Session 5: How To Win In Today's Tax World

KPMG Ignite
10:30 am – 11:15 am
Session 5: How To Win In
Today's Tax World
Wanda Rumball, Partner, KPMG Law LLP
Gerald Grenon, Partner, KPMG Law LLP
Agenda
CRA Landscape
Audit Trends and Initiatives
Taxpayer Toolkit
The Players and When To Play Your Cards
Resolving Disputes in the Tax Court
Recent Trends and Developments
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Canada Revenue
Agency
• Current Conditions
• Audit Initiatives
• Taxpayers’ Rx
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Current CRA Landscape
External Forces
• International backdrop
• Federal fiscal reality
• Budget constraints – shrinking resources
Internal Responses
• Enhanced efficiencies (for CRA)
• Enhanced revenue raising objective
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Audit Trends and
Initiatives
General
• Increasingly aggressive
• Increasingly focused audit resources
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Audit Trends and
Initiatives
Specific
• Large corporation audit strategy
• Information requests
• Risk-based audit approach
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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CRA’s Risk-Based
Audits
CRA’s Old Approach
CRA’s New Approach
Size
Individual legal entities
> $250 M revenue
“Groups” with > $250 M
revenue
Certainty
Audit Protocol
Real-time audit assistance
Audit cycle
Perpetual
None to regular visits
Tax Governance &
Taxpayer Behaviour
Not relevant
Can be very relevant
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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CRA’s Risk-Based Audits
Audit coverage
High risk
Medium risk
Low risk
• Compliance
audit
• Quick review
• More indepth
review
• Shorter
audit
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
• Typical CRA
audit
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CRA’s Risk-Based Audits
CRA considers the following in evaluating risk:
•
•
•
•
•
•
•
•
•
Audit history
Corporate governance (oversight)
Corporate structure (controls)
Openness and transparency
Participation in aggressive tax planning
Unusual or complex transactions
Major acquisitions or disposals
Industry issues
International transactions
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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CRA’s Risk-Based Audits
The 12 Questions
1.
Provide information about your internal tax function: how many staff and what are
their roles and responsibilities?
2.
Do you have a formal framework for identifying and assessing tax risks associated with
normal ongoing operations? If so, provide information on how risk is identified,
managed, reported, monitored and mitigated. Provide names of those who oversee
tax risk management.
3.
Are tax risk review conducted? If so, how often and who gets the results? Can you
provide us with the results?
4.
What tax matters do the directors and senior management normally get involved in?
Are they proactive or reactive? Please provide supporting documentation.
5.
What tax intermediaries are used and what is their involvement in tax risk
management? What are your expectations from these individuals?
6.
Do you monitor the risk of non-compliance with tax obligations? If so, how do you do
this and what do you do when you discover a potential issue?
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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CRA’s Risk-Based Audits
The 12 Questions
7.
What systems and processes does the company have to ensure that data and
information for tax purposes are accurate, reliable and maintained in accordance with
requisite legislation?
8.
Has the company used external advisors for tax services within the last 2 years and
does this happen on a regular basis? Have any of them been retained on a
contingency fee basis?
9.
Do you have a tax strategy that is consistent with your overall business strategy? If so,
please provide details.
10. Do you have a risk management committee? If so, please identify the members and
their roles and advise if you would be willing to give us access to the minutes of the
meetings.
11. What are your top 5 priorities with respect to tax?
12. Do you have any other information regarding tax risk that you feel is relevant to assist
us in understanding your business and which will allow us to better define your risk
assessment?
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Audit Trends and Initiatives
Top 10 List
1.
2.
3.
4.
5.
6.
7.
Transfer Pricing & APAs – financial instruments, restructuring
Interest deductibility – reasonableness
Professional fees – transaction costs, personal
Foreign Accrual Property Income (FAPI) and surplus pool computation
Permanent establishment/residency – in Canada, in a province
Withholding taxes – Regulation 102, 105, Part XIII
Enterprise – payroll audits, penalties – 163(1), management fees, taxable
benefits, aircraft
8. Surplus Stripping
9. Rollovers – T2057 (section 85) – valuation and compliance focus
10. Indirect Taxes and SR&ED
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Taxpayer Toolkit
• Diligent compliance
• Strong books and records
• Tax planning
• Dealing with the CRA
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Taxpayer Toolkit
Dealing with the CRA
Manage the relationship
• Transparency
• Educate auditors
• Optimize risk assessment
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Taxpayer Toolkit
Risk Assessment Optimization
•
•
•
•
•
Plan for meeting/request
Document tax governance practices (policy statement)
Invest in systems/controls
Co-ordinate with risk management
Strong in-house capability
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Taxpayer Toolkit
Manage the Issues
• Relationship v. Issue
• Evaluate tolerance for aggressiveness
• Large corporation strategies
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Life Cycle of Typical
Contested Issue
• Audit – CRA Audit Division
• Objection – CRA Appeals Division
• Filing of pleadings in Tax Court – brings Department of
Justice on to file
• Tax Court hearing
• Federal Court of Appeal (Appeal as of Right)
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Typically Differing
Approaches
Re Documents and Oral Evidence
• Auditors are auditors – they want to see documents to believe (and
have audit powers)
• Auditors and the value of a concise explanation (backed by
documents)
• Appeals Officers – should be more willing to consider all forms of
evidence; experience varies
• Crown lawyers and discovery
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Metrics Applied to CRA and Impact
• No cradle to grave metrics; CRA’s branches measured
separately
• Audit
“TEBA” – Tax Earned by Audit
o Percentage of cases resulting in a change
o


75% - small and medium enterprises – revenue of $1 million to $50
million
90% - large business – revenue of > $50 million
• CRA Appeals – elapsed time to resolve dispute/quality
assurance review
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Choosing When to Play Your Cards
• Dealing with an auditor (or appeals officer) with a closed mind (and
finding out whether you are dealing with a closed mind)
• Opting to change the players (up the chain, or referrals to other
departments in CRA)
• Less use of “Designated Appeals Officers” as DOJ contact in litigation
– increasingly Appeals Officer that reviewed objection remains
involved
•
Especially if HQ Appeals involved in review of objection
• Attempt to increase influence of DOJ in determining whether cases
settle (Protocol – limited but intended to have more general
influence – but will it succeed where same Appeals Officer?)
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Statistics
Notice of Objection Statistics
(income tax and GST/HST)
Period
TP Successful
Partial Success
No Change
2005-06
33%
21%
46%
2006-07
22%
18%
60%
2007-08
29%
24%
47%
Average
28%
21%
51%
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Statistics
Tax Court of Canada Appeal Result
(additional success for taxpayers beyond Notice of Objection
stage)
All Files
Allowed in Full
Allowed in Part
Dismissed
18%
35%
47%
• Dragged down by Informal Procedure Statistics
(2002-06)
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Resolving Disputes in
the Tax Court
Milestones
Pleadings
• Notice of Appeal
• Reply
• Answer
List of Documents
(Partial vs. Full Disclosure)
Discoveries
Pre-Trial Conferences
Trial
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Matters Affecting Prospect of
Resolution without Trial (Baseline)
Need for Principled basis
• Courts have refused to enforce settlements on basis CRA/DOJ could not
agree to settlement not in accordance with law
• How principled?
• Pure saw-offs based on litigation risk not accepted
• Some issues – e.g. allocation of purchase price are generally flexible –
others all or nothing
“Softsim Technologies” – Tax Court enforced settlement on basis
“I could have reached the same findings in a judgment” and
writes “If settlements are to be taken seriously, I fully agree that
parties should be bound by them”.
Hindrance and opportunity
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Matters Affecting Prospect of
Resolution without Trial (Baseline)
Consider possible attractive settlements in taking positions
from early in dispute – especially for large corporations, given
objection rules
Arrange for right mix of issues to be before decision-makers at
CRA / DOJ, or judge at pre-hearing conference or hearing
• Year by year basis, but can pick year to file Notice of Appeal, and can
combine years in Notice of Appeal
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Recent Trends and Developments
• Budget Cuts
• Tax Court rule designed to increase settlements – greatly increased
recovery of costs if make settlement offer (that is rejected) and do as
well or better in court
• “Substantial indemnity” – 80% of real costs (solicitor client) from date of
offer
• Welcome but limited impact by virtue of need for principled basis.
• CIBC World Markets – FCA reads in that cost rule can’t apply where
settlement offer not principled.
• Is the Rule now useless in litigation with single issues that have no
obvious mid-points?
• Is “I WIN, NO COSTS” a qualifying offer? (No)
• Costs from Consolidated Revenue Fund
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affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Exclusive Offer For KPMG IGNITE Attendees
Personalized CRA risk-based assessment coaching session
Receiving the risk-based evaluation letter from the CRA creates angst in any
organization – the letter requests a meeting with non-tax executives and
demands detailed description of the tax function and processes in your
organization.
Advance preparation is key to minimizing stress and maximizing the
outcome for taxpayers.
In a coaching session our experienced professionals would help you
(i) evaluate your organization’s current preparedness for the request;
(ii) identify specific actions / issues to address prior to receiving a request; and
(iii) suggest strategies to help you plan for the day that the letter arrives.
LET US HELP YOU BE PREPARED.
© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Thank you for coming.
Wanda Rumball, Partner, KPMG Law LLP
[email protected]
Gerald Grenon, Partner, KPMG Law LLP
gagrenon[email protected]