Release date: May 15, 2012
Guest: Rick Biscaro
Running time: 7:57 minutes
In this episode, Rick Biscaro walks through what to do in a few “sticky” situations taxpayers may encounter when dealing with the CRA.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry: My name is Gerry Lewandowski and with us today is Rick Biscaro, a PwC Senior Tax Advisor that works out of both our Toronto and Ottawa offices. Rick is a former director with the CRA Income Tax Rulings Directorate, and an original member of the CRA’s General Anti-Avoidance Rule (or GAAR) committee. With more than 30 years experience with the CRA, Rick has the knowledge and insight necessary to really understand how to effectively deal with the Agency.
Thank you for joining us, Rick.
Rick: Thank you Gerry, it’s my pleasure
Gerry: So for today’s podcast Rick we are going to do something a little different. You have come up with a number of scenarios that our listeners may find themselves in when dealing with the CRA. With your depth of experience and unique window into the thinking and operations of the CRA, you are able to provide some helpful insight and strategy on how best to work with the CRA in these situations.
Rick: Well I certainly hope to!
Gerry: So I guess each of these scenarios can start with “What if ...?”
Rick: That is a good idea as all taxpayers won’t necessarily find themselves in all these situations, but they may, or will in future, find themselves in one of more similar situations and some insight into their taxpayer rights can be helpful.
Gerry: OK Rick – let’s get started then. “What if ....” Due to oversight, employee error, or employee fraud a taxpayer fails to claim legitimate expenses in the years in which they were incurred. These years are now statute barred and the CRA auditor is refusing to allow a deduction in the open year in which the error or fraud was discovered. Can anything be done in this situation?
Rick: Gerry, in this particular situation, assuming that the CRA auditor agrees that the expenses in question are legitimate and would otherwise be deductible in the years to which they relate, the taxpayer has two options.
First, if the expenses would have been deducted in the appropriate years and resulted in tax refunds for those now statute barred years, CRA, relying on its Mission Statement value of "integrity" to treat people fairly and apply the law fairly, may, or should apply section 221.2 of the Act to those refunds to offset taxes payable in subsequent open years.
Second, the Agency is mandated to collect all taxes owing under the Act from a taxpayer, no more ... and no less. In order to achieve the right tax result, CRA could and should accept the deduction of the expenses in the year the error or fraud was discovered and rely on its Fairness Pledge and Taxpayer's Bill of Rights to do so.
Gerry: Now you mention a Fairness Pledge from the CRA. Just what is that?
Rick: This is a publication that outlines that the Agency’s service will be responsive, consistent, impartial and objective, and recognizing that clients have specific needs and concerns. The one page Pledge deals explicitly with timeliness, consistency, impartial review, flexibility, taxpayer support and accountability. PwC’s Tax Controversy and Dispute Resolution team have produced a Tax Memo on the CRA’s commitment to service. This memo is attached in the supporting documents to this podcast or can be viewed on the PwC webpage www.pwc.com/ca/tcdr.
Gerry: OK Rick, so onto the next scenario. “What if ....” a client is assessed differently or less favorably than another client in respect of the same issue by the same CRA Tax Services Office (or TSO) or, for that matter, even a different TSO? What recourse is there for the taxpayer that received the less favorable treatment from CRA?
Rick: The client receiving the less favorable treatment has recourse to CRA's Fairness Pledge wherein the Agency states it will apply the law consistently and equitably and ensure that taxpayers are treated equally under similar circumstances. This may require engaging senior tax officials and where necessary, headquarter’s officials, should the auditor and his supervisor be reluctant to follow Agency policy.
Gerry: So Rick, “What if ....” an issue that was examined and accepted, or, given the degree and scope of the audit undertaken, should have been examined by the CRA auditor in a prior audit, is now being reviewed by the CRA in a current audit and the auditor is proposing to assess it for the current year as well as the previously audited year or years. What should the client do in this situation? It seems somewhat unfair that they go back over years that have already, or should have already been scrutinized by CRA.
Rick: The auditor should be reminded of the CRA assessing practice outlined in IC75-7R3 Reassessment of a Return of Income. Paragraph 3(c) of the circular states that CRA will not normally reassess where the understatement of tax in the return for the year should have been apparent to the Agency, considering the degree of examination and audit that the return received. If the auditor refuses to apply this policy, the matter should be elevated to senior TSO officials.
Gerry: And our final scenario Rick. “What if ....” the CRA asks the client to produce all documents, e-mails, faxes, books, records etc. with respect to the client's dealings with its numerous controlled foreign affiliates. This would require the client to devote several employees and a lot of time and cost to gathering the requested information. Is there anything the client can do to reduce the burden of such a broad information request?
Rick: Yes there is Gerry. The CRA in the Taxpayer Bill of Rights recognizes the need to minimize the time, effort and costs that taxpayers have to incur to comply with the Income Tax Act. It also recognizes in its June 2010 policy statement “Acquiring Information from Taxpayers...", that officials should clearly identify the transaction, claim or issue being reviewed. With respect to the above broad based request, the auditor should be asked to focus his query on specific CFAs and the specific issue under examination so that the taxpayer can respond in a timely manner with information and documents relevant to the specific issue. This would reduce the time and cost to the taxpayer to comply with the CRA auditor's information request.
Gerry: Thank you for your time today Rick. It sounds like it is really important for a taxpayer to know their rights and how to best work with the CRA for an optimal outcome. Presumably you are available to assist and contribute your invaluable knowledge to these “sticky” CRA situations.
Rick: Absolutely Gerry – our listeners can go to our previously mentioned PwC Tax Controversy and Dispute Resolution page at www.pwc.com/ca/tcdr for further PwC thought leadership on the topic or feel free to contact myself or one of my PwC colleagues.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.