Questions For Competent Authority Services Division

Currently, we supply records where the recipient has provided a US address, including

We are improving the way we use the information we receive from treaty partners in the automatic exchange of information program. As well, we are working to increase the types of data we exchange, in addition to the number of countries with whom we exchange data.

For the 2000 tax year, we provided over 800,000 NR4 records and approximately 30,000 records of the other types to the United States.

The program is reciprocal; we receive similar data from the U.S.

(b) the scope and volume of what is communicated under information exchanges where one country, in the course of its routine auditing and investigating process discovers information that it believes may be of interest to a treaty partner and “spontaneously” forwards it.

Where information is found during the course of an audit that may be of interest to another tax jurisdiction, the information is forwarded spontaneously. That is to say, it is sent without the receiving country requesting it. The information is quite specific in nature.

For example, during the course of an audit on an airline pilot it may be determined that the pilot is not resident in Canada for tax purposes. The pilot has shown evidence of a foreign residence but can show no proof of paying taxes to the foreign jurisdiction. In this case, we would forward the relevant information to the foreign jurisdiction. That would include a narration of the situation along with such information as identification, income, and indications of residence in that country.

For 2001/2002 we received 18 spontaneous exchanges and sent 22.

2. With respect to specific requests,

(a) what proportion of requests are made on behalf of local tax services audit in the context of a local international audit and by Legal Services/Department of Justice in the context of tax litigation vs. requests initiated by Canadian Competent Authority in the context of an ongoing competent authority negotiation.

CA sent 157 specific requests to other countries in 2001/02. The vast majority was on behalf of TSOs with a few for Justice. CA does not use this mechanism for CA negotiation.

(b) is it still CCRA policy that “a significant amount and/or principle should be involved before a specific request for information is initiated” and then, only after “reasonable efforts have been made to obtain the information from Canadian sources”?

Our internal guides do continue to reflect these basic policies. They are a combination of common sense business practice and a prerequisite to good relations with our treaty partners. Nevertheless, there is no definition of these terms and each exchange, whether incoming or outgoing, is considered on a case-by-case basis.

3. With increasing levels of co-operation among revenue authorities and thus, their reliance upon one another to provide information under the exchange article of the relevant tax treaty, of concern for Canadian taxpayers is the scope of what is being exchanged and the extent to which they are being made aware of requests, whether as taxpayer or as a third party provider of information. Again using Aricle XXVII, can you comment on the following:

(a) the CCRA’s interpretation of Article XXVII in the context of providing to the U.S. competent authority documents or information “provided” to the CCRA by a third country.

CCRA’s interpretation is that we are prevented from passing on information received from one country to any other country without express written permission from the source country. Information provided to other countries is treated in the same way.

(b) the extent to which advance rulings or information related to or underlying them is being exchanged.

Advance rulings are not normally exchanged.

(c) the CCRA’s policy in connection with notifying a Canadian taxpayer from whom information is being sought by the CCRA on behalf of a treaty partner specifically, whether the Canadian taxpayer can expect to be informed of:

The internal CCRA policy has been not to notify the taxpayer unless it was necessary to obtain the information. The issue revolves around the trade-off between the obligation of exchanging information with treaty partners in a timely manner and the right or need for the taxpayer to be aware of the request for information by a foreign state.

We are conducting a complete policy review of the exchange of information function and this is one area where we are revising policy. Our new internal guide states that the taxpayer should be informed whenever CCRA officials must go beyond internally held files to respond to requests.

For example, a common request is to determine if a taxpayer is known to our tax jurisdiction and confirmation that they are paying taxes. We don’t intend to inform taxpayers of routine requests of this nature.

Another common request is to verify that transactions have actually occurred, that amounts are correct, that they have been reported, etc. In all such instances, the CDN taxpayer will be advised that it is a request from a foreign jurisdiction. The taxpayer will be advised of the country of origin and the tax issue. The taxpayer will be advised of what information received from them will be forwarded to the foreign state.

An exception to the general rule may be where the foreign jurisdiction can show that taxpayer knowledge may result in flight, disposal of funds, jeopardy of a court case, etc.

4. Can you comment on any changes in policy and procedure implemented by the CCRA as a consequence of the changes introduced in the third Protocol to the Canada-US Income Tax Convention which included the following three basic changes:

(a) the test of “necessity” for obtaining the desired exchange of information was replaced with a test of “relevance”.

This wording is found in the first section of the exchange of information article and it forms the basis of exchange. The wording is always similar to:

The OECD model uses the word “necessary” but the OECD commentary states:

Our treaties are not all uniform in this respect; some use necessary, most use relevant; CCRA treats both words identically so there is no policy change.

(b) the taxes covered were expanded to include all taxes imposed by Canada or the United States.

It is a generally-accepted view of OECD and its member countries that the exchange of information articles should be broadened in their tax scope to the extent possible. Recent Canadian treaties, including the one with the US, broaden the taxes covered to all federally imposed taxes. This has the effect of allowing Canada to request and exchange information on GST and excise taxes as well as the income-related taxes previously covered. Information on customs duties, however, would not fall within the ambit of the article; but, information is exchanged under customs agreements.

(c) the taxes covered were also expanded to include taxes imposed by a political subdivision or local authority in Canada or the United States which are substantially similar to the taxes covered by the treaty as set out in Article II. (this includes, for example, Canadian provincial income taxes and U.S. state and municipal income taxes).

For the most part, the Canada-US Income Tax Convention (the “Convention”) and other Canadian treaties deal only with taxes imposed at the federal level and do not deal directly with taxes imposed at the provincial or state level. However, for exchange of information purposes, the wording in many of our more recent treaties has been amended to allow CCRA to provide information obtained under a treaty for federal purposes to be passed on for tax purposes to provincial, state or local authorities. We cannot obtain or request information on behalf of provinces/states/local authorities.

Article XXVII(1) allows the CCRA/IRS to directly provide information received from the other country under the Convention to its provinces, states or local authorities, if it relates to a tax imposed by that province, state or local authority and that tax is substantially similar to a federal-level tax covered under Article II of the Convention (e.g., income or capital tax).

5. Again, as part of the increased level of co-operation among revenue authorities, programs like simultaneous audits have become a part of compliance enforcement for many countries including Canada. Can you comment on the CCRA’s Simultaneous Audit Program with the U.S. or any other current working arrangements that Canada has to conduct joint or simultaneous audits exchange of information and what protocols govern the activity? How does a taxpayer know when such an audit is underway? How frequently are these audits being used? Are these audits industry specific?

The simultaneous audit program is an arrangement with a foreign jurisdiction whereby each CA agrees to perform an audit on related companies, independently, in their respective countries, in a simultaneous timeframe with the objective of exchanging relevant information.

Since these audits are conducted by each jurisdiction in an independent manner, the exchange of information can be accomplished under existing protocols.

We have an administrative agreement with the U.S. and are in the process of renewing it. The agreement sets out in greater detail the administrative process that has been agreed to in the conduct of these simultaneous audits.

To date, these audits have not been used routinely. In general, they are initiated because one jurisdiction has domestic compliance issues and indications that another jurisdiction may also have compliance issues. Upon notification, if the other jurisdiction agrees and initiates an audit it becomes obvious to the taxpayers that they are being audited by the two jurisdictions. There is no firm policy to advise the taxpayer that information may be exchanged.

European and Scandinavian jurisdictions use simultaneous audits more routinely as part of scheduled audits. This seems to be accepted by taxpayers as being less burdensome than a piecemeal, country-by-country verification of interrelated entities.

We conduct less than a dozen of these annually with the U.S. We are in the process of exploring the possibility of expanding the use of simultaneous audits with the U.S. and other major treaty partners.

6. Can the CCRA comment on the application of Article XXVI A – Assistance in Collection of the Canada-US Income Tax Convention.

Article XXVI A provides for Canada and the US to lend assistance to each other in the collection of taxes. In summary, this provision allows each contracting state to use the same powers, as it would normally use to collect a domestic debt, to collect the debt on behalf of the other contracting state. The major limitation is that such actions cannot be taken against citizens of the requested country nor entities that during that period, derived their status as being such an entity from the requested state.

The long held common law principle that Canadian Courts cannot be used to enforce the revenue laws of foreign countries yield to this provision. In fact, CCRA is collecting debts on behalf of treaty partners, and has such debts collected on their behalf.

7. Tax disputes involving two or more treaty countries giving rise to an issue of double tax are often resolved through competent authority under the mutual agreement procedure of most tax treaties. For Canadian taxpayers who have been reassessed, the initial choice of forum is domestic appeals and/or submitting the case to the competent authorities. In terms of pursuing both, IC 71-17R4, paragraph 35, states:

It is understood that as a matter of practice, taxpayers pursue their rights well beyond the objection stage and engage in extensive negotiations and discussions with Appeals. Can you comment on the extent to which a Canadian taxpayer may pursue a reassessment that gives rise to double taxation through the Appeals process in Canada without forfeiting its right to seek competent authority consideration?

In the context of the current IC, I would like to point out that paragraph 35 is referring to a situation where a request for CA assistance that has already been made by a taxpayer is being followed by a simultaneous request by the taxpayer to an Appeal or court action.

Under no circumstances will CCRA allow two independent processes (the CA process and either the Appeals process or court action) to proceed at the same time. Since the CA process is in effect a service being provided to the taxpayer to relieve double taxation at the request of the taxpayer, if the taxpayer decides to instead proceed with a domestic remedy, this is the prerogative of the taxpayer. By extension, if the taxpayer makes a request to proceed with an appeal or go to court while CA is negotiating its case, the CA negotiations will be automatically terminated. It should be noted that in circumstances where a Notice of Objection has been filed with Appeals and held in abeyance pending resolution at CA, Appeals is instructed to notify CA if the taxpayer proceeds with an Appeal or court action. This system is in place to ensure, once again, that two independent processes are not being implemented at the same time.

Having said that, I believe the tone of the preamble and post-amble to the paragraph 35 quote relates more to situations where a taxpayer is already in the Appeals process and has not yet made a decision to refer the case to CA. The issue then becomes how far in the Appeals process can the taxpayer proceed without jeopardising their chances of the case being accepted at CA when and if the taxpayer wishes to stop the Appeals negotiations.

The short answer is that CCRA’s current policy is to allow a taxpayer to instruct Appeals to “hold in abeyance” a Notice of Objection at any time in the Appeals process as long as there is no Appeals settlement. CCRA does not make a distinction as to which stage in the Appeals process the taxpayer has reached as long as Appeals has not settled the matter, i.e., decided to confirm, vary or vacate an audit assessment. Once a file is held in abeyance by Appeals, the CA may accept the case, and will negotiate and, if deemed appropriate, vary the result that was concluded at the assessment stage of the audit through competent authority negotiations.

This policy, of course, does not extend to a court proceeding where a taxpayer has exhausted the Appeals process. At this stage, if the taxpayer wishes to stop the court process and seek CA assistance, the taxpayer is reverting back to whatever Appeals settlement was reached prior to proceeding to court. In such circumstances, the CA will present to the other jurisdiction the original settlement concluded in Appeals (prior to the court proceedings), but will not vary the result in any way.

As well, please comment on the following related questions:

(a) is the main concern of the CCRA in these situations that a taxpayer not use Appeals to negotiate a “better start-position” for the ultimate discussion with the competent authorities?

The Appeals function is specific to verifying that the application of domestic law is applied correctly and reasonably. The function of CA is to resolve double tax with another taxing jurisdiction. If an Appeals decision (settlement) is not rendered, CA is tasked with not only reviewing the issue to determine if our domestic law has been applied correctly and fairly, but also with resolving the double tax. In other words, the CA does not necessarily accept the audit adjustment as the starting point for negotiations with the other tax jurisdiction. If the CA review determines that the adjustment should be varied downwards, the CA may present to the other jurisdiction this varied position as the starting point for double tax negotiations.

However, once Appeals has decided that the law has been applied correctly and the taxpayer has been treated reasonably, it could be argued that it would be inappropriate for CA to vary this result through a CA negotiation. Where Appeals has decided an issue, the policy has been that the role of CA is to resolve the double tax by presenting a position that is backed up both by audit evidence and the analysis that was performed by Appeals. This theoretically should be strong enough to convince the other jurisdiction of the correctness of the adjustment, and should result in correlative relief being provided.

Although the “better start-position” may have been a factor in the decision not to vary an Appeals settlement, it would not have been the overriding reason, i.e., if the policy was to negotiate files decided by Appeals, theoretically, since the domestic law had been confirmed and the transfer price deemed reasonable, we would probably vary the Appeals settlement very little, if at all; the rationale being that the taxpayer had already received a fair and comprehensive review of the issue.

(b) will IC 71-17R4 be amended to articulate this policy?

One issue that we are revisiting is the current policy of not, under any circumstances, varying decisions/settlements made by Appeals. There has been some confusion over the term “Appeal settlement” that is found in paragraph 36 of the circular. The Canadian CA has interpreted this to mean any decision that has been made and finalised by Appeals. It may be construed, however, that the term “settlement” in the context of the Appeals process refers only to a decision that has been reached with the concurrence of the taxpayer. The Appeals process can result in the confirmation of 100% of an audit adjustment without the taxpayer’s concurrence, or a result that is varied downward, but one that the taxpayer once again does not agree with. These two scenarios could be considered as not being “settlements” with respect to the Appeals process. The new IC will fully explain the difference in terminology, and what, if any, revised position CCRA will take with respect to the types of Appeals decisions just described.

One of the goals of CA is to ensure that our practices are consistent with our treaty partners. In this regard, with respect to the U.S., our understanding is that they will vary a decision reached by their Appeals if the taxpayer has not agreed to the decision. We are therefore in the process of clarifying what would qualify as equivalent for Canadian purposes with the view of providing reciprocity.

(c) is there particular language that should be included in an objection where a taxpayer has or intends to file for competent authority?

The Notice of Objection lists the facts and provides explanations for objecting to a particular audit adjustment. Where the taxpayer wishes to proceed with the CA process, the taxpayer should clearly indicate that he/she wishes to hold the objection in abeyance pending a resolution at CA. This is also referred to as filing a protective Notice of Objection, whereby the taxpayer ensures his/her domestic rights (both appeal and court) are protected, just in case the taxpayer does not accept a CA settlement agreement.

(d) is there a written policy for local Appeals offices to follow in these cases? (Some practitioners have found the experience uneven. Often an Appeals Officer is concerned that there may be no genuine interest in the local discussions and therefore, does not really participate in the discussions to resolve at the Appeals level.)

The only “written” policy concerns the fact that Appeals will respect any request by a taxpayer to hold an appeal in abeyance so that the taxpayer can proceed to CA. There are procedural policies in place that all Appeals offices follow when a request is made to stop the appeals process in order for a competent authority request to be made. The appeals officer will analyse a file in Appeals with the object of determining if Canadian tax law has been applied correctly and reasonably. The fact that a file may be held in abeyance in Appeals at some point in the Appeals process should not change the approach or attitude of the Appeals officer when deciding the correctness of the adjustment.

8. The requirements set out in IC 71-17R4 for the necessary elements to be contained in a competent authority request are very basic. Is it in a taxpayer’s interest to provide significantly more? If so, why.

In accordance with IC 71-17R4, the taxpayer, should include the following in a CA request: