US TRANSFER PRICING

The IRS has announced new rules for transfer-pricing issues that will have a major effect on all cross-border transactions between non-arm’s length parties. The new requirements will include a form called a Schedule UTP. Basically this form will describe to the IRS all issues related to valuations and transfer-pricing along with treaty exemptions and other filing positions that are related to the corporate tax return. This will provide the IRS with details that are issues of uncertain filing positions taken by the taxpayer, effectively declaring to the IRS what filing positions are taken that may be questioned by the IRS. Somewhat like waving a red flag in front of a bull and saying “Here I am, come and get me”.

The detail required in this new reporting is substantial and equivalent to self-incrimination. It will include an IRS coding system to rank the priorities of each position, must list the relevant IRS code that applies or may apply to the particular position, a request that they not challenge a specific position (as if they would comply with that!) along with all necessary calculations, valuations and reasons for the position taken.

While this impacts the filing positions of US tax filers, since more and more Canadian companies are required to file, even if it is a protective return to establish a treaty exemption, it is quite possible that this form will be required as part of these filings in the future. In addition, the old adage of monkey see – monkey do, may result in similar requirements coming from the CRA.

CANADA REVENUE AGENCY – ON THE ATTACK

CRA is becoming more aggressive with certain filing positions taken by taxpayers and in their audit profiles. Included is the challenge of the deductibility of multiple vehicles in the same business. They recently lost a case where a taxpayer was able to demonstrate that he used more than one car for his business as he drove one in the winter and another in the summer. CRA is becoming much more insistent on seeing vehicle logs to substantiate the business use.

AIR MILES/POINTS

Air mile/points have also again risen as an audit target and they will be actively pursuing taxpayers who use points accumulated on a business card for personal use. It is important that proper planning be put in place to minimize the potential for a personal taxable benefit being assessed.

PERSONAL SERVICE BUSINESS

We have not heard much of from CRA on this subject in quite a while but there is apparently a project starting on the issue of personal service businesses that may impact many companies that have a very small workforce or possibly a single customer. This can result in a denial of the small business tax rates as well as the denial of many expenses.

FAMILY TRUSTS

There is a CRA project underway to ensure that trusts have been set up properly, that the settlement property actually exists and is in the possession of the trustees and that any loan interest has been properly paid. CRA is also looking for records of an annual meeting of trustees. This means that trustees should ensure that annual minutes acknowledging the meeting of trustees should be documented by having all trustees sign the minutes.

NON-RESIDENT BENEFICIARIES OF AN ESTATE

Under Canadian tax law, if a capital distribution is made by a trust to a non-resident beneficiary it is a deemed disposition of the beneficiary’s capital interest in the trust and would therefore require the filing of a section 116 certificate and the trust would be required to withhold tax from the distribution. CRA has confirmed that this requirement would also apply to estates. This is a signal to trustees and executors that any distribution to a non-resident must follow these rules or they will become personally liable for any tax liability.

SHAREHOLDER AGREEMENTS

A shareholder agreement is an often ignored document that is very important to any business enterprise where there is more than one shareholder, even if it is a family corporation. Issues that arise may involve bankruptcy or insolvency, separation or divorce, irresolvable operational issues and death.

In the matter of a death what can often happen is that the shareholder agreement may be contrary to the will and result in litigation. It should be a requirement in the agreement that stipulates adherence to the agreement by the estate. Since the estate is not an original party to the agreement, failure to have this stipulation in the agreement can result in expensive and time-consuming disagreements.

INSURANCE AND FAMILY LAW

One frequent unexpected problem on a family breakdown is the failure of the parties to review life insurance policies, pension plans and TFSAs in order to revise the beneficiary designations and sometimes result in a former partner receiving the benefits.

TAX-FREE SAVINGS ACCOUNTS (TFSA)

A recent technical change in the rules allows a holder of a TFSA to designate a beneficiary of the account. If the beneficiary is a spouse or common-law partner the designation allows the account to be transferred to the survivor without any tax or probate and becomes part of the survivor’s TFSA. Another clarification from CRA is that stock options can be a qualified TFSA investment but, if they are not public shares, valuation may be a problem.

IN THE COURTS – VOLUNTARY DISCLOSURE PROGRAM (VDP)

An interesting case called College Park Motors has put the whole VDP in danger of being cast aside by professional advisors as the result of an overly zealous prosecution by CRA. The taxpayer had discovered an error and, following the rules outlined by CRA, filed a voluntary disclosure for the periods covering the error. After the assessments for those years were completed and assessed, in accordance with the information provided by the taxpayer, CRA’s audit section opened a file re-examining a substantial number of statute-barred years. When the taxpayer challenged the audit as being beyond the limitation period the CRA’s position was that the VDP was a prima facia admission of gross negligence and therefore the limitation did not apply. The Court reluctantly agreed with the CRA position but by winning this one battle CRA may have torpedoed their own program by scaring any taxpayer from coming forward on a voluntary basis.