by George Gonzalez
May 2024
At a tax conference in Toronto this month I learned several interesting things, two of which I want to share here. They are labeled below as “Bringing in CPAs to Their Side” and “Tax Planning is an Uncertain Art”.
Bringing in CPAs to Their Side
One thing that I learned relates to the CRA’s hiring of tax specialists. At the conference I met a former CPA tax practitioner who now works for the CRA. She explained to me that she and a number of other CPA practitioners had been hired by the CRA in the last year or so. They are working in a group dedicated to advising the CRA on what can be done to minimise tax avoidance. Apparently the CRA believes that by hiring advisers “from the other side” they can (1) learn about tax avoidance techniques that tax practitioners suggest to their clients and (2) get advice on measures that can be taken to reduce tax avoidance.
The impression that this leaves me with is that the Canadian government wants to develop even stronger tax avoidance measures than are already in place. Taxpayers should probably expect a greater administrative burden – via information reporting and tax return filing requirements – in future.
Tax Planning is an Uncertain Art
The other point that I want to share with you comes from an article that I read in the latest issue of one of the Canadian Tax Foundations’ publications, entitled “Corporate Tax Planning” (Canadian Tax Journal, Volume 72, Issue 2). Although, as the name of the article implies, it focuses on tax planning for corporate entities, many points made in the article apply to individuals as well.
The article was written by a team of tax lawyers who regularly practice tax litigation. While, during my career, I have worked on tax appeals within taxing authorities’ hierarchies (the CRA and the IRS), I have rarely been involved in client tax litigation, i.e., cases that went to court. I found the authors points in the article to be enlightening and at times fascinating.
From my viewpoint, the goal of tax planning Is to strike a balance between the maximisation of return (which usually means minimising taxes) the minimisation of risk. The risk to be minimised could be stated as the risk of being reassessed by the CRA. It could also be stated as the risk of losing litigation against the CRA if an issue goes to court. Realistically, most taxpayers have no interest in going to court, and therefore their risk is defined as potential CRA reassessment. For large corporations and other deep pocket taxpayers, however, risk may be defined not in terms of potential CRA reassessment but in terms of the probability of losing in court.
These are the key points from the article that I want to share with you. I believe they are valid points whether the taxpayer’s risk minimisation objective relates to potential CRA reassessment or potential tax litigation.
- “Perfect certainty and predictability are not always possible, even when [the tax planner] is tasked with interpreting seemingly clear words in seemingly clear situations.”
- The authors quote Supreme Court Judge Côté J as saying “The FAPI regime is one of the most complicated statutory regimes in Canadian law.” (FAPI refers to the Foreign Accrual Property Income rules within the Income Tax Act, which many Canadian international investors large and small must deal with.)
- An example is given of a court case in which the issue in dispute revolved around what at first blush seems simple: what constitutes conducting business? The authors state that “if there can be no certainty or clarity with respect to such foundational concepts as what constitutes conducting business, how can there ever be perfect certainty or clarity? In our view, there cannot be.”
- “It is not uncommon, even at the Tax Court level, for a judge to be unfamiliar with certain areas of tax law.” I found this to be surprising and not surprising at the same time. On the one hand I expected Tax Court judges to be no less than experts on all aspects of the tax law, but on the other hand the Income Tax Act is so massive and oftentimes convoluted that it is probably impossible for any one person to be a true expert in all taxation matters.
- The authors discuss a case that “illustrates that courts are not sympathetic to tax plans that have little (or no) commercial substance”. Their point is that even with tight tax planning, if there is a lack of economic substance to a transaction or series of transactions, regardless of the letter of the tax law, the courts generally side with the government in a tax dispute.
- “It should be remembered that the Act is accessory legislation…the Income Tax Act is a taxing statute alone, not a commercial code; and . . . as a consequence, the taxpayer’s legal relations must be determined under private law before the ITA can, in an accessory manner, be applied to them.”
- An example given in the article on the last point is a case that involved a charitable gift donation tax deduction. The court found that no gift had actually been made legally and, therefore, no tax deduction was allowable.