Time’s Up: CRA’s 100 Day Mandate for Improvement

After years of frustration on the part of tax professionals and taxpayers alike, the Finance Minister ordered the Canada Revenue Agency to clean up its act in 100 days. Specifically, the improvement plan was to run from September 2 through December 11. Finance Minister and Minister of National Revenue, Francoise-Phillippe Champagne instructed CRA to fix “unacceptable wait times and service delays.” Time’s up this week and CRA has released an update on progress. What gets measured, gets done. Let’s see what CRA’s metrics show. 

  Evelyn Jacks, Your Money, Your Life   To read the latest blog entry by Evelyn Jacks: Cash Flow Plan: September 15 Instalment Can Be Avoided  

Canadian taxpayers and investors may be feeling a bit jittery about market volatility but Jim Flaherty, Minister of Finance, says we are in good shape, all things considered. He told the House of Commons Standing Committee on Finance last week that Canada is well positioned to face global economic challenges posed by challenges in the US and Europe. However, the global recovery is fragile, he said, and both governments and individuals need to manage potential fiscal challenges accordingly. While the news coming from the US is not greatóthat the country is in the midst of its weakest recovery since the Great Depression according to Bank of Canada Governor Mark CarneyóCanadians can direct efforts to prepare for a prolonged recovery period. Fiscal sustainability is fundamental, he warned, both at government levels, but also by households, citing that Canadians are as indebted today as Americans and the British. Financial advisors, therefore can take the lead with their clients to discuss debt and cash flow management sooner, rather than later. The Finance Minister, for his part, plans to update the economic and fiscal outlook for Canada later this fall, but in the meantime is committed to return to budgetary balance a year early, by 2014ñ15, through its deficit reduction action plan.     Additional Educational Resources:  

The Westminster Principle, named after the 1935 House of Lords decision in The Duke of Westminster's Case, holds that a taxpayer can legally arrange their affairs to minimize tax payable, regardless of motive. This tenet of our tax jurisprudence is seemingly contradicted by Canada's General Anti-Avoidance Rules (GAAR) which were introduced in 1988. In 1984 the Supreme Court in Stubart refused the Government's argument that transactions must have a legitimate business purpose. Following this decision Parliament added section 245 of the Income Tax Act which now provides the CRA with an opportunity to reassess taxpayers who have complied with the letter of the law, but who they feel have "misused or abusedî the provisions; uncertainty is inescapable. Fortunately, Canada retains the structure of the British common law system that upholds the rule of law and the separation of powers between the three branches of government- legislative, executive, and judicial. The independence of the judiciary is therefore a cornerstone of our system, and recent judgments from the Tax Court of Canada and the Federal Court of Appeal re-affirm that autonomy. This is good news for taxpayers challenged by creative CRA claims that they have "misused or abusedî the provisions of the Act in order to produce a tax benefit. In Lehigh Cement Limited v. Canada, 2010 FCA 124, the CRA contended that Lehigh had contravened the spirit and intention of the Act in structuring its finances; the Federal Court of Appeal unanimously disagreed and provided some valuable information. At paragraph 37 the court stated: "the fact that an exemption may be claimed in an unforeseen or novel manner, as may have occurred in this case, does not necessarily mean that the claim is a misuse of the exemption. It follows that the Crown cannot discharge the burden of establishing that a transaction results in the misuse of an exemption merely by asserting that the transaction was not foreseen or that it exploits a previously unnoticed legislative gap.îFurthermore, in Collins & Aikman Products v The Queen, 2009 TCC 299 the court cited the words of Paris J. in Landrus v. The Queen, 2008TCC274, where it was stated: "the Minister has tried to use the GAAR to fill in what he perceives to be a possible gap left by Parliament; that would be an inappropriate use of the GAAR.î These sort of judicial statements are reassuring for Canadian taxpayers and lawyers. The continuing independence of the judiciary has mitigated the seemingly limitless ambit of the GAAR and the CRA's ability to question the purpose of certain business transactions. The judiciary are bound by the legislation that Parliament enacts, but they undoubtedly strive to protect taxpayers from aggressive and asinine assertions from the CRA who attempt to claim that the GAAR is a set of ëcatch-all' provisions for any transactions that they feel provide a tax benefit unforeseen by Parliament. The GAAR creates uncertainty in the law, which is never a welcome attribute. The rule of law, the notion that all laws should be made prospectively and not retroactively, that they should be clear and available to all concerned, and that nobody should suffer a loss of liberty as a result of arbitrary governmental power, is the foundation of the Westminster Principle and our common law system. The GAAR sits uncomfortably with these long held principles and therefore the independence of the judiciary is more important than ever in Canadian tax law jurisprudence. The common law, meaning the binding and/ or persuasive judicial statements and interpretations of legislation and previous case law, will continue to be the only avenue of clarity for the nebulous General Anti-Avoidance Rules unless Parliament amends them. It will be interesting to see whether the Westminster Principle can stand its ground with the help of the judiciary or whether the GAAR will ultimately prevail; these recent comments offer a shimmer of hope for Canadian taxpayers. Greer Jacks is a research assistant with the Knowledge Bureau working out of Victoria, BC, and has been contributing to court case updates in EverGreen Explanatory Notes.   Additonal Educational Resources:   <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com🏢office" />

Evelyn Jacks, Your Money, Your Life   To read the latest blog entry by Evelyn Jacks: Following Investment Advice in Volatile Times

If recent market volatility is on the mind of investors and taxpayers, no doubt a chat about recovery time is in order, particularly when taxpayers have about a decade left before retiring. The calculations below assume that the investor's savings of half a million are in a registered account so that the earnings are not eroded by income tax for the purpose of this illustration.They have lost half their value in market turmoil. How long will it take to recover? Rate of return will matter, a lot. So will inflation protection. Doing the math, if this investor were to invest his entire remaining portfolio in 10-year government bonds, which are currently yielding 2.88%, his saving would have recovered to $332,085 at the end of 10 years. In order to make it back to $500,000 before retirement, he must add an additional $14,730 to the pot each year. He should also keep in mind that, depending on inflation rates over the next ten years, that $500,000 could have a purchasing power of less than what $400,000 has today. Astute investors will be looking to their tax and financial advisors for help with this significant challenge to find cost, tax and debt management efficiencies to help build up the fortress. Additional Educational Resources: Registered vs. Non-registered investment calculator, available in EverGreen Explanatory Notes.    

Two recent cases and a fact sheet from CRA on how it reviews returns Reviewing returns at the Canada Revenue Agency, underscore how expensive non-compliance can be, and in these turbulent times, trouble with the tax department is the last thing that frazzled investors need. The owners of Dominion Transmission Inc. have pleaded guilty in the Provincial Court of Manitoba to three charges of tax evasion for the years 2002 to 2004 and have been fined a total amount of $140,000. In this case the owner kept 2 sets of books, one for cash sales and one for non-cash sales, with the result that fines were levied on all three levels of taxationópersonal, corporate and GST. On the corporate side, the fines represented 100% of the taxes attempted to be evaded. On the personal side, a fine representing 132% of the evaded personal federal taxes for the years 2002 to 2004 on income that was not reported was levied. A third fine penalized under-reported GST. In the case of Spence v CRA, 2011 FC 426, we are reminded that it pays to double and triple check returns. The CRA is unrelenting when it comes to inaccurate returns, even if a third party makes the mistakes for you! ëThe Fairness Rules' give the CRA a wide discretion to waive or reduce some of the penalties involved in late filing or payment of taxes, but the penalties and interest charged must have resulted from circumstances beyond the taxpayer's control. Illness, accident, serious emotional or mental stress caused by a death in the family or natural disasters can trigger the fairness legislation. Unfortunately for Mr. Spence, he did not meet those criteria and so the court found in favor of CRA. This is a wake up call for all taxpayers and tax advisors- be careful because the moral is simply this: You are responsible for what's reported on your return Additional Educational Resources: EverGreen Explanatory Notes, currently updated for the most recent news in tax law, compliance and jurisprudence.