March 31, 2010 by Dan White.

CRA gets caught in their own errors.

Contrary to popular opinion, you can fight CRA and win. That is the business we are in, fighting CRA. We do fight CRA tax problems,  we provide solutions to those problems and we do achieve victories. Usually the solution is a procedural war with CRA. Fighting CRA is not particularly easy. There are brush offs,  ignoring, there are silly responses… all these things usually cause taxpayers to just fold. We have learned from experience that one has to be dogmatic and persistent as well as knowing CRA weaknesses.

It is good to see that “a Lady in her 80’s,” could and did fight and win.

To read more about fighting CRA, go to www.taxauditsolutions.ca

Dan White

Here is a good article written by Neil Reynolds, for the Globe and Mail.

Neil Reynolds
Taxman fallible? Lady in her 80s has the answer

Sometimes, the CRA has to deal with its own human errors

Published on Wednesday, Mar. 31, 2010 12:00AM EDT Last updated on Wednesday, Mar. 31, 2010 6:31AM EDT

In Saunders v. the Queen, the Tax Court of Canada had only a single legal question to resolve: Did the appellant, Elizabeth Saunders, described in court documents as “a lady in her 80s,” file her 2007 income tax return by the deadline of April 30, 2008, or did she file it on May 20, 2008, the date stamped on her return by Canada Revenue Agency staff at the agency’s Montreal office?

The answer would determine whether the agency had the right to levy a late-payment penalty. It would also give the public a glimpse of the arbitrary inclinations of government bureaucracy.

Accountant Nicolas Karavolas testified for the appellant, his client. He described first the established process that his office had followed for a number of years when filing personal income tax returns in the final days before the deadline. As he and his staff (all of whom were accountants) completed various clients’ returns, one staff member would rush them - a pile of returns at a time - to the CRA’s office, where the delivery person would join the line of people waiting to have their returns stamped.

The delivery person would then return to the office for another batch of returns. The office kept a list of all the returns with the corresponding delivery dates. Aside from lineups at the CRA office, Mr. Karavolas testified, the process worked well. Each return got a CRA stamp documenting the time of delivery.

In 2008, presumably in an attempt to provide faster service, the CRA modified its system. It would still accept returns at the counter from people who didn’t mind waiting. Taxpayers could avoid the wait, however, by inserting their returns into the slot of a closed box (similar to a mailbox). It was this time-saving mechanism that the Karavolas team used when it filed Ms. Saunders’ return. The Karavolas list indicated that her return was deposited into the CRA “mailbox” on April 29, 2008. The CRA, however, stamped it as May 20, 2008. What went wrong?

Throughout the days before the April 30 deadline, the CRA procedure for emptying the box didn’t change. At the end of the day or perhaps the next morning (according to CRA testimony), CRA staff would remove the accumulated returns from the box and deliver them to other staff for stamping; these stamped returns were then turned over to other employees who dispatched them to the appropriate CRA officers for processing.

Was this system reliable? The senior CRA official who testified for the agency said it was “pretty” reliable - which was why he believed the stamp properly identified Ms. Saunders’ return as delinquent.

Oddly, the CRA used only a single date in stamping the returns, regardless of the actual date of filing: “April 30, 2008.” The agency reasoned that the deadline date was the only one that mattered. Any return that was not dated April 30 would be automatically deemed a late filing.

Of the Karavolas tax returns deposited in the CRA box on April 29, 2008 (according to the Karavolas list), half bore CRA stamps with drop-off dates in May. The CRA confirmed that it had put in place no mechanism to verify the delivery date of returns placed in the mailbox.

In her ruling last month, Tax Court Judge Georgette Ann Sheridan ruled for “the lady in her 80s.” First, the judge found the three Karavolas witnesses credible. She found the CRA executive who testified, Phillippe Demeule, credible as well - though, she noted, he had “no personal knowledge” of either the collection procedures in place at the agency’s Montreal office at the time, or of how the Saunders return “was treated at the time of filing.” “I must say that I do not share Mr. Demeule’s faith in the infallibility of a huge government bureaucracy, especially during its busiest time of the year,” Judge Sheridan said in her ruling.

She concluded that the different stamp dates resulted from “the mishandling of returns by the roster of unidentified (and, for the Appellant’s purposes, unidentifiable) officials charged with retrieving, stamping and redirecting the flood of returns that would have been deposited at the Montreal office in the dying days of April, 2008.”

Furthermore, Judge Sheridan observed, the record showed that Ms. Saunders met with her accountant early in April, learned that she would owe a significant tax payment, subsequently transferred the money into her chequing account, and delivered two cheques to Mr. Karavolas (one for her federal taxes, one for her provincial). This behaviour, the judge said, hardly suggested either a tax cheat or a tax avoider. “In closing,” the judge added, “it is interesting to note that after 2008, the Canada Revenue Agency modified the collection box procedure to allow for date stamping upon delivery.”

In this case, the tax agency wasn’t dealing with taxpayer dishonesty. It was dealing with human error in its own department. The judge voided the late-payment penalty that the CRA had imposed - though, in fairness, it should have been paid, as damages, to “the lady in her 80s.”

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March 27, 2010 by Dan White.

You have to love it.!  It is pretty interesting the subject of “Politics & Propaganda.”  I guess some real lobbying and some real back room chats changed what was really going to happen.

The Minister of Finance has said in the past that there would be no more changes. I suppose that his “spin” is pretty clever… It went along the lines of; I know you believe what you think you think that I meant, however, I am sure that you don’t realize that what I actually meant was not what you think I meant, or that you actually realize that what it appears you  I think , I meant what I said, however, however I don’t think that what I said was not clear, it is just not what I think you think I meant…… oh, boy…. oh, boy… spin spin, we sit and spin, then we suck it up and we spin again. And miraculously the truth becomes a truth that was not a truth, but was meant to be a truth, even if it is not clear which it was, but the intent was clear. As Jean Cretian said; “A truth is a truth is a truth.”

So now the tax problems change. HST is getting more and more confusing and convoluted… But I guess CRA will like that, as all the new HST issues will get more and more complicated.
So now HST which was intended as a flat tax is no longer a flat tax, and the flat tax fell flat… and now us, the  Tax Dudes are going to need to try to figure it all out.

Stay tuned for more HT data here and at www.taxauditsolutions.ca

Dan White

Here is a good article from the Globe and Mail by Tara Perkins.

________

No GST hit for financial sector: Ottawa
Finance Minister Jim Flaherty

Finance Minister Jim Flaherty

Tara Perkins

Globe and Mail Update Published on Friday, Mar. 26, 2010 7:39PM EDT Last updated on Saturday, Mar. 27, 2010 3:12AM EDT

Finance Minister Jim Flaherty has pledged to not impose any additional GST on financial services, suggesting that a rule change that appeared to cost the sector $1-billion was just badly worded.

“There’s no intention of changing tax policy,” he said Friday at a press conference in Oshawa, Ont., on another subject.

The Finance Department issued a statement late Friday saying that the Canada Revenue agency will review and update the rules, and that it welcomes views and suggestions from the industry.

“Businesses need clear GST rules,” Mr. Flaherty said. “We are not imposing new taxes.”

Mr. Flaherty’s comment was met with cautious optimism from the industry.

Barry Segal, a tax partner with Ogilvy Renault, said the comments “should be viewed as a positive step in the tax and financial communities.”

Mr. Flaherty’s remarks suggest that the Canada Revenue Agency’s February notice, which laid out what many experts in the financial sector viewed as a radical change to the way GST applied to a number of services, “may have gone beyond what the Department of Finance intended,” Mr. Segal said.

“We will have to see whether the government’s legislation conforms to Minister Flaherty’s comments,” he added.

The issue began when Ottawa said in December that it would clarify the rules that govern how GST applies to a number of financial services, in response to recent court cases on the topic. The CRA followed up with details in February. The changes applied retroactively to Dec. 14.

The financial sector says the CRA notice amounted to a drastic change in tax policy that would increase Ottawa’s GST revenue by more than $1-billion a year.

It boils down to the definition of “financial service” in tax laws. Such services are usually exempt from GST but Ottawa altered the definition so that many activities that “facilitate” or “prepare” financial services appeared to be newly subject to tax.

Mr. Flaherty said Ottawa did not mean to do that. “We will have the tools in the first Budget Implementation Act to make sure we get back to the status quo before the court cases, so people can rest assured that the tax treatment of defined financial services will not change,” he said.

Some experts are not satisfied.

Mike Firth, a tax partner with PricewaterhouseCoopers, said that “what industry really needs is a clear response on the specific examples of [services] which the CRA has clearly declared are taxable effective Dec. 14, 2009, whereas they were clearly agreed as exempt before that date, such as commissions paid to car dealers to arrange for consumer credit and commissions paid to investment dealers for the sale of mutual fund units.”

Most industry voices were optimistic.

“Anybody that’s trying to save for retirement or anybody that’s trying to save using mutual funds or other financial products, this is good news for them,” said Barbara Amsden, director of strategy and research at the Investment Funds Institute of Canada.

However, she added that she remains cautious until she hears the final word from the Canada Revenue Agency.

“It gives us some assurance,” Jim Murphy, head of the Canadian Association of Accredited Mortgage Professionals, said of Mr. Flaherty’s position.

“We hope the Minister’s comments today reflect the government policy of not raising taxes on consumers,” said Steve Masnyk, a spokesman for the Insurance Brokers Association of Canada.

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March 21, 2010 by Dan White.

 HST is the final nail in the coffin of what home ownership is all about. And it is not all bad news. The dilemma that has been created,  is HST is a tax problem for home buyers. This changes the price of homes that people can afford. The HST will give birth to smaller more affordable homes. Especially for new home buyers.

As far as downtown Vancouver condos having $100,000 in HST is not so much of a problem in the greater scheme of things. Those that travel in those circles, can afford more tax problems.

Eventually there will be a positive effect on the economy due to HST, but the effect on home ownership is permanent.

There will be a positive effect on the home renovation business. Renovations versus moving has taken an tax aptitude adjustment. This area of the economy will boom.

Want to start a new business…. ?  How about training for home owners in being their own renovators  ?

“Hello 1950’s” way back then, people could not afford big houses. The average family had a small home of less than 1,000 square feet. They had one car and they had a bunch of kids. They learned to live together.

Then houses got larger and the basements got bigger and were large unfinished storage areas or they became finished and the homeowner had tons of living space… and the size of homes grew because people could afford more and more. Or they could afford more and more debt.

Then zoning regulations were passed preventing small homes from being built. No one wanted to be embarrassed by having their monster home devalued by some modest home next door.

Then came the condos… they don’t even have basements and there is a plethora of condos that have less than a 1,000 square feet. They filled a lifestyle need that accepted not having basements and large amounts of rarely used space.

Now in “1950 revisited,” in order to get new home buyers, there is going to be a  new offering. Smaller and smaller homes, with finished basements or that can be finished by the new home owner. Basements will become the kitchen family room for us “want to be Italians,” who love the family interaction of living and eating together.

The kids won’t be able to smoke pot in the house and not be noticed. Mom and Dad will have the kids underfoot. Now that is a concept…

Houses will be to live in, not to impress people. What we now have is a concept of being HST taxed into reality of needing to live within our means. Modest living will become our new reality.

The second car will again be the old beater… Cheap will be called “Less Tax.”  Less tax is less problems. CRA auditors will no longer be offended by life styles beyond the auditor’s own ability to live. The CRA Lifestyle Audit will go away for the average family, and be reserved for the rich.

The concept of average families being able to live in the styles of the last few decades has now been taxed away. Canadians will learn to live tax smarter. Failing which, they won’t be able to pay their taxes and will financially crash and burn.

You are not “Richer than you think.” That BNS ad should be called a BS ad.

To learn how to turn the page on tax reduction strategies go to www.taxauditsolutions.ca

Dan White

____

Read what the Vancouver Sun has to say on this matter.

 Why I have come to think of the new HST as a death tax

And why I think this year, as never before, the first-time buyer who wants to make informed choices needs Tuesday’s seminar

By Peter Simpson, Vancouver SunMarch 20, 2010

“Of two things you can be certain -death and taxes.” -Benjamin Franklin

As forward-thinking as he was, inventor Ben likely never imagined death would be taxed.

B.C. residents are a scant 3 1/2 months away from the implementation of the harmonized sales tax -the dreaded HST -and, yes, death is included on the provincial government’s hit list.

In fact, a Surrey funeral home has been running public-notice ads in local newspapers urging folks to beat the HST. “Plan now and save. Prearrange your cemetery and funeral plans now to avoid paying hundreds of dollars in extra tax … save seven per cent.”

I resisted the temptation to call the funeral director to ask if he had problems with crowd control as panicked people picked through the caskets.

And is it just me, or does anyone else find it morbidly amusing that the tax date, July 1, is the day Canadians are usually celebrating, not lamenting a huge hole in their wallets?

More businesses are now offering beat-the-HST specials. Expect these marketing efforts to multiply through the spring as businesses are anticipating a post-HST sales hangover during the summer.

As we inch closer to H-Day, politicians on both sides of this issue are jockeying for position. The other day, I found in my mailbox a flyer from federal NDP leader Jack Layton. The headline screamed: “Thanks to the HST, Vancouver homebuyers will get ripped off.” Layton wanted me to tick off a box indicating I agreed with him and return the form, postage paid. I passed.

Recently, provincial Finance Minister Colin Hansen held a news conference to announce that University of Calgary public-policy chair Jack Mintz believes the HST will boost investment and create thousands of jobs. No surprise here: Mintz is the academic who supported Ontario’s HST model last year.

I opined many times that the HST might be beneficial to some industry sectors. I get that, I really do. But the HST will impose a heavy burden on consumers, especially on big-ticket items like new homes. To its credit, the provincial government, after months of intense pushback from the homebuilding industry, made adjustments to how the HST is applied to new homes.

Originally, the rebate threshold was $400,000, ridiculously low for the Lower Mainland. There was also a one-time rebate of $20,000 on homes priced higher than $400,000. Last November, the threshold was raised to $525,000 and the rebate hiked to $26,250.

At the time, I said the enhancements deserved a handshake, but that we were still a long way from slapping out any high-fives. Many new homes in this region are priced well above $525,000. And the people plunking down their hard-earned cash for those homes are average folks, representing all age groups and professions -teachers, blue-collar workers, office personnel, firefighters, whatever.

A developer told me the average HST bill on his downtown Vancouver condos will be $100,000, after the rebate. Remember when you could buy a whole condo for less? The developer also said he, along with many competitors, are scrambling to to get homebuyers into their homes before the HST hammer hits.

Recently, at the Canadian Home Builders’ Association annual conference in Victoria, I attended a presentation by pollster Allan Gregg, who outlined his latest polling results on government actions and the housing market. Most of those polled said the most important issues facing Canada are the economy and taxes. The environment -by a wide margin -was the least important issue.

Regarding the HST, the question was asked: “On balance, do you think the HST will make it easier or harder for people like you to buy a house in the future?” Not surprisingly, 69 per cent of those polled in Ontario and B.C. said the HST will make it harder or significantly harder to buy a home.

Understandably, house prices and other affordability factors significantly affect the intentions of renters, who were asked: “How likely do you think it is that you will be purchasing a home in the next two to three years?” Sixty-five per cent indicated it was either not very likely or not at all likely.

On the financing front, 69 per cent of the renters who intend to purchase a home believe it will be easy for them to obtain a mortgage. Regarding homeowners who intend to renegotiate their mortgages, 83 per cent were confident it would be easy for them to obtain a mortgage.

Overall, Canadians are optimistic about the future, and both consumers and governments now recognize how important housing is to the economic recovery and growth.

Another study released last week by RBC found that 91 per cent of Canadian homeowners believe a home is a good investment, the highest level in 12 years. Sixty per cent believe housing prices will rise in 2010 and 64 per cent believe mortgage rates will also rise. Bottom line, now is the time to buy.

The RBC report notes homebuyers, particularly first-timers, need solid advice about what they can afford, not only today, but down the road. And this sage advice is the perfect segue into where exactly first-time buyers can get all the advice they need to make more informed purchase decisions -the 16th annual free seminar for first-time homebuyers, presented next Tuesday by the Greater Vancouver Home Builders’ Association and the Homeowner Protection Office.

The Vancouver Sun and Province are sponsors.

Seminar attendees will get answers to these questions: What location is preferable? What type of home is best matched to needs and financial resources? What are the mortgage options? What are the legal considerations and closing costs? How will the federal government’s new mortgage qualifying rules and upcoming HST affect buyers? What is involved with buying a pre-sale condo? What are the benefits of builder licensing and mandatory home warranties?

Pre-registration is required. Learn more about the seminar and register at gvhba.orgor call . Registrations will also be accepted via voice mail during the weekend.

Peter Simpson is the chief executive officer of the Greater Vancouver Home Builders Association.
© Copyright (c) The Vancouver Sun

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March 19, 2010 by Dan White.

 CRA is on a mission,being, to get as much money as they can. Sometimes it boggles the mind as to how they can be so inconsistent in their approach to businesses.

Being that a lot of people incorporate to pay less taxes, which in itself is a bit of a joke, because in the big picture that belief is unfounded.

We won’t get into the fact that there are thousands of more legal issues that surround being incorporated which makes having a corporation a risky business.

Aside from the extra tax payable, the higher risks, there is a lot more bookkeeping.

And of course more government agency problems. Especially with CRA.

Here is an example of a CRA problem.

Posted in the Globe and Mail, comment by  the Canadian Federation of Independent Business

Published on Thursday, Jan. 14, 2010 8:54AM EST Last updated on Thursday, Mar. 18, 2010 3:33PM EDT

“Employment Insurance claims are most often refused when employees are considered to have a non arm’s length relationship with their employer. In such cases, the number of years paid into EI is not relevant. In general, the Canada Revenue Agency (CRA) does not consider these jobs insurable due to the non-arm’s length relationship that exists, whether through blood (e.g. son), marriage (including common-law) or adoption. Where CRA believes the employer and employee have a job contract similar to one that would apply to an unrelated employee, they are considered to work at arm’s length. In such a case, EI premiums must be paid.”

Dan’s comments:
I find it pretty interesting that CRA does so much sucking and blowing at one time. Their current practice is to go to a single director corporation and deem the director to be their own employee and set up a payroll account for them. Yet they don’t allow that person to collect EI. Of course being that I make a living dealing with CRA issues, it is good for my business of fixing the messes they create. CRA is completely incorrect and inconsistent in their approach, so it is a fixable problem. So; “Long Live CRA” and may they continue to create problems that we get paid to fix.
Dan White
Whitby

To learn more about dealing with CRA go to www.taxauditsolutions.ca

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March 18, 2010 by Dan White.

About Complaints to CRA.
This is a good article about service level complaints against CRA. You can complain before going to the ombudsman, and I would recommend that you do that first. You will get a faster response, and may be able to resolve the matter at level one.

I note that the ombudsman’s office only had a thousand proper complaints last year… I guess you can look to see that grow about  a hundred times greater as Canadians learn that there is power to the complaint. Too many accountants are telling clients that there is no point to complaining because nothing happens. That is true if a complaint is either wimpy or filed by a wimp. (Not all accountants are wimps, although CRA gives them some pretty good reasons to be wimpy)  I you are going to accept a level one brush off.. then, there is no point in complaining.

When considering complaining to the ombudsman, the issues are really to understand that all an ombudsman can do is deal with how you are treated and not if the numbers are wrong or deal with legal issues..

Wrong numbers fall under the administration of the ITA, auditors are required to come to the right numbers. However that is not always the case. If you are dealing with legal or administration complaints, that is best dealt with directly with CRA.

Auditors are authorized representatives of the Minister, to administer the ITA and the ETA… they are not authorized to overrule other laws.

CRA staff do not like having complaints escalated, so if you file your complaint properly, you will get a response. Often you will get what I call the level one compliant brush off. If this happens, then you need to escalate the complaint, and put in some more ammunition in your gun.

To learn more about the fine art of complaining, go to www.taxauditsolutions.ca

Dan White

By Bruce Johnstone, Leader-PostMarch 18, 2010 2:10 AM

Canada’s Taxpayers’ Ombudsman, Paul Dube, spoke to the Regina & District Chamber of Commerce on Wednesday.

Canada’s Taxpayers’ Ombudsman, Paul Dube, spoke to the Regina & District Chamber of Commerce on Wednesday.
Photograph by: Roy Antal, The Leader-Post, Leader-Post

Canada’s Taxpayers’ Ombudsman says the biggest problem he deals with in mediating disputes between taxpayers and the Canada Revenue Agency is poor communications.

Paul Dube, a self-confessed “recovering lawyer,” who was appointed to the newly created position in 2008, says the CRA is a big, powerful bureaucracy that doesn’t always communicate well with its clients.

“The CRA has a tough job,” Dube said following a speech to the Regina and District Chamber of Commerce here Wednesday. “They have to protect the tax base. They have to detect fraud. They have to weed out the cheaters.

“And yet they have to give taxpayers their fair due and administer benefits to those who are eligible. Sometimes they err on one side, sometimes they err on the other.

“So they’re damned if they do and damned if they don’t.”

What Dube, who was named Canada’s first Taxpayers’ Ombudsman in February 2008, attempts to do is ensure that taxpayers are treated fairly and professionally by the CRA.

“The way the CRA administers the law, the way they calculate the amounts is not within our mandate,” Dube said. “What is in our mandate is the way they explain to you what they’ve done, and the way they treat you.”

While the Taxpayers’ Ombudsman can’t adjudicate disputes over tax rates or policies, or matters before the courts, or disputes that pre-date the ombudsman’s creation, it can “bridge the communications gap” between the CRA and its clients.

“The bottom line is: Taxpayers are entitled to know how and why the CRA came to that decision,” Dube said. “And sometimes that’s all taxpayers want.”

Dube added that CRA generally does a good job in dealing fairly with taxpayers, but sometimes people “fall through the cracks.”

“Rules are dumb. Rules applied universally sometimes have an unfair result,” Dube said.

Given the size and scope of CRA’s job — the agency has 44,000 employees, handles 26 million individual tax returns and 1.6 million corporate filings, and administers benefits for 11 million Canadians — mistakes are inevitable.

“We are dealing with the exceptions. Just given the sheer volume of the transactions, the exceptions can mount and they can be pretty significant situations for taxpayers.”

In its first year of operation, Dube’s office received 5,000 contacts, but not all were valid complaints. Out of those 5,000 contacts, about 1,000 files were opened and over 950 files were closed that year.

“We’re on track to match that this year. The difference is more of the complaints are mandate-related,” Dube said.

“(Last year) a lot of people heard about us and just called us and said ‘I’m paying too much tax and I don’t like my notice of assessment.’

“This year, we’re finding more of the calls are within our mandate.”

Dube said taxpayers are pleased to learn they have rights, such as the right to be treated professionally, courteously and fairly, the right to receive complete, accurate, clear and timely information, the right to lodge a complaint against the CRA.

“People are encouraged by the fact that they have somebody to go to with these complaints — outside the CRA. That’s the big difference,” said Dube, whose office is funded out of CRA’s budget, but reports directly to the minister of revenue.

Taxpayers with complaints about the service provided by the CRA can call or visit www.taxpayersrights.gc.ca.

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March 14, 2010 by Dan White.

 While the following cases are not exactly current, they are really good refreshers in how to see GAAR. (General Anti Avoidance Rules.)

This a first rate bench mark for deciding about a transactions.

For more information on how CRA sees things, go to www.taxauditsolutions.ca

 Dan White

__________

Most important tax decision in a generation
By Arnold Ceballos
Toronto
October 28 2005 issue

In a widely-awaited pair of decisions, the Supreme Court has set out guidelines which could make it easier for taxpayers to arrange their affairs in a way that minimizes taxes without violating the general anti-avoidance rule in the Income Tax Act.

The Court established a new test for determining when there is a violation of the general anti-avoidance rule (GAAR), which is set out in Section 245(4) of the Act.  The Court stated that three requirements must be established before the GAAR will be applied: a tax benefit must result; the transaction is an avoidance transaction; and there was abusive tax avoidance in the sense that the tax benefit would be inconsistent with the object, spirit or purpose of the provisions relied upon by the taxpayer. The burden is on the taxpayer to refute the first two prongs of the test, while the Minister must establish the third prong. If the existence of abusive tax avoidance is unclear, the Court said the benefit of the doubt goes to the taxpayer.

“The decision is enormously significant and sets out the parameters for legitimate tax planning,” said Vern Krishna, Executive Director of the Tax Research Centre at the University of Ottawa. He adds that the decision is particularly important because the GAAR is an overreaching section of the Act that hovers over the entire statute.

The new guidelines are set out in judgments released Oct. 19 arising out of two cases that considered the GAAR.

In Canada Trustco Mortgage Company v. Canada [2005] S.C.J. No. 56, the Court was considering a tax-reducing arrangement established by Canada Trustco Mortgage Company (CTMC). CTMC is a mortgage lender which derives revenues from leased assets. The company had purchased a number of trailers which it then leased back to the vendor in order to offset revenue from its leased assets by claiming a capital cost allowance on the trailers.  By doing so, CTMC was able to defer paying taxes on the profits reduced by the capital cost allowance deductions, which would be subject to recapture into income when the trailers were later sold.

The Minister of National Revenue disallowed the capital cost allowance claim and on appeal the Tax Court set aside the decision. The Federal Court of Appeal affirmed and the government appealed the matter to the Supreme Court of Canada.

The second case was Mathew v. Canada [2005] S.C.J. No. 55, involving Standard Trust Company (STC), whose business included lending money on the security of mortgages. The company became insolvent when the real estate market declined, leaving an unrealized loss of $52 million. The liquidator executed a series of transactions which, through the operation of certain provisions of the Income Tax Act, allowed a number of taxpayers to use the losses accrued on the mortgages against their own incomes. The Minister of National Revenue applied the GAAR and disallowed the deduction. Both the Tax Court and the Federal Court of Appeal upheld the Minister’s decision. The taxpayers appealed to the Supreme Court.

The basic issue before the Supreme Court in both cases involved an interpretation of the GAAR and specifically whether the there was abusive tax avoidance by the taxpayers in question.
The GAAR was added to the Income Tax Act in 1988 as a result of the 1984 Supreme Court decision in Stubart Investments Ltd. v. The Queen. In that decision the Court rejected a literal approach to interpreting the Income Tax Act, while also rejecting the business purpose test, which would have restricted tax reduction to transactions with a real business purpose. In response, the government introduced the GAAR in order to deny the tax benefits of certain arrangements that comply with a literal interpretation of the provisions of the Act, but which amount to an abuse of the provisions of the Act.

In the current Canada Trustco case, the government argued that the usual result of the capital cost allowance provisions should be overridden by the GAAR where there was no real financial risk or “economic cost” to the taxpayer, which it said was the case with CTMC’s leasing arrangement.

The Supreme Court, however, rejected this interpretation, agreeing with the Tax Court judge that the transaction was not so dissimilar from an ordinary sale-leaseback so as to take it outside the object, spirit or purpose of the capital cost allowance provisions. In doing so, the Court articulated a new two-part approach to interpreting whether the tax avoidance was abusive, based on what it called a unified textual, contextual and purposive approach.

Writing for a unanimous court, Chief Justice Beverley McLachlin and Justice John Major stated that the “first step is to determine the object, spirit or purpose of the provisions of the Income Tax Act that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids. The second step is to examine the factual context of a case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue.”

The Court continued: “the abusive nature of the transaction must be clear. The GAAR will not apply to deny a tax benefit where it may reasonably be considered that the transactions were carried out in a manner consistent with the object, spirit or purpose of the provisions of the Act, as interpreted textually, contextually and purposively.”

“The Court established a legal standard for GAAR and it did that very well,” said Al Meghji of Osler Hoskin & Harcourt LLP in Toronto, who acted for Canada Trustco. He added that the Court’s task was to ensure that GAAR was an effective anti-avoidance tool while at the same time applying it in a way that did not result in unacceptable commercial uncertainty.

The difficulty with GAAR, he continued, was that it “was very capable of becoming a smell test.” According to Meghji, the new legal standard allows a determination of whether something is abusive without reference to subjective views about what is or is not acceptable.

In Mathew, the Court applied its reasoning from Canada Trustco and held that, based on a contextual and purposive interpretation of the relevant sections of the Income Tax Act, and in particular the partnership provisions relied upon by the taxpayers, the impugned transactions were abusive and frustrated Parliament’s purpose.

Kim Hansen, a Vancouver sole practitioner who represented the taxpayers in the Mathew case, agreed that the Court did a good job of providing direction with respect to applying GAAR, pointing out that “the rule itself provides uncertainty.”

Calling the Canada Trustco decision a “major setback for the government”, Professor Krishna says he expects the Department of Finance to respond to the decision in much the same way it did following the Stubart decision. “They overreacted in 1988 and I expect they’ll overreact again and bring technical amendments to bolster the rule,’ said Krishna.

Justice lawyer Anne-Marie Levesque, who represented the government in both cases, agreed the Court gave “clear guidance to the government, to taxpayers, and to courts on how it sees GAAR being applied in the future.”

However, she added that “the Court has put GAAR in a box and I’m not sure the government saw the same box as the Court.” She said that the government will consider the decision and its impact before deciding how it will affect the future application of GAAR.

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March 5, 2010 by Dan White.

Agressive Tax Planning Crackdown

CRA is looking to deny tax savings where a tax expert advises based on collecting a share of the rewards.

I guess this means that getting tax advice saves taxes.  (Now I am really glad that  I don’t charge based on the money I save people.)

Read other news from our Budget 2010 Section

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March 2, 2010 by Dan White.

I don’t know… but it seems to me that $53,000 for job related expenses could be high. Regardless of high, low or whatever; Toronto has not been handling this properly.

How it should work is that the counselors can be paid an extra $53,000. They then deduct as employment expenses those expenses that legitimately reflect job related expenses. The rest is taxable income. End of story.

Things such as zoo passes, seem pretty personal to me… not that I want to get personal on this.

For more info on tax problems and solutions;  go to  www.taxauditsolutions.ca

Dan White

Here is the Globe and Mail article on the subject.

ANNA MEHLER PAPERNY

From Tuesday’s Globe and Mail Published on Tuesday, Mar. 02, 2010 12:00AM EST Last updated on Tuesday, Mar. 02, 2010 5:01AM EST

The Canada Revenue Agency is trying to tax Toronto city councillors on benefits ranging from golf and zoo passes to underground parking spaces. And the city is fighting back.

On Feb. 18, each councillor received a letter from the city’s pension, payroll and employment division with the results of a CRA employer compliance audit. Each letter included a figure (some in the thousands of dollars) for taxable benefits related to passes for the Toronto Zoo, Sony Centre, TTC and city garages. It also included councillors’ expenses (each has a budget of $53,000 annually) as taxable benefits.

“The city does not agree with the interpretations set out in the proposal,” the division’s director, Celine Chiovitti, wrote in the letter, adding that the city believes councillors need all of these things to do their jobs and shouldn’t have to pay taxes on them.

The city is challenging the CRA’s findings through a submission to its audit division and a notice of objection. The city has until March 15 to respond, the letter said, asking councillors to submit information on their 2006 and 2007 expenses by that date.

The city has set up drop-in sessions for councillors to meet with the lawyers it has retained to deal with the dispute: David Spiro and Timothy Fitzsimmons of Fraser Milner Casgrain.

Councillor Joe Mihevc said he’s puzzled by the designation. “It’s appropriate that we pay our appropriate share of taxes … I have no problem on that front,” he said. “But when you look at the things they want to tax, it seems a bit ridiculous.” He added that most councillors use their expenses budget to cover such costs as newsletters and community meetings, not personal items. “My sense is that the CRA gave us a cursory look and did not probe in detail as to how these quote-unquote ‘benefits’ are actually used by city councillors,” he said.

But Councillor Rob Ford, who has long spoken out against councillors’ “perks,” said the CRA is right to crack down on free passes for councillors.

“All these perks, one right after the other. And I’ve tried to get rid of them at budget meetings and they just laugh at me,” he said. “I think it’s great that they’re forcing us to show who’s used [a pass], and how many times you’ve used it. And if you have used it, you have to pay taxes on it, ’cause it is an income.”

Mr. Ford said he has filed numerous complaints with the CRA, and, “finally, somebody up there’s listening.”

Yesterday evening, CRA spokesman Philippe Brideau said he couldn’t immediately confirm that the agency has conducted the audit and is asking for payment. He cited confidentiality provisions in the Income Tax Act.

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