?The Act gives CRA four investigative powers: • inspection; • requirement of domestic and foreign-based documents and information; • search and seizure; and • inquiry.This paper will only discuss the first two powers as they are commonly used in non-criminal tax audits bythe CRA.A. Inspection - Section 231.11. IntroductionSection 231.1 sets out various powers available to CRA that are normally used in the course of a fieldaudit. Generally speaking, auditors on the staff of the Taxation Services Office visit the offices oftaxpayers to assemble information about the affairs of one or more taxpayers. For simplicity, the analysishas been broken down into the following categories: • Who may enter the premises? • Where is the person permitted to enter? • When may the authorized person enter the premises? • For what reason may an authorized person enter premises? • What are the specific inspection powers available to CRA under section 231.1? • What may be examined? • To what extent must a person comply?2. Who May Enter The Premises?Any person authorized by the Minister of National Revenue may do so. This includes the Commissionerof Revenue, who may exercise all powers and perform all duties of the Minister under the Act.Subsection 220(2.01) permits the Minister to delegate his powers and duties under the Act to an officer orclass of officers in the CRA. This replaces the former requirement under paragraph 221(1)(f) that suchdelegation be done by regulation (former Regulation 900).
  45. 45. -4-3. Where Is This Person Permitted To Enter?An authorized person may only enter premises or places where: • any business is carried on; • any property is kept; • anything is done in connection with any business; or • any “books or records” (likely those under section 230) are or should be kept.Yet if any premises or place constitutes a “dwelling-house” (as defined in section 231), an authorizedperson may not enter that dwelling-house without the consent of the occupant except under the authorityof a warrant authorizing the person to enter the dwelling-house. Under subsection 231.1(3), a “Judge”(as defined in section 231) shall issue a warrant following an ex parte application when he is satisfied byinformation on oath of the following factors: • there are reasonable grounds to believe that a dwelling-house is a premises or place where any business is carried on, any property is kept, anything is done in connection with any business or any records or books are or should be kept; • entry into a dwelling-house is necessary for any purpose relating to the “administration or enforcement of the Act” (see 5 below); and • entry into the dwelling-house has been refused or there are reasonable grounds for believing that it will be refused.Should the Judge refuse to issue a warrant because the Judge believes that entry is not necessary forany purpose relating to the administration and enforcement of the Act, the Judge may: • order the occupant to provide reasonable access to CRA to any document or property that is or should be kept in the dwelling-house; or • order other things as are appropriate in the circumstances to carry out the purposes of the Act;to the extent that access has been or may be expected to be refused and the document is or may beexpected to be kept in the dwelling-house.4. When May The Authorized Person Enter The Premises?The authorized person under section 231.1 may do so at all “reasonable” times. Usually an auditor willcontact the taxpayer to arrange a convenient date to commence the field audit. However, there is noguarantee that an auditor or officer from Investigations (i.e. the “Tax Police”) will not show up at any timeduring business hours without warning to examine books and records to obtain information about anytaxpayer.5. For What Reason May An Authorized Person Enter Premises?- Administration and Enforcement of the ActThe CRA auditor may do so “for any purpose related to the administration or enforcement of [the] Act”.This expression has been defined in a number of cases. These cases include:
  46. 46. -5- • Canadian Bank of Commerce v. A-G Canada 62 D.T.C. 1237 (S.C.C.); • James Richardson & Sons v. The Queen 82 D.T.C. 6204 (F.C.A.); • R. v. Bruyneel 86 D.T.C. 6119 (B.C.C.A.); • McKinley Transport 90 D.T.C. 6243 (S.C.C.); • Canadian Forest Products et al. 96 D.T.C. 6506 (F.C.T.D.); • AGT Limited 96 D.T.C. 6388 (F.C.T.D.), affirmed 97 D.T.C. 5189 (F.C.A.); • Federation de Caisse Populaire Desjardins (Sept. 19, 1995, unreported Q. Sup. Ct.); and • Greater Montreal Real Estate Board 2007 FCA 346.In brief, these cases establish that the phrase means that the Minister would have to satisfy a Court thatthere is an inquiry either to determine the tax liability of a specific person(s) or to verify compliance withthe Act by identifiable persons. In a recent decision, R. v. He 2011 BCSC 368, the British Columbia Supreme Court confirmed that thetest enunciated in Richardson in the context of section 231.2 of the Act applied equally to section 231.1,and that the latter provision is only available to the Minister to obtain information relevant to the taxliability of some specific person or persons if the tax liability of such person or persons is the subject of a“genuine and serious inquiry”. The person or persons do have to be named, and it is not sufficient ifinformation is sought about a specific class of persons. The He decision is under appeal to the BC Courtof Appeal which commented, on August 29, 2011, that the future appeal will determine whether theappeals judge in the first instance was correct in holding that Richardson still has application. The papercomments later on how the principles in Richardson were found, in 2007 in Greater Montreal Real EstateBoard, to be no longer applicable under section 231.2 because of changes to the wording of thatprovision.6. What Are The Powers Available To CRA Under Section 231.1?A CRA auditor may exercise the following powers: • inspect, audit, or examine the books and records of a taxpayer and any document of the taxpayer or of any other person that relates or may relate to the information that is or should be in the books or records of the taxpayer or to any amount payable by him under the Act; • examine property in an inventory of a taxpayer or any property or process of or matter relating to the taxpayer or any other person, an examination of which may assist the authorized person in determining the accuracy of the inventory of the taxpayer; • examine property in an inventory of a taxpayer or any property or process of or matter relating to the taxpayer or any other person, an examination of which may assist the authorized person in ascertaining the information that is or should be in the books or records of the taxpayer or any amount of any tax payable by the taxpayer under the Act; • require the owner or manager of the property or business and any other person on the premises or place (of business) to give the authorized person all reasonable assistance,
  47. 47. -6- and to answer all proper questions relating to the administration or enforcement of the Act; • require the owner or manager of the property or business to attend at the premises or place with the authorized person; and • make one or more copies of any document (including print outs of electronic documents), property in an inventory, or any property or process or matter relating to the taxpayer or any other person.7. What May Be Examined?An auditor may review “books or records” of the taxpayer or “documents” of the taxpayer or any otherperson. “Documents” include money, a security and a record. As discussed above, a “record” is definedby the Act to include “an invoice, account, book, agreement, chart or table, diagram, image, map,memorandum, plan, return, voucher, letter, telegram, statement (financial or otherwise) and any otherthing containing information (whether in written or any other form)” that relates or may relate to theinformation that is or should be in the books or records or that relates or may relate to the amount of taxpayable by the taxpayer under the Act and also includes computerized information. The CRA auditormay also examine property in an inventory or any property, process or matter relating to the taxpayer orany other person which may assist in determining the accuracy of inventory of the taxpayer or inascertaining the information that should be in the books or records of the taxpayer or any amount payableby him under the Act.It is debatable whether documents such as tax planning memoranda fall within any of these categories.The documents contemplated should be those which permit the taxes payable or the taxes or otheramounts to be collected, withheld or deducted by a person to be determined.8. To What Extent Must a Person Comply?A taxpayer or the affected person has certain responsibilities: • no hindering, interfering or molesting to prevent proper copying, proper audit, proper examination or proper inspection under section 231.1; • no prevention of or attempt to prevent these activities; and • the provision of “all reasonable assistance” and the response to “all proper questions”.Subsection 231.5(2) provides that a taxpayer shall comply unless he is “unable to do so”. There is nodefinition of this phrase in the Act and there has been little discussion in the case law: R. v. Bourassa,[1968] C.T.C. 412 (B.C.S.C.); R. v. Arvai, [1977] C.T.C. 263 (Ont. Prov. Ct.); Muir v. The Queen, [1979]C.T.C. 259 (Ont. Co. Ct.). Generally speaking, a duty of confidentiality owed to a client or former client oremployer will not override the obligation to comply (see the discussion of solicitor-client privilege, below).Physical infirmity or inaccessibility should provide sufficient excuse.There has been little discussion in the case law of what constitutes “reasonable assistance”. In MNR v.Potoroyko 83 D.T.C. 5113 (Sask. Prov. Ct. ) and MNR v. Rolbin (1982, unreported) it was interpreted assuch assistance as is reasonable in the circumstances to enable the authorized person to carry out histask of audit examination. However, it does not mean that the taxpayer has to do the auditor’s job andprepare new documents. Reasonable assistance may however extend to obtaining records from which toinformation may be retrieved or explaining procedures or documents. “Proper” questions should berelevant and must only relate to the named taxpayer about the administration and enforcement of the Act.
  48. 48. -7-What constitutes a proper question for the purpose of this provision was in issue in The Queen v.Marcoux [1985] 2 C.T.C. 254 (Alta. Prov. Ct.).A failure to comply is an offence under the Act and a person, if guilty, may be liable on summaryconviction for a fine and possibly imprisonment under subsection 238(1).Failure to comply with a section 231.1 request may result in the issuance of a compliance order by acourt to do so (section 231.7). This is discussed in Section VI below.B. Provision of Documents or Information - Sections 231.2 and 231.61. IntroductionTaxpayers, practitioners or third parties who do not willingly provide information or documents mayreceive, by personal service or registered or certified mail, a “requirement” to do so. One or morerequirements may be issued under sections 231.2 or 231.6 of the Act. Requirements are oftenexceedingly broad in scope and may relate to both domestic and foreign information. Undersubsection 238(1), failure to comply with such a requirement may constitute an offence under the Actpunishable by fine and possibly imprisonment. See Regina v. Smith (2005 B.C.P.C. 0046 (B.C. Prov.Ct.)). In the case of foreign-based information, failure to comply substantially may prohibit a taxpayerfrom introducing in civil proceedings any information or document covered by that notice(subsection 231.6(8)). See Glaxo Smith Kline Inc. 2003 D.T.C. 918 (T.C.C.). Failure to comply with asection 231.2 requirement may result in the issuance of a compliance order by a court to do so(section 231.7) (see Section VI below) and possible prosecution under section 238 (Regina v. Lemieux2007 SKPC 135 (Prov. Ct. Sask.) and Iwaschuk 2004 D.T.C. 6371 (F.C.T.D.)).For reviews of this area, see Patrick Lindsay and Mark R. Robinson, “Requirements To ProduceDocuments and Information: Policy and Practice,” Report of Proceedings of Sixtieth Tax Conference,2008 Tax Conference (Toronto: Canadian Tax Foundation, 2009), 12:1-38; Lisa Heddema and GrantRussell, “CRA Requests for Information Under the Income Tax Act - A Review of Sections 231.1 and231.2,” 2008 British Columbia Tax Conference, (Vancouver: Canadian Tax Foundation, 2008), 1:1-18;Trent Henry and Andrew Kingissepp, “Managing the Confidentiality of Tax Accrual Working Papers,”Report of Proceedings of Sixty-First Tax Conference, 2009 Tax Conference (Toronto: Canadian TaxFoundation, 2010), 29:1-28; and Cheryl A. Gibson and Daniel V. Misutka, “The Art of Resolving TaxDisputes,” 2011 Prairie Provinces Tax Conference, (Toronto: Canadian Tax Foundation, 2011), 5:1-25.In the Québec decision of Chambre des notaires 2010 QCCS 4215, sections 231.2 and 231.7 wererecently held unconstitutional insofar as they seek disclosure from lawyers and notaries of informationsubject to solicitor-client privilege. See Guy Gagnon, “The Ultimate Protection: Solicitor-ClientCommunications”, McCarthy Tétrault on Tax Disputes Report #56 (November, 2010: CCH) for a detaileddiscussion of the case. The decision is currently under appeal to the Québec Court of Appeal.2. Who May Require the Provision of Documents and Information?Only certain parties in addition to the Minister, Deputy and Assistant Deputy Minister may authorize theissuance of a requirement. One must consider whether the Minister’s authority has been duly delegatedunder subsection 220(2.01) to ensure that the requirement has been properly issued. See Murphy 2009FC 1226.3. What May Be Demanded?The “requirement” contemplated by section 231.2 of the Act may seek:
  49. 49. -8- • “any information or additional information, including a return of income or a supplementary return”; and • any “document” (see section 231) which includes money, securities, and any of the following (whether computerized or not): books, records, letters, telegrams, vouchers, invoices, accounts and statements (financial or otherwise).A requirement mandated by section 231.6 of the Act may seek “any information or document that isavailable or located outside Canada and that may be relevant to the administration or enforcement” of theAct. CRA has indicated that it will rely on section 231.6 to obtain foreign-based information or documentsthat may be relevant to the administration and enforcement of the Act, notwithstanding that the particularinformation may pertain to a taxation year that is prior to the enactment of the provision.In either case, the information sought must be for “a purpose related to the administration or enforcementof the Act”. A decision of the Federal Court of Appeal, Tower v. The Queen 2003 D.T.C. 5540,considered the scope of this phrase as well as the scope of the requirement power to cause taxpayers tofurnish information that did not already exist. The Court found that taxpayers and their accountants wereobliged to do so. Does section 231.2 require a Canadian resident to provide information to which it hasaccess in Canada but is stored in data facilities owned by another party located outside of Canada? IneBay Canada Limited and eBay CS Vancouver Inc. v. MNR 2007 FC 930, Hughes, J. determined that theinformation cannot truly be said to “reside” only in one place or to be “owned” by only one person. Thereality is that the information is readily and instantaneously available to those within the group of eBayentities in a variety of places. It was irrelevant where electronically stored information is located or whoas among those entities by agreement or otherwise asserts “ownership” of the information. The use ofthe information in Canada was critical as the information could be summoned up in Canada and for theusual business purposes of eBay Canada. Location of the electronic storage apparatus outside Canadafor corporate efficiency did not assist the taxpayer. The information was considered “Canadian” and not“foreign”. The eBay litigation has a number of subsequent decisions. See 2008 FC 180, 2008 FCA 141and 2008 FCA 348. See E. Kroft, “Requirement Letters and Technology” December 4, 2008 Tax Topics(CCH).3.1 “Fishing Expeditions” and Ex-Parte Orders – Subsection 231.2(3) a. CriteriaTo avoid problems raised in apparent “fishing expeditions”, the Act permits the provision of information ordocuments on unnamed persons in limited circumstances. The Minister, under section 231.2, shall notimpose on any person (third party) a requirement to provide information or any document relating to oneor more unnamed persons unless he first obtains the authorization of a Judge of the provincial superiorcourt or a Judge of the Federal Court. That authorization may be subject to conditions, and it will begranted following an ex parte application only if the Judge is satisfied by information on oath that: • the person or group is ascertainable; and • the requirement is made to verify compliance by the person or persons in the group with any duty or obligation under the Act.For a recent decision discussing the application of the foregoing conditions, see Lordco 2011 FC 209where the Federal Court permitted the CRA to obtain information from an employer concerning certainunknown employees who had allegedly received taxable benefits by attending cruises organized andhosted by their corporate employer.The judicial authorization in section 231.2 regarding “unnamed persons” may be subject to judicial reviewwithin 15 days after the service of notice and may be cancelled, confirmed or varied depending on certain

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