6 December 2011 Roundtable, 2011-0427281C6 - 2011 TEI-CRA Liaison Meeting - Qu. 9

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

Principal Issues: Advance Deposit Accounts
a) Would CRA please clarify the procedure for transfers of advance deposits to payroll accounts?
b) Would CRA reconsider its administrative requirement that taxpayers allocate prepayments to specific tax years, revert to its prior process of holding taxpayer funds in an undesignated account as of the effective interest date, and apply the funds when and as reassessments are made?
c) Would CRA confirm whether transfers are permitted among related parties in a corporate group? In addition, would CRA confirm that the transfers are permitted between corporate entities and partnership entities?
d) Where there is no credit or collection risk (e.g., in respect of large corporate groups), would CRA consider instituting a process check to cease automatic transfers to settle offsetting tax liabilities of large corporations?

Position: See Response.

2011 TEI-CRA Liaison Meeting
December 6, 2011

Question 9 - Advance Deposit Accounts

a) Transfers to Payroll Accounts

In large corporations with multiple payroll processing and disbursement centres and multiple tax accounts across the country, unintentional mistakes in payroll tax remittances can occur for a variety of reasons. In such cases, the application of advance deposit amounts to payroll tax obligations to mitigate penalties would be beneficial.

In its Fact Sheet on Making and Managing Advance Deposits, (footnote 1) CRA states that an advance deposit on reassessments may be transferred and used as a remittance on a payroll account. In addition, the response to question 6 of the Question and Answers of the publication reiterates that taxpayers may transfer an advance deposit as a remittance on a payroll account.

While some TSOs routinely permit transfers from the advance deposit account and do not assess a penalty for the late remittance where such an amount is used to satisfy a payroll tax obligation, TEI members report that at least one TSO requires a written request for the transfer of the advance deposit before the due date of the payroll remittance. By imposing such a requirement, the TSO is effectively vitiating the relief the advance deposit mechanism is intended to afford to taxpayers. Since CRA has the funds in the advance deposit account, a written request before the payroll deposit due date should not be required. Would CRA please clarify the procedure for transfers of advance deposits to payroll accounts?

CRA Response

Thank you for bringing this situation to our attention. This type of feedback is helpful to the CRA as we are continuously looking for ways to improve our services.

If a taxpayer wishes to transfer an advance deposit to their payroll account, the request should be sent to the attention of Business Accounting at the responsible Tax Centre (TC). The TC staff would be glad to help you out in this regard. These procedures will be clarified with the TCs and TSOs to ensure they are being followed correctly.

Alternatively, a taxpayer or authorized representative may make a request through the MyBA portal, via the "Make Online Requests" tab in order to transfer credits to their payroll account. It should be noted that this functionality is also available for transfers from the GST/HST to Corporate Tax and vice versa.

b) Advance Deposits Must Be Assigned to a Specific Tax Year

As discussed in connection with Question 13 during last year's liaison meeting, TEI believes CRA's current approach to the administration of advance deposits and prepayments for tax reassessments is cumbersome. With the recently enacted reduction in the interest rates paid on refunds, would CRA reconsider its administrative requirement that taxpayers allocate prepayments to specific tax years, revert to its prior process of holding taxpayer funds in an undesignated account as of the effective interest date, and apply the funds when and as reassessments are made? Properly administered, the advance deposit mechanism protects corporate taxpayers from onerous, non-deductible interest charges on deficiencies. By reducing the after-tax cost of settling disputes, the mechanism also reduces the scope and degree of controversies between CRA and taxpayers.

CRA Response

The CRA met with representatives of TEI on February 28, 2011 to discuss the requirements to maintain the advance deposit allocation process.

The CRA administers advance deposits in accordance with the Income Tax Act (ITA), the Income Tax Regulations, and in the spirit of promoting voluntary tax compliance and self-assessment.

Despite the legislated refund interest rate change for corporate taxpayers, there is still a need to manage advance deposits in a consistent and prudent manner. The administrative process allows all businesses (including unincorporated ones) to deposit funds to protect themselves from interest costs resulting from a reassessment. The Auditor General, in her spring 2009 report, recommended the Agency should:

...develop and consistently apply a robust administrative policy framework for managing advance deposits, and analyze the likelihood of future reassessment and calculate future interest expense for accounts with advance deposits.

In light of the Auditor General recommendations, the Agency revisited its administrative policy framework for managing advance deposits with a view to strengthening it, particularly as it relates to potential refunds and interest expenses. The existing administrative process encourages one on one discussions between each taxpayer and our Audit and Business Accounting staff. This dialogue ensures that taxpayers do not pay interest unnecessarily, that the CRA fully consults with taxpayers so that they understand their potential for reassessment and that taxpayers do not leave funds on deposit needlessly.

c) Lack of Documentation regarding Related Party Transfer Guidelines

While CRA has provided guidelines for transferring advance deposits between different years and different types of accounts (e.g., between an income tax account and a GST/HST account) there is no guidance on transferring amounts between related entities in large corporations. Previously, related party transfers were permitted. Would CRA confirm whether transfers are permitted among related parties in a corporate group? In addition, would CRA confirm that the transfers are permitted between corporate entities and partnership entities?

CRA Response

Transfers within the same account or between related accounts of a corporation will be completed based on the following guidelines:

• Only an authorized officer/representative of the corporation can ask for a transfer of installment payments.
• Payments are to be applied to specific tax years.
• A taxpayer can transfer funds between tax years in the same account or to another account to pay an existing balance or required installments. A taxpayer can also remit on an employer account.
• A taxpayer can transfer either part of a payment or an amount made up of several payments.
• A taxpayer can ask for more than one transfer during the year.
• A taxpayer cannot transfer a payment after we have assessed the income tax return for the tax year in question.

These guidelines relate to a single corporate entity.

In reference to the second part of the question of whether transfers are permitted, the CRA would like to meet with a TEI representative to clarify under what circumstance transfers would be requested between corporate entities and partnerships.

d) Automatic Settlement of Offsetting Tax Liabilities by CRA

CRA will occasionally, without consulting with the affected entities or taxpayer, transfer tax deposits intended to cover a particular tax year or tax type to offset other unpaid tax liabilities from other years or tax types. Thus, the unilateral transfers are between different tax years of the same tax types as well as different types of tax accounts (e.g., between an income tax account and a GST/HST account). Often, the application of the deposit by CRA is not the course of action the entity would prefer. As important, once the action is discovered, it is difficult for the entity to track and reconcile its accounts to make corrections. Where there is no credit or collection risk (e.g., in respect of large corporate groups), would CRA consider instituting a process check to cease automatic transfers to settle offsetting tax liabilities of large corporations?

CRA Response

The CRA is obligated to comply with the legislative provisions in the Income Tax Act (ITA) and the Excise Tax Act (ETA). Advance deposits that have been applied to a specific tax year are not subject to the allocation offset process. However, available credits will be allocated/offset in the following order: to an existing debt on the account, to an existing debt in the division (e.g. RT) and then to existing debts on other revenue lines for the Business Number.

A system change was made in 2009 to remove the account details for transfers from the outputs (Statement of Interim Payments and Statement of Arrears) if the Business Number that the credit was transferred to differed from the originating Business Number account. These transfers are simply reflected as a "Transfer" on the outputs.

The CRA continues to provide details about transfers that are within the same Business Number.

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Available at http://www.cra-arc.gc.ca/whtsnw/tms/dvncdpsts-fs-eng.html.