The Society of Trust and Estate Practitioners (STEP Canada) held its 16th annual national conference on June 16-17 in Toronto. As it has in previous years, the conference featured a Canada Revenue Agency Roundtable wherein two representatives from the CRA answered 19 questions about topical issues facing tax and estate practitioners and their clients.
The CRA was represented by Steve Fron (Manager, Trusts Section, Income Tax Rulings Directorate) and Phil Kohnen (Manager, Trusts Section, Income Tax Rulings Directorate).
The following is a summary of several of the questions and answers relating to audits and assessments. (The complete list of Roundtable questions is available here.)
Question 6 – Trust Audit Issues
The CRA was asked to provide an update on the most common audit issues that it finds / reviews regarding trusts.
The CRA stated it has reviewed a broad range of trust compliance issues in recent years, including:
Attribution under subsection 75(2) of the Income Tax Act (Canada) (the “Act”);
Benefits pursuant to subsection 105(1) of the Act;
Gifts by Will – The CRA noted that it had recently determined that no gift could be made for tax purposes where the power to make such a gift did not exist in the Will;
Stop loss rule in subsection 112(3.2) – The CRA stated that they deal with a variety of issues in regards to this subsection of the Act, but specifically mentioned the issue of the deductibility of professional expenses in the context of the administration of an estate; and
Late or amended subsection 104(21) designations.
Question 9 – Interest and Penalties on Deficient Instalments of Inter Vivos Trusts
In response to Question 20 at the 2010 STEP Canada national conference, the CRA noted that under its current administrative policy the CRA would not assess installment interest and penalties where an inter vivos trust does not make instalment payments required under section 156. The CRA was asked to confirm that this remains its current policy.
The CRA stated that, with respect to inter vivos trusts, the CRA will not assess penalties or interest where the trust fails to pay installments. However, in preparation for the changes to the trust rules in 2016, all trust rules are being reconsidered and that the policy will be reviewed during such this process (for a discussion of some of the proposed changes relating to trusts, see our commentary on the 2014 federal budget here).
Question 13 – Voluntary Disclosures
The CRA has held voluntary disclosures that cover more than 10 taxation years in “limbo” as a result of the decision in Bozzer v. The Queen (2011 FCA 186). Apparently, voluntary disclosures officers are awaiting direction from head office in Ottawa to determine how to deal with voluntary disclosures that exceed 10 years. The CRA was asked for an update on this situation.
In Bozzer, the Federal Court of Appeal held that the 10-year limit under subsection 220(3.1) of the Act refers to years during which the interest accrued, not the year in which the original tax liability arose. Before Bozzer, the CRA had taken a contrary administrative position on the application of subsection 220(3.1).
The CRA stated that the voluntary disclosures that exceed 10 years are now being processed in accordance with the findings in Bozzer.
Question 14 – Registration of Tax Preparers
Recently, the United States government lost its appeal of the decision in Sabina Loving et al v IRS et al (No. 13-5061), which stated that the IRS has no legal authority to regulate the tax preparation industry. The CRA was asked comment on this case and to provide an update on its consultations regarding the registration of tax preparers in Canada.
The CRA noted that it had previously announced its consultation process on the proposed Registration of Tax Preparers Program (RTPP), a component of the CRA’s efforts to ensure and improve compliance in the small- and medium-sized business community.
The CRA stated that it does not intend to introduce tax competency standards or professional development standards through the RTPP. The CRA stated that the registration of tax preparers (who will be issued an identification number) will allow the CRA to efficiently identify and work with tax preparers to prevent common errors.
Question 19 – Multiple Assessments
The CRA was asked to consider a lengthy hypothetical regarding multiple assessments of a series of transactions. In such situations, the multiple assessments (only one of which could be correct) could create a cumulative tax liability in excess of the value of the transaction itself. The CRA was asked whether, in these types of situations, it would grant interest-relief under the fairness provisions.
The CRA stated only that subsection 220(3.1) of the Act gives the Minister discretion to waive or cancel arrears of interest in whole or in part. Subsection 220(3.1) also gives the Minister the ability to cancel penalties in a 10-year period. The CRA referred to Information Circular IC 07-1 “Taxpayer Relief Provision” (May 31, 2007), which states that interest and penalty relief may be available where the taxpayer cannot pay as a result of financial hardship.