May 2015 Alberta CPA Roundtable

This provides summaries of questions posed at the May 2015 CRA Roundtable hosted by CPA Alberta for which CRA provided responses, together with the full test of the responses. The full text of the questions is available at the CPA Alberta site. There were two concurrent sessions on GST and income tax issues, as well as a plenary wrap-up session.

CRA disclaimer: The responses are provided by CRA for information purposes only and relate to the provisions of the law and policies in force at the time of publication and are not a substitute for the law. Responses might not extend to all situations and are not determinative of the tax treatment of a specific taxpayer’s situation.

Plenary Questions

Q.1. Owner-Managed Business Audits

Summary of Question

When owner-managed businesses are audited, CRA may require the provision of personal particulars of the shareholders and family members of the shareholders. What should the taxpayer do when there is no legal authority to obtain those documents? What recourse is available if there is no agreement with CRA's interpretation of the restrictions under s. 241?

CRA Response

When small and medium businesses are selected for audit, the CRA seeks to gain assurance about the completeness of the income reported in their tax filings. In these businesses, internal controls are usually weak and segregation of duties is generally absent. The use of indirect tests in these situations is a generally accepted means of gaining assurance about the completeness of the income reported.

Indirect tests that are undertaken by the CRA include bank deposit analyses, rough net worth calculations, or analyses of sources and applications of funds. In order to undertake these tests and assess risk of unreported income effectively, auditors must obtain complete financial information of the individual taxpayer or corporation whose business is under audit.

Where the business is carried on in a sole proprietorship, or in a corporation with a sole shareholder or that is closely held, there is potential co-mingling of business and personal funds. As such, when performing indirect tests, auditors will also request personal financial information of the spouse (or common law partner), the shareholder of a corporation and his or her spouse (or common law partner) and other contributing individuals living in the same household.

The authority to request personal bank statements of the shareholder, spouse (or common law partner) and other contributing individuals is outlined in subsection 231.1(1) of the Income Tax Act (ITA). This provision permits the CRA to inspect, audit or examine records of other persons where information in those records may relate to information that is or should be in the books and records of the taxpayer who is under inspection, audit or examination.

All personal information of the taxpayer and other persons is requested at the start of the audit enabling auditors to confirm, at the outset, that business transactions are reported within the business and not in the personal bank accounts of the proprietor, shareholder or their fmaily members.

Where the information related to a family member cannot be provided by the taxpayer under audit, the CRA will seek to obtain the information directly from the family member.

The privacy and confidentiality of taxpayer infromation is protected and managed under the strict confidentiality provisions of section 241 of the Income Tax Act, and we are also obliged to protect personal information under provisions of the Privacy Act. Please be assured that the CRA respect the obligations in using all information that we obtain from taxpayers in the course of our audits.

Paragraph 241(4)(a) permits the provision of taxpayer information to any person that can reasonably be regarded as necessary for the purposes of the administration and enforcement of the Act. Where information obtained from a third party is to form a part of the basis of an adjustment, auditors are instructed to ensure that only information relevant to the adjustment is provided.

Q.2. CRA Technical Positions

Summary of Question

An Audit proposal letter referred to a “Ruling” from CRA’s Legislative Application Section (LAS). It appears this is a division of Audit, rather than Rulings.

(a) Does the CRA have two different groups for the function of interpreting legislation?

(b) To what extent does the LAS coordinate with Rulings to ensure their interpretations are consistent?

(c) Is the full text of the applicable LAS technical analysis available to the taxpayer?

(d) We are advised that various Memorandums of Understanding between various CRA sections have been entered into, including one which restricts the LAS to application of the law to specific facts, with interpretation of the law itself being delegated to the Rulings Division. Will the CRA publish the details of these MOU’s?

CRA Response (a):

No.

The Legislative Application Section (LAS) is found within the Large Business Audit Division of the Compliance Programs Branch (CPB) and is responsible for the provision of various audit and technical support functions to the audit community. In this regard it provides technical assistance to large case auditors in the application of the ITA to specific facts and issues identified in the context of an income tax audit. CPB is responsible for administering the provisions of the Income Tax Act and audit policies and guidelines. This is accomplished, in part, through the technical interpretation services received from the Income Tax Rulings Directorate (ITRD).

ITRD is found within the Legislative Policy and Regulatory Affairs Branch. It role is to interpret the Income Tax Act. ITRD’s interaction with the auditors focuses on interpretive issues. It is also responsible for dealing directly with taxpayers on Advance Income Tax Ruling requests or technical queries about the interpretation of the Act.

It is important to note that these two technical areas consult and interact with each other as deemed necessary on a file or issue by issue basis.

CRA Response (b):

Where necessary, LAS will consult with other CRA areas including, for example, ITRD or CRA Legal Services. If there is a question about the interpretation of the ITA, LAS will refer it to the ITRD. ITRD and LAS have a close working relationship and consult each other regularly to ensure consistent application and interpretation of the provisions of the Income Tax Act.

CRA Response (c):

In most cases, LAS will provide a written memorandum responding to the auditor’s query. Such memoranda are issued directly to our clients, who are the auditor, manager, or tax services office (TSO) from whom the query originated. The nature of the queries varies and as such, distribution of an LAS memorandum is at the discretion of the requestor, generally the auditor or audit manager. Taxpayers may informally request a severed copy of the memorandum from the auditor or manager assigned to their case, or alternatively, may formally request the document via the Access to Information procedure (ATIP). We encourage informal requests and responses in order to promote transparency and an efficient audit process.

Depending on the timing of the query in relation to the audit, the auditor may, at his or her discretion, provide an opportunity to the taxpayer to provide representation to LAS to be included in the documentation supporting the technical query.

CRA Response (d):

The CRA Memorandum of Understanding (MOU) between ITRD and ILBC is an internal document. It does not act so much to restrict the operations of either area but rather clarify general guidelines to the TSOs and the various technical areas regarding the process of making a technical referral to Headquarters. Such a consistent referral process helps streamline the incoming queries, ensure consistency of responses, and allows the Compliance Programs Branch to monitor requests of a similar nature. The division of responsibilities between CPB (administering and applying the ITA) and ITRD (interpreting the ITA) has not changed. Overall, the flow of requests in accordance with the provisions of the MOU are expected to allow the CRA to utilized its technical resources in the most efficient and effective manner.

The management and ultimate disposition of a particular query is an internal process. Whether a particular referral is directed to ITRD or CPB is decided on a case-by-case basis as determined by LAS, the intake coordinator, in consultation with ITRD as necessary. CPB and ITRD maintain communications on files as deemed necessary.

Q.3. Penalties and Penalty Relief

Summary of Question

Taxpayers can contest a penalty by applying for penalty relief, or by objecting to the penalty itself. CRA’s general policy is to waive penalties only in situations of:

• extraordinary circumstances beyond the taxpayer’s control;
• where actions of the CRA contributed to the penalty
• financial hardship.

CRA also appears to consider penalty relief appropriate only where the taxpayer has taken reasonable steps to avoid or to correct any errors or omissions in a reasonable period.

1. What are CRA’s policies and processes where the same penalty is the subject of both Objection/Appeal and a penalty relief request?
2. How can professional advisors assist CRA in situations where both avenues are being taken?
3. Outside of financial hardship, can the CRA provide any examples of a taxpayer who has not exercised due diligence, but who would be considered eligible for penalty relief?
4. Would the CRA consider submitting a request (perhaps jointly with the tax community) that Parliament provide more detailed guidance as to the types of circumstances where penalties may be waived or upheld?

CRA Response (a)

Penalty and interest are non-discretionary assessments; they are assessed as a result of noncompliance with the legislated obligations.

When a person files an objection to the interest and penalty amounts assessed on initial assessment or audit assessment, the main dispute is whether or not the CRA has correctly applied the legislature to assess the type of interest/penalty and whether the assessed amount is correct.

In resolving the objection, the appeals officer will determine the following:

• Whether penalty and interest is applicable under the relevant Tax Acts; and
• Whether the amounts are correctly calculated.

The appeals officer will also consider arguments (including the due diligence defense) in making a decision on the objection/appeal case.

The Canada Revenue Agency’s (CRA’s) general policy is to review the taxpayer requests for interest and penalty relief at the same time as any associated tax issue(s) under objection or appeal.

Where an active objection or appeal case is identified, the relief request is referred to the responsible appeals officer to be reviewed concurrently along with the tax issue(s) under dispute on which the penalty and interest were assessed.

While the review of an objection is ongoing, the appeals officer may communicate an informal decision on interest and penalty relief to the taxpayer. However, a formal written decision will generally not be issued until the objection or appeal is resolved or until all rights of appeal have expired.

CRA Response (b)

Taxpayers are encouraged to provide a detailed account of the facts and circumstances surrounding their failure to comply and the penalty assessed as a result.

Where the facts and circumstances of a dispute involve both due diligence arguments (i.e., reasonable effort was made and steps taken to comply) and interest and penalty relief considerations (i.e., taxpayer was unable to comply due to circumstances beyond their control), the taxpayer should be advised to file a Notice Of Objection (NOO).

The objection/appeals review process focuses on the legislation, arguments presented by the person filing the dispute, and correct calculation of the assessed amount, while Taxpayer Relief considers circumstances where the Minister may apply discretion to waive or cancel penalty and/or interest.

The appeals officer will review the facts and circumstances and consider the taxpayer’s arguments in the context of both due diligence and relief, as appropriate. If the taxpayer is successful in demonstrating due diligence, the penalty is not exigible and the assessment will be vacated. In this case, a request for penalty relief would become redundant.

CRA Response (c)

To establish due diligence, the taxpayer must demonstrate that positive steps were taken to meet their tax obligation and that a reasonable effort was made to comply. The focus of the review is on the events and actions taken leading up to the failure.

When reviewing a request for interest or penalty relief, the CRA will consider the circumstances surrounding the non-compliance as well as other factors, including the taxpayer’s previous compliance history, whether the taxpayer exercised a reasonable amount of care, and how quickly the taxpayer remedied any delay or omission.

CRA Response (d)

The existing taxpayer relief provisions of the Income Tax Act (and similar provisions in other Acts) do provide the Minister’s delegate with the broad discretionary authority to grant penalty relief in certain circumstances when taxpayers were prevented from complying with their income tax obligations. The CRA has general guidelines in Information Circular 07-1, Taxpayer Relief Provisions that describe types of non-exhaustive circumstances where it may be appropriate to waive (not assess penalties) or cancel assessed penalties. Each request for penalty relief is decided bases on its own merit.

This broad discretion already gives the CRA adequate ability to be flexible and responsive to the taxpayer’s particular circumstances in deciding whether penalty relief is warranted. The CRA remains open to discussing any specific concerns faced by the tax community with the taxpayer relief provisions (including the guidelines in IC 07-1) or the penalty assessment provisions.

Q.4. Common Adjustments

Summary of Question

Please provide a summary of the most common areas of audit review and adjustments in the course of:

(a) Audits of private corporations and their shareholders;

(b) Reviews, include pre- and post-assessment reviews, of personal income tax filings;

(c) Reviews under the “high net worth individuals” project.

CRA Response

Part (a)

Please refer to the CRA Common adjustments webpage

at: http://www.crarc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/djstmnts-eng.html.

Part (b)

Please refer to the CRA Common adjustments webpage

at: http://www.crarc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/djstmnts-eng.html.

Part (c)

Our Related Party Initiative program is responsible for compliance reviews of high net worth individuals (HNWI). From our research and compliance activities in this area, we have noted that HNWI are a diverse population engaged in a wide variety of business activities. They often conduct business and hold wealth through a range of entities, including private corporations and personal trusts, and operate in assorted geographic locations which may include offshore interests. Our compliance reviews are adapted to these structures. Therefore, in addition to reviewing compliance by the corporations in the HNWI’s organizational structure, we also risk-assess compliance at the HNWI’s personal level by examining the role of personal trusts, private foundations, and partnerships in the structure and evaluating the impact of offshore entities. Our risk evaluations are now supplemented with more detailed data available from robust foreign reporting rules and broader access to electronic funds transfer (EFT) information.

The compliance issues we have detected have been equally diverse but not unusual, including capital gain versus income issues, lack of foreign reporting, write offs of personal-use property and failure to report certain income. We have also noted frequent participation in a wide range of aggressive tax planning arrangements.

Q.5. [no response]

This question was not addressed by the CRA.

Q.6. Liaison Officer Initiative (LOI)

Summary of Question

1) How are businesses selected for participation in LOI?

2) What happens if a taxpayer does not respond to an invitation?

3) When will a decision be made on whether the pilot project will turn into a permanent project?

4) What assurances are there that information obtained under the LOI will not be used to select taxpayers for audit or reassessment?

CRA Response

Participating CRA offices in the Prairies region are inviting taxpayers who provide services to buildings and dwellings to participate in the LOI. This industry code includes janitorial services, exterminators, chimney cleaners, and window cleaners. A team in Ottawa provides the local CRA offices with lists of taxpayers in this sector who may be at risk of some non-compliance that we feel would be best addressed through assistance.

Taxpayers are introduced to the LOI by mail and then contacted by phone and invited to participate in the program. Participation is voluntary. If a taxpayer advises the CRA that they do not wish to participate in the program, no further contact is made.

The recent Federal Budget included a statement establishing the LOI as a permanent program. The LOI is an educational program. The limited information gathered as part of this program is kept separate from other CRA databases and is kept for statistical purposes only and will be analyzed for monitoring the success of the program only. No information in respect of the taxpayer’s financial statements or any tax filings is retained and no leads are made to our audit programs. The LOI program’s objective is to educate taxpayers and help them correct mistakes.

Income Tax Questions

Q.1. Trusts and Estates – Recent Legislative Changes [no response]

This question was not addressed by the CRA.

Q.2. Represent a Client

Summary of Question

Can the CRA provide updates on progress towards making capital dividend account balances available electronically?

CRA Response

We are still working out some technical details in the development of a new worksheet to aid taxpayers in calculating the CDA balance. Once this has been finalized, we will be better able to establish a target timeframe for displaying the calculated balance on MyBA. We are aware that this is a highly desired feature amongst the tax preparer community, so we are actively working to expedite implementation. In terms of a general timeframe, we would be looking at implementing no sooner than 2017, since there are still numerous system/technical components to work out.

Q.3. Automobile allowances

Summary of question

1. What documentation will the CRA consider when determining whether an automobile allowance paid at more than the limits under Paragraph 18(1)(r) in accordance with prescribed rules (Reg. 7306) is non-taxable to the individual?
2. When an allowance exceeds the prescribed amounts, does the CRS consider the entire allowance to be non-deductible, or only the portion in excess of the prescribed amount?
3. Where an allowance is paid to an individual who is not an employee, or to a person who is not an individual (such as a corporation), are there circumstances where that amount would not be required to be included in the recipient’s income, such that the payer’s deduction would be restricted?

CRA Response (a)

In general, CRA considers the per-kilometre rates prescribed in section 7306 of the Income Tax Regulations (ITR) to be reasonable.

In recognition of the fact that in some situations actual vehicle costs could exceed the prescribed rate, a greater amount my be permissible without the allowance being included in the individual’s income, as long as supporting documentation establishes that the allowance paid is reasonable and that the allowance is paid only for business use of the vehicle. In order to support the reasonableness of an allowance, a record of all operating expenses such as fuel, repairs, and insurance are required for that particular vehicle, as well as information such as logbooks and/or repair invoices that document the total kilometres driven on that vehicle. These records can be in either paper or a standard electronic format that will be easily accessible if the CRA requests supporting documentation from the taxpayer (employer/payer).

It is also important to note that an individual cannot be reimbursed for expenses and receive an allowance related to the same use of the same vehicle. (This does not apply to situations where toll or ferry charges or supplementary business insurance are reimbursed, if the allowance is determined without taking these reimbursements into account.)

Although rates prescribed in section 7306 of the ITR represent the maximum amount that can be deducted as business expenses as allowances paid for automobile use, these rates can be used as a guideline for the purposes of determining whether there is a taxable benefit to the employee. Reasonable allowances do not need to be included in income when the individual completes their income tax and benefit return.

CRA Response (b)

As stated in the Employer’s Guide—Taxable Benefits and Allowances (T4130(E)Rev.14), if an allowance paid is in excess of a prescribed amount it will not be considered reasonable for the purposes of determining taxable benefits and is taxable to the employee. As the full amount of the allowance will be included in the employee’s income in these circumstances, the allowance is deductible in full by the employer, subject to section 67. The reasonability of allowances in excess of prescribed amounts can be considered in some circumstances. (Refer to the answer provided in (a). ) Where an allowance paid in respect of an automobile exceeds the prescribed amount bit is considered reasonable for the purposes of determining whether there is a taxable benefit to the employee, the deduction to the employer will be restricted to the prescribed amount.

CRA Response (c)

Note that paragraph 18(1)(r) would not apply to an allowance paid to a corporation. Normally, a vehicle allowance is paid to an employee or other officer of a corporation in the performance of their duties in earning income on behalf of the corporation.

If the automobile allowance is paid to an individual who is not an employee, generally one could presume that these payments form part of payments for services provided and would be business income to the payee. For the payor, the amounts paid are treated in a similar manner to other expenses incurred by the payor. The expenses would have to be incurred for the purpose of earning income from a business and be reasonable under the circumstances. Whether the amount paid is included in the payee’s income, however, is dependent on the circumstances of the recipient of the allowance insofar as whether it is received in respect of a source of income.

Q.4. Costs of Objection[no response]

This question was not addressed by the CRA.

Q.5. Charitable Gift of Prefrred Shares[no response]

This question was not addressed by the CRA.

Q.6. Direct Deposit for T1 Refunds

Summary of Question

a. While a taxpayer who has registered with the CRA for “My Account” service is able to go into the CRA system and determine the banking information, if any, on file with CRA, we are unaware of any way for representatives to determine if a client is registered. Could the “Represent a Client” portal indicate whether there is Direct Deposit information on file for the taxpayer, with limited or no account data? Follow-up Question: Simply adding a check mark that there is or is not DD on file would be useful.

b. Can CRA confirm they will continue to issue cheques for refunds (and/or GST/HST credit, Canada Child Tax Benefit and other payments) after March 31, 2016 where direct deposit information has not been provided?

c. Can CRA confirm that this initiative signals a new acceptance of CRA of electronic banking as evidence of payments?

CRA Response (a)

Please note that this is not being considered. This type of information is available only to the legal rep or the taxpayer. This also includes the suggestion above that the CRA simply indicate that there is DD information on the account without providing details to the representative.

Follow-up question: The area responsible for this information has confirmed that such an option is not under consideration at this time, but it may be reviewed in the future.

CRA Response (b)

The Canada Revenue Agency (CRA) will continue to issue cheques to Canadians beyond April 2016 and we would like to reassure you that payments which Canadians currently receive by cheques will continue. The CRA will, however, continue to encourage Canadians to enrol in direct deposit as it is a faster, more convenient, reliable, and secure way to get their income tax refund and credit and benefit payments directly into their account at a financial institution in Canada.

CRA Response (c)

The CRA is committed to developing and supporting electronic payment options which include providing quality service to meet our client’s needs. The development of MyPayment in conjunction with our online banking partners and our direct deposit initiative demonstrate our acceptance and conviction to adopting online services for our clients.

If an electronic payment has not been credited to a taxpayer’s account the CRA will attempt to trace the payment and sometimes will require proof of payment from the taxpayer or representative. While we acknowledge that electronic payments cannot be proven with a copy of a cheque, proof of an electronic payment is available.

Proof of an electronic payment made either through the taxpayer’s online banking or through MyPayment would be a bank statement or a print of the account details screen from the taxpayer’s online banking site that show the payment transaction. Both of these would show the date, the amount and the recipient of the online transaction.

Q.7. Legal Address

Summary of Question

On Represent a Client, the CRA has a “legal address” which is attached to the basic nine-digit business number but which is only visible to the CRA. Please confirm the purpose and use of this “legal address”. Can the CRA make this address available to be seen online by taxpayers and their representatives, so that they will be aware that it may require updating?

CRA Response

This is in reference to the address of the “Legal Entity.” Essentially the system allows the input of an address for the Legal Entity (BN9) in addition to address updates for each specific program account. So the Legal Entity addresses (i.e. physical and mailing) can be completely different than the physical and mailing addresses for each program account. Section A of the RC1 is for the BN9. The subsequent sections (Part B and forward) are specific for program accounts. You can input different addresses in each of those sections.

Secure Portals Operations Section has confirmed that the legal entity address does not display as an option to update when a user requests change of address. They have also confirmed that this enhancement has been requested; however, there is no ETA at this time.

Q.8. Business Registration Online

Summary of Question

Has there been any progress on allowing accounting (or law) firms to use Business Registration Online to register and open business numbers for new corporations and other businesses? Why are they restricted to a single registrtion annually?

CRA Response

The removal of the restriction limiting users on the amount of registrations they can do in BRO applies to all users. This includes professionals such as accounting and law firms.

In a sense it was made specifically to answer a need expressed by accounting and law firms.

Q.9. Audit Selection

Summary of Question

Can CRA clarify how “business intelligence” (BI) affects the audit process?

CRA Response

The CRA continues to focus its audit resources on files with the highest risk and it does so through business intelligence. Business intelligence (BI) emphasizes that CRA increasingly leverages internal and external information sources, research results, and our data processing capacity in order to continuously improve the Agency’s ability to identify and address non-compliance through audit, improve our risk assessment system, and inform our use of innovative approaches to improve compliance.

Business intelligence is used in selecting files for audit, with a few notable exceptions such as research audits and consequential adjustments, and identifying the appropriate treatment for particular groups of taxpayers, including those participating in Industry Campaign Approach, Letter Campaigns, and Liaison Officer Initiative.

Q.10. Prohibited Investments [no response]

This question was not answered by the CRA

Q.11. Tax Free Savings Accounts [no response]

This question was not addressed by the CRA.

Q.12. Payment Alternatives – “My Payment”

When a taxpayer who has a June 15 deadline realizes during April that they owe additional tax for the prior year and must pay by April 30 to avoid interest charges, it appears they cannot make that payment using “My Payment” as it does not allow for instalment payments for the prior year. Can the CRA expand its payment options to include this?

CRA Response

Instalments are intended to pay tax that would be due April 30 of the following year. They are paid in the calendar year in which you are earning income. Instalments are not intended to pay tax for a previous calendar year. So, a prior year instalment option is not feasible.

Our accounting systems for individuals have an intricate payment logic based on the three tax segments currently available. Adding another payment option on MyPayment would require extensive new system logic to ensure the payments from any new option were allocated correctly. As the CRA is currently going through a massive project to replace the existing accounting system as is, the changes required to the system in order to facilitate a new option is not practical at this time.

Perhaps a new payment option could be a future consideration.

If a self-employed individual finds they consistently need to make a payment on April 30, they can make voluntary instalment payments during the calendar year that they earn the income.

Q.13. Special Assessments Program

Summary of Question

When a tax return is e-filed, why does the CRA go around professional e-filers by sending out standardized letters directly to taxpayers under the Special Assessments Program?

Follow-up Question:

The accounting community would like CRA to consider sending a copy of the assessment to the one who prepared it (accountant/tax preparer) or perhaps adding a paragraph in the letter saying something like: “if your return was prepared by an accountant, please provide them a copy of this letter for their assistance.”

CRA Response

Special Assessments Program

Information on CRA’s review programs can be found at the following link: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rvws/menu-eng.html

The reviews conducted during this program can take place before or after a Notice of Assessment has been issued.

The Special Assessments Program conducts a more in-depth review of the income tax returns to identify and gather information on trends and situations in areas of non-compliance that may represent a risk to the self-assessment system.

All requests for information are sent directly to the taxpayer. This includes taxpayers who have authorized someone to act on their behalf such as a tax preparer.

The information that the CRA seeks for these in-depth reviews is typically in the possession of the taxpayer, for example, documents that show proof of payment, statements of income received, or various documents confirming identity. The taxpayer may choose to bring the required documentation to their authorized representative to reply to the CRA’s request. In that instance, the CRA will then interact with the authorized representative for any subsequent contact regarding the review.

CRA Response to follow-up question:

Thank you for your comments; however, the CRA will not be introducing any changes to the communication methods currently in place for the special assessment program.

Q.14. SR&ED

Summary of Question

Consider the situation where a person performs eligible SR&ED support work (consistent with paragraph (d) of the definition of “scientific research and experimental development” found in subsection 248(1) of the Act) in the United States. The salaries represent less than 10% of the overall SR&ED wages claimed. Therefore, the SR&ED wages for work performed outside Canada should be allowed. However, we understand that had the work performed outside Canada been direct “experimental development” under the definition in paragraph (c) of the definition of SR&ED in subsection 248(1), the amount would have been disallowed. Can CRA please comment if our understanding is correct?

CRA Response

Answer – (References are included below):

As with any scenario, it depends on all of the facts. In the scenario presented we understand that the “direct experimental development” referred to is also work done solely in support of SR&ED in Canada. In other words, it is experimental development work (i.e. 248 (1)(c) work) that is an integral part and is solely in support of the SR&ED project work carried on in Canada. If this is the case then the salary expenditures would be eligible subject to the 10% limit.

It is our position that salary expenditures for work defined as basic research, applied research, experimental development of SR&ED support work that is performed outside Canada can be claimed subject to the 10% limitation. However the SR&ED work carried on by the employee outside Canada must be an integral part and solely in support of the SR&ED work carried on in Canada.

Please refer to section 10 of the SR&ED Salary or Wages Policy for a more complete discussion of this issue [Section 10 was then reporduced in the original response].

Random Income Tax Questions

Q1[T183 forms]

Summary of the Question:

Is it necessary to fill out the T183 authorization if there is already a T1013 on file for that individual?

CRA Response

A T183 form is required for each T1 return filed electronically. The T183 form gives the electronic filer permission to transmit the taxpayer's return electronically to the CRA using our EFILE system. The T183 form is required regardless if a T1013 form is on file for the taxpayer in question. The T1013 form is used to authorize or cancel a representative on a taxpayer's account. This form is required if the taxpayer wants the CRA to deal with another person as their representative for income tax matters. One form gives permission to electronically transmit the T1 return (T183) to the CRA and the other form authorizes a representative to deal with CRA on the taxpayer's behalf (T1013).

Q2 [misallocated payments]

Summary of the Question

It was mentioned that the tax preparers/accountants having "Represent a Client" access can transfer misallocated payments directly through MyBA. Will the same option be available through My Account in the near future?

CRA Response

The area responsible will do more research to determine if certain type of payments can be transferred by reps in the portal and will get back to us.

GST Questions

Q.1: Effective date on form RC4616 Election under section 156

Summary of Question

What should one indicate as the effective date of the s. 156 election where the parties previously maintained a GST25 form on file? Will the CRA be assessing for uncollected GST where the effective date on the RC4616 is “administratively incorrect” due to not locating the original GST25 forms?

CRA Response

Issue No. 95 of the Excise and GST/HST News provided information on the simplified filing procedures concerning existing elections for nil consideration under section 156 of the Excise Tax Act (ETA). Specifically, specified members of a qualifying group that have existing elections, each with a different effective date that is before January 1, 2015, only need to file one Form RC4616 indicating December 31, 2014 as the effective date (covering all members instead of each filing separately). Each Form GST25 that was completed when each election was made should be kept with the electing members' books and records and reflect the original effective date of the election. The common effective date of December 31, 2014, specified on Form RC4616, will be recorded in the CRA's systems and will not invalidate the application of the election for supplies made before that date.

For periods prior to 2015, we will apply the administrative policy as indicated in paragraphs 31 and 32 of the GST/HST Memoranda Series 14.5 - Election for Nil Consideration, which provided the following election procedures and CRA administrative policy:

The election must be made jointly by the specified members of the qualifying group who are parties to the election by completing Form GST25, Closely Related Corporations and Canadian Partnerships - Election or Revocation of the Election to Treat Certain Taxable Supplies as having been made for Nil Consideration and specifying the day on which the election becomes effective. Registrants are not required to file Form GST25 with the CRA, but must retain a copy of the completed election form with their books and records.

If the parties have conducted themselves as if an election were in place and all conditions for making the election were met during the period since the effective date, specified members may make the election with an effective date prior to the date of signing the election form

Q.2: Rebates

Summary of Question

Despite providing summaries of the amounts being claimed, type 1A and 1C rebates (GST 189) are being rejected when no original documents are provided.

CRA Response

An application for a rebate of GST/HST (GST189 form) for the reason code 1A or 1C requires that all documents and information be attached to the claim form. The reason code 1A is for a claim that GST/HST was paid in error for goods purchased or delivered to a reserve and the reason code 1C is for a claim that GST/HST was paid in error. Certain other reason codes also have the same requirement. Please see guide RC4033, General Application for GST/HST Rebates for additional information. The documents and information are required to support the claim and are reviewed to confirm necessary information. In order to avoid the rejection of the claim please ensure that all required information and documents are submitted with the GST189 form.

Q.3: Additional information to support claims

Summary of Question

Recognizing that the CRA may ask for specific documents as support for calims resulting in refund claims, shouldn’t the information requested be limited to what is required by the legislation? For example, providing cancelled cheques should not be required and less information is require for invoices less than $30.

CRA Response

If you feel that an Examiner is asking for supporting documentation not required under the Excise Tax Act, we encourage you to address this with the Examiner's Team Leader at the time of the examination. Effective January 2014, a requirement for all CRA Audit Staff is to ensure that every letter sent to a taxpayer (registrant) or representative includes the Team Leader's name and phone number. This information is provided for a situation that you have expressed concerns with.

Q.4: Description of Property acquired

Summary of Question

What level of detail is required on Form GST44, Part C which asks for a "description of property acquired" in the sale of business assets? CRA rejects generic descriptions such as "All real property, capital property, intangible assets such as the assignment of all leases and all inventory for the operation of a commercial real estate business," stating that the description "is not sufficiently detailed to determine if all or substantially all of the business has been acquired."

CRA Response

Subsection 167(1) of the Excise Tax Act specifies that if certain conditions are met an election may be made using the prescribed form containing the prescribed information. The prescribed form is Form GST 44. Part C of the Form GST 44, requires a "description of property acquired" and advises that if additional space is necessary a separate sheet of paper should be attached. The instructions on page 2 of Form GST 44 describe the type of information that should be provided as follows:

"List the land, building, equipment, inventory and any other property as defined on this page that has been acquired from the supplier. The list of property is likely described in the agreement between supplier and recipient."

As such, a detailed list of all property acquired should be provided in order for CRA to make a determination that all or substantially all of the business has been acquired. For more information please see GST/HST Memorandum 14.4, Sale of a Business or Part of a Business.

Q.5. Appeals Directorate process

Summary of Question

Since the Appeals Directorate is not supposed to discuss a file with the auditor or their team leader, why is the Appeals Directorate using ECAS auditors who performed the audit in meetings with taxpayers and their professional advisors?

CRA Response

Effective April 1, 2015 Electronic Commerce Compliance Division (ECCD) was renamed "Electronic Data Support Division" (EDSD). It should be noted that this is a support division that provides advice, technical support, tools, and information related to emerging trends in ecommerce and new technologies, with respect to electronic accounting systems to ensure that the CRA is able to audit taxpayer and registrant businesses that use increasingly sophisticated electronic accounting systems. These support services are provided by Electronic Data Support Specialists (EDSS), formerly known as Electronic Commerce Audit Specialists (ECAS).

Unlike the GST/HST and Income Tax auditors, EDSS do not generate any reassessments. At the objection stage, during meetings with taxpayers and their representatives, these specialists, when present, are there to provide technical support and assistance to Appeals officers relating to ecommerce issues. Their role is similar to that of a Valuations expert who provides specialized service to various divisions of CRA.

The ultimate responsibility of deciding whether to allow, vary, or confirm an assessment under objection rests with the Appeals Officer. As the EDSS is not the auditor, he/she is invited to participate in meetings at the objection stage to provide specialised support, with the knowledge of the taxpayer and, if applicable, the taxpayer's representatives. There are no plans for the Appeals Branch to have its own electronic commerce specialists or its own specialists in a number of other disciplines where specialized technical expertise is required. It is important to separate the technical specialisation from the ultimate decision-making responsibility.

Follow-up Response

We would like to clarify that while appeals officers do not normally discuss the file with the auditor, they may if they need some clarification on something in the audit file, similar to the appeals officer going back to the objector to get clarification on their position. If this happens, the objector should be informed that the appeals officer discussed the file with the auditor.

Q.6. Corporate Purchasing

Summary of Question

In large corporate groups the purchasing is generally done by one entity (Corp A) and then journal entries are made to transfer the expense over to the correct entity (Corp B). Corp A claims the ITC and does not charge GST to Corp B as there is a section 156 election in place.

Should there be an invoice issued to support Corp A claiming the ITC as it has made a taxable supply to Corp B?

CRA Response

Under section 169, a GST/HST registrant is generally entitled to ITCs in respect of GST/HST paid or payable on the taxable supply of goods and services to the extent that the supply is for consumption, use or supply in the course of a commercial activity. A "commercial activity" of a person, generally, includes a business carried on by the person except to the extent to which the business involves the making of exempt supplies. However, whether a registrant is engaged in commercial activity is a question of fact. The determination of whether a registrant is engaged in commercial activity is made on a case-by-case basis.

Where a person pays an amount for a good or service, is the recipient of the supply (i.e., is the person liable to pay for the supply), and is reimbursed by another person, the first person has resupplied the good or service. Where an agency relationship does not exist, the reimbursement of expenses is considered to be a supply of the property or service and will be subject to the GST/HST based on the tax status of the property or service. Where Corp A and Corp B, are closely related, the resupply may not be subject to tax if there is a valid election made under subsection 156(2).

In order to claim an ITC a registrant must have the appropriate supporting documentation. Subsection 169(4) requires the registrant to have obtained sufficient evidence in such form containing such information as will enable the amount of the ITC to be determined, including any such information as may be prescribed in the Input Tax Credit Information (GST/HST) Regulations (the Regulations).

Where Corp A pays an amount for a good or service and is the recipient of the supply and then resupplied the good or service to Corp B, Corp A should have the documentary requirements under subsection 169(4) and the Regulations to claim the ITCs. The documentation requirements of subsection 169(4) are for the acquisition of the goods by the person claiming the ITC. There is no documentary requirement under subsection 169(4) for the supply between Corp A and Corp B. There should be sufficient documentation or information in the books and records to support that a resupply of the good or service was made.

Q.7. Training service [no response]

This question was not addressed by the CRA.

Q.8. GST/HST Interpretation 11585-13D [no response]

Q.9 [no question]

Q.10. Section 167 election [no response]

This question was not addressed by the CRA.

Q.11. Bare trust or nominee [no response]

This question was not addressed by the CRA.

Q.12. Section 296 and Policy 149R

Summary of Question

We are still seeing CRA auditors failing to apply 296(2) when credits are identified by the registrant that have not been claimed before the time of the audit, and some auditors are suggesting that the registrant can claim the ITCs on a future return even though prohibited by the legislation. Will the CRA please comment?

Does Policy 149R (re adjustment of previously-filed returns) override s. 296(2) as suggested by a RIP auditor?

CRA Response

296(2)

When a GST/HST return for a particular reporting period is selected for audit or examination, the auditor or examiner is assessing whether or not the net tax reported by the registrant for the particular period under audit or examination is correct or if a change to the net tax is required based upon all available information and documentation. Since the auditor or examiner is assessing the return, they must take into account any unclaimed input tax credits (ITCs) or allowable deductions for the particular reporting period in the course of determining the registrant's net tax as per subsection 296(2). Please note that The CRA considers the "particular reporting period" to be the reporting period in which the ITC or deduction first became claimable. HQ will remind auditors and examiners of this requirement when assessing net tax.

Policy 149R and 296(2)

Policy Statement P149 deals with situations where a registrant makes a request to have CRA adjust a previously filed return and does not apply to returns under audit or examination. The Minister is not required to assess all GST/HST returns as per subsection 296(1) and thus is not required to accept all requests for changes to previously filed GST/HST returns. P149 discusses situations where the Minister will accept a request to amend a previously filed GST/HST return and, as a result, assess the return in question. Please note that although correct at the time of issue in 1994 and revised in 1999, P149 has not been updated to reflect legislative changes to section 296.

Q.13. ITCs for GST payable

Summary of Question

Are assessments issued by the RIP group being reviewed by senior CRA staff with experience in interpreting the law?

CRA Response

The CRA strives to ensure that all (re)assessments are based on correct law, policy, and procedures. CRA staff receive technical training over the course of their career to ensure that this goal is met. Proposal letters are reviewed by Team Leaders prior to issuance. If you feel that incorrect law or policy is being applied in your situation, we encourage you to contact the Examiner's Team Leader at the time of the examination. As mentioned previously, effective January 2014, a requirement for all CRA Audit Staff is to ensure that every letter sent to a taxpayer (registrant) or representative includes the Team Leader's name and phone number.

Q.14. Section 186 [no response]

This question was not addressed by the CRA.

Q.15. Leas of tangible personal property [no response]

This question was not addressed by the CRA.

Q.16. University & Public College Meal Plans [no response]

This question was not addressed by the CRA.