Bob Dylan wrote a song that had the phrase: "For the times they are a changing". Now, the song was written in the 60's and it had to do with the political environment. Here we are in 2017 and in Canada, when it comes to tax policy, administration and collection, one could easily conclude that the times are indeed changing and have changed!
In this brief article, I will touch on a number of major themes. To some readers, these subjects will be familiar as numerous Western industrialised societies are pursuing the very same policy goals. The difference between how Canada and other states deal with these objectives is likely more a question of individual state commitment or political will and the actual money expended by each state to achieve the professed mandate.
In terms of fiscal policy with direct tax implications, the Federal Liberal government of Canada had signalled in the spring of 2017 that it was planning to introduce new tax measures to close certain 'loopholes'. As we enter September, interested parties and the public will likely be provided with an opportunity to comment upon the government's plan to fundamentally alter the landscape for small to medium size businesses by ending income sprinkling. The government has other corporate measures on its tax agenda but these objectives have not been fully vetted and we have yet to see what the final proposed legislative picture will look like. Often, the government of the day will "float" what appears to be draconian series of tax reforms and after public airing and consultation pulls back to a lesser set of changes in order to appease various concerns whether articulated by interest groups or business leaders and /or associations.
Certainly, the latest measures have various lobby groups outraged with the proposals. It is fair to say that on the one hand, these measures are designed, as advertised, to close tax loopholes. On the other hand, it is equally fair to argue that some of the more severe measures could hurt the Canadian economy, discourage business from either moving to Canada or encourage others to find a more attractive, corporate tax friendly environment. There has been much written on the upcoming budget measures and because of the brevity of this column, I will simply remind the readers that there are excellent sites and places to read full commentary on the upcoming tax proposals in Canada (see for example: the leading source for Canadian Tax information from the Canadian Tax Foundation).
Canada is undoubtedly committed to BEPS. The result is that there has been a noticeable level of improved international enforcement when it comes to tax reporting, aggressive tax planning and outright tax avoidance. In the international area, the Canada Revenue Agency ("CRA") has significantly beefed up its compliment of tax auditors. Simply put, there are a lot more government auditors examining corporate returns and individual returns than ever before. One of the key areas that catches the eyes of the auditors is foreign reporting and foreign source income. The reference to "trust" income in just about any manner in a tax return captures the immediate interest of a CRA auditor. The words "offshore trust" is odious for the CRA and much is made to determine the nature and reporting characteristics of any monies emanating from an offshore trust. Practitioners should take note this will all be ramped up with Canada's 1 July 2017 implementation of the Common Reporting Standard in new Part XIX of the Act, with a likely increase in the use of Canada's TIEA network.
While the scrutiny of tax returns has been heightened on the international front, this has not diminished the focus on either aggressive tax planning or outright tax avoidance. In the case of 'close to the line' tax planning, the CRA has sought to curb these activities with assessments and reassessments that often raise the two common generalised modes of challenge, namely raising the potential that a transaction is subject to the General Anti-Avoidance Rule and/or that the transaction is subject to the Sham doctrine.
As I practice both in the civil and criminal worlds of tax, when I refer to outright tax avoidance, I think of the subject in two ways; that being, in the civil context – where fines may apply and a transaction can be effectively tax reversed and in the criminal context – where corporations can be subject to heavy fines and individuals can be fined but more importantly, go to jail. Hence, turning to the criminal side of tax avoidance, there is clearly a stronger stance taken by the courts across the country against white collar crime. In years gone by, it would not be common to see Canadians heading to jail for tax crimes. Not any more, tax violations that spawn tax prosecutions result in convictions and in many cases, corresponding incarceration. Even so, in comparison to other jurisdictions such as the United States and Germany, Canada lags well behind in the criminal tax enforcement arena. (As my co-author Dr. David Kerzner of the book International Tax Evasion in the Global Information Age reminds me: "Canada's enforcement powers in the area of tax administration can be likened to equipping the CRA with bows and arrows while the IRS has drones – its information request system is backed up by a mandatory court issued summons.") However, in Canada, this is the case for a variety of reasons and to give credit where credit is due, the Federal governments in recent years have made significant political and financial commitments to improve policy enforcement.
Canada is not any different to other Western states in that the search for new ways to raise tax revenue is one focus and at the same time, Canada and specifically the CRA collections branch have stepped up their efforts to collect what is owed to the Fisc. Some tax writers have wondered out loud as to whether the government may move to the same type of payment requirement that is statutorily imposed by the Excise Tax Act (the goods and services tax – "GST") Put in other words, when a taxpayer is reassessed or assessed and owes money for GST – whether or not the taxpayer objects and subsequently appeals – any money owing is immediately collectible and payable. This is not the case when money is owed for Income Tax purposes. If a taxpayer is assessed or reassessed for income tax, the money is not payable, in most circumstances, until the appeal process is exhausted. There are some exceptions and interest on any money owing does accrue. It is therefore not surprising that if a taxpayer does owe money that the CRA collections officers will resort to all tactics and tools at their disposal to collect. These tools range from a lien on a property, to third party demands for the redirection of money to the Receiver General, to garnishment and a number of other statutory 'weapons'.
It should be clear to the reader of this brief review that Canada may be on the threshold of discouraging greater business migration and development in the country because of new tax policies, yet to be formally introduced and implemented, that will raise taxes for corporations and eliminate perceived 'loopholes' in the tax system. Canadians and the rest of the world will have a better idea as to where the Trudeau Liberal (Federal) government is taking us within the next several months. So, readers of this column with business clients in Canada should pay close attention to economic pronouncements and especially the forthcoming Budget. Not only is the course of policy about to change, we also know that enforcement and collection has received greater financial and political support. In some respects, it is fair to say that many of the recent steps taken by the government in relation to enforcement and collection are long overdue.
Previously published in Corporate LiveWire.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
