Release date: July 30, 2013
Guest: John De Thomasis
Running time: 07:18
In this episode we discuss the Soft-Moc case: what led to the dispute, the Federal Court of Canada's decision, and what you can do to help prevent this from happening to your organization.
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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.
Sharon: Hello, it's Sharon Mitchell of PwC and today we're joined by John De Thomasis - a PwC Senior Manager in the South Western Ontario Tax Group. John’s a CA and specializes in the area of Transfer Pricing. He joined the firm in 2007 after working at the Canada Revenue Agency for nearly six years as a Senior Technical Advisor in the Audit Division. John's experience as a transfer pricing auditor and participation in several high profile audits provides for insight and experience into global transfer pricing matters affecting multinational corporations of all sizes. Thanks for joining us today John.
John: You’re welcome, Sharon.
Sharon: Now today we’ll be talking about the Soft Moc case, a recent decision of the Federal Court of Canada involving an information request during a transfer pricing audit. John, can you give us some background on this case?
John: Absolutely Sharon. First off, you’re right - this decision is really a result of the Canada Revenue Agency, or the CRA, using its legal powers to gather foreign information during a transfer pricing audit.
It seems that the CRA was conducting what would have been a routine audit involving Soft-Moc, a Canadian company, and its related companies in the Bahamas. At a certain point, the CRA felt it wasn’t getting the information it needed to conduct its audit. So it resorted to its legal powers under the Income Tax Act and issued a formal Requirement for foreign-based information.
Well, the taxpayer wasn’t happy with this approach. So, they asked the Federal court to review the Requirement and either set it aside or have it varied.
Sharon: And was this the CRA’s first request for information or did it come about more of a last resort?
John: Well, that’s a good question. So, no this was not the first request. According to the facts, the CRA had issued two audit queries and nearly two years had passed before the CRA resorted to a formal Requirement. One interesting point is how extensive the Requirement was. It included 74 questions related to, among other things, the financial statements of the Bahamas companies, their minute books and organizational charts, and even their transactions both among themselves and with various third parties
Sharon: So what transpired from when the Requirement was issued to Soft-Moc and this situation ending up in court?
John: Soft-Moc filed for a judicial review because, based on their arguments, they felt it was unreasonable. In their opinion the information being requested was either
So, the taxpayer asked that the Requirement either be set aside or changed to exclude certain information.
Now, Soft-Moc’s request was important because it could mitigate problems that they may face in the future. For example, a taxpayer might be prevented from using any of the materials listed in a Requirement in a future court proceeding if it did not substantially comply with the Requirement. So putting that another way, if Soft-Moc ever found itself in court and wanted to rely on some of the material listed in the Requirement, it could be prevented from doing so. Alternatively, failure to comply could lead to judicial compliance orders or even punishment for contempt of court.
Sharon: So what was the Court’s decision?
John: In deciding this case, the judge is quoted as saying that Requirements, “need to be both relevant and reasonable, but the threshold is low and the powers of the minister are wide ranging.” So to this end, the Court sided with the CRA and they dismissed Soft-Moc’s request to have the Requirement either set aside or changed. The court appears to have said that the documents requested by the CRA are fair game.
Sharon: Well that sounds like quite a victory for the CRA. What lesson can taxpayers take away from this decision?
John: There are a few lessons to take away. First, it’s a good reminder that the CRA has legislative powers to gather foreign based information during an audit. It’s also a reminder that the CRA has shown a growing inclination to use Requirements when they feel information is not forthcoming. Now given the judge’s comments, i.e, “the threshold for exercising these powers is “low” and that they’re “wide ranging”, the CRA may even feel more empowered to go this route in the future.
Sharon: Now what is our PwC observations and experience been generally around Requirements?
John: Well, in our own experience, we’ve recently seen more Requirements being issued and being discussed by the CRA earlier in the audit process. And these aren’t just confined to contentious or complex cases, but also cases where there may have been communication gaps between taxpayers and the CRA. We are also seeing the CRA assess behavioural risk, really focussing on general cooperation through the audit process and the timeliness of taxpayer responses.
This general trend towards Requirements – it’s really no surprise in the context of international tax and cross border transactions. These topics continue to be of significant concern to the CRA. Auditors already have wide-ranging powers to gather information - in this current environment they’re likely feeling more pressure and even more power to use them.
Sharon: So what can we learn from all of this John?
John: Well, ultimately, this decision underscores the need for an effective audit defence strategy – and one that considers not just the technical understanding of the arm’s length principle, but a strategy that also considers the Canadian audit process. It highlights the need to manage information flow, expectations and just as important, the need to manage behaviours during the audit process.
Sharon: So the message is that our listeners should carefully devise and execute an audit defence strategy and manage the audit process to avoid formal Requirements. For additional Transfer Pricing information, please visit our PwC website at www.pwc.com/ca/transferpricing. Thanks for joining us today John.
John: Thanks Sharon it was a pleasure to be here.
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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.