New Taxpayer Right in Canada: No Reprisals for "Service" Complaints

From the Canada Revenue Agency website: Harper Government launches new right to ensure Canadian taxpayers are treated fairly [french version here]
The new right says:

16. You have the right to lodge a service complaint and request a formal review without fear of reprisal.   

We know that to be trusted, effective, and efficient, we must conduct ourselves ethically and honestly, and the CRA strives to do so every day. Our employees are expected to act in accordance with the CRA Code of Ethics and Conduct and the Values and Ethics Code for the Public Sector. These codes are terms and conditions of employment and they reinforce our commitment to serve the public with integrity, professionalism, respect, and cooperation. This right means that if you lodge a service complaint and request a formal review of a CRA decision, you can be confident that the CRA will treat you impartially, and that you will receive the benefits, credits, and refunds to which you are entitled, and pay no more and no less than what is required by law. You should not fear reprisal. We are required to apply the law and relevant CRA guidelines and policies, which may include the charging of penalties, or requiring the payment of your debt. When CRA employees act in accordance with the law, these do not constitute acts of reprisal. If you feel that you have been subject to acts of reprisal, the CRA wants to hear from you. We take your concerns seriously. Tell us about them by completing section 3 – Reprisal Complaint on Form RC193, Service‑Related Complaint. We can assure you that we will address your complaint, and that we will send it directly to an investigation office located at CRA Headquarters. This will ensure that the investigation is conducted independently of the office associated with the complaint.

At a meeting with members of Certified General Accountants (CGA) Canada to discuss taxpayer fairness, Minister Gail Shea stated:

“Our Government is committed to ensuring that all Canadians are treated with fairness and respect by the Canada Revenue Agency. In our system of voluntary compliance, taxpayers must have confidence in the objectivity and fairness of CRA’s actions as a tax administrator. This new addition to the Taxpayer Bill of Rights will help reinforce public confidence in Canada’s tax system, and ensure that Canadians taxpayers feel free to speak up if they have a disagreement with the CRA.”

 Curiously, the CRA website adds the following:

Although there is no evidence that Canadians have been subject to reprisal by the CRA, in his work across the country, the Taxpayers’ Ombudsman heard that taxpayers would sometimes hesitate to lodge a complaint for fear of being treated differently afterward. To address this unwarranted fear and encourage Canadians to speak up if they have a disagreement with the CRA, the Ombudsman recommended that a new right be added to ensure Canadians are confident they will be treated fairly. 

The Taxpayer Bill of Rights is an agency statement that lacks the force of law, but many of its rights are legislated (via the Charter or otherwise). This new right aligns with observed attempts by tax agencies to present themselves as "service-oriented," that is, as if taxpayers were customers. It remains to be seen if and how taxpayers will avail themselves of this newly articulated right.

Employee Mobility & Assignments Abroad-Conference at McGill Law-May 29

The Canadian Tax Foundation will host a conference at McGIll Law next Wednesday on the (timely!) topic of taxing workers when they go abroad. Eminent McGill law grad and former McGill chancellor Richard Pound will deliver the lunchtime address. Info below and on the CTF website.

EmployeeMobility - Assignments Abroad 

Wednesday, May 29, 2013 

8:45 a.m.  –  4:45 p.m.

Followed by a cocktail reception sponsored by Stikeman Elliott 

McGill University, Faculty of Law
3660 Peel Street (library entrance)
Montréal

[Register online] [Registration form - PDF]

This year, the theme for the Canadian Tax Foundation’s annual Journée d’études fiscales, is employee foreign assignments. Speakers at this conference will be discussing the various taxation considerations which arise, both from the perspective of the employee and of the employer, when Canadians choose to temporarily or permanently move their place of work abroad. Various aspects of taxation will be analyzed during the course of the day by experts in the field.

Click here for program & registration info.

After the cocktail, stick around for a Roundtable on Tax Justice, info here and more to come soon.

Call for Papers: Annual Conference of the Canadian Council of International Law

The organizers of the CCIL's 2013 annual conference have issued a call for papers:

CCIL 42nd  Annual Conference: Call for Papers
Contemporary Actors and their Actions: A New Look at the Formation of International Law
November 14-16, 2013 - Ottawa, Ontario

The Canadian Council on International Law invites paper proposals or summaries of proposed presentations from faculty members, doctoral level graduate students in law and related disciplines, and practitioners, on topics dealing with the theme of its 42nd Annual Conference: “Contemporary Actors and their Actions: A New Look at the Formation of International Law”.

Paper proposals or summaries of proposed presentations in English or French should be no longer than a single page in length and should include a biographical statement or curriculum vitae.  Proposals are due June 3, 2013 and should be sent to manager@ccil-ccdi.ca.

Great topic. More info at the link.

CTF Conference on Tax & Employee Mobility-McGill Law School, May 29 2013

Si vous avez de la difficulté à lire ce courriel, s.v.p. visionner la version en ligne. Afin de vous assurer de bien recevoir nos courriels, ajouter ctf-fcf@ctf.ca à votre carnet d'adresses.

Bureau 2935 1250, boul. René-Lévesque ouest Montréal, QC H3B 4W8 Téléphone : (514) 939-6323 Télécopieur : (514) 939-7353 Inscrivez-vous avant le 4 mai pour profiter du tarif "oiseau matinal" Journée d'études fiscales Mobilité des employés à l'étranger (English below) Le mercredi 29 mai 2013 8 h 20 à 16 h 45 Suivi d'un cocktail gracieusement offert par Stikeman Elliott Université McGill, Faculté de droit 3644 rue Peel Montréal [Inscrivez-vous en ligne] [Formulaire d'inscription - PDF] inscrire à votre agenda Cette année et dans le cadre de la Journée d'études fiscales, la Fondation canadienne de fiscalité a choisi de présenter des conférences ayant pour thème les Canadiens qui travaillent temporairement ou de façon permanente à l'étranger. Plusieurs aspects de la fiscalité seront abordés, tant du point de vue de l'employé que du point de vue de l'employeur, par des experts en la matière. Les faits saillants de la Journée d'études fiscales comprennent : (certaines présentations seront en anglais) • Les aspects fiscaux pour l'employé et pour la société (employeur)                  > impact sur les régimes de retraite et autres régimes de rémunération                  > frais de localisation du ou vers le Canada                  > planification du rapatriement                  > mécanisme de compensation salariale (tax equalization)                  > impôt au décès ou impôt sur les successions • Utilisation d'une société particulière pour « services d'employé »                  > exemple de mécanismes d'opération                  > bénéfices potentiels et éléments fiscaux à considérer • Éléments fiscaux à considérer lors d'un transfert dans un pays émergeant • Aspects administratifs à considérer                  > Retenues à la source                  > Mécanismes de recharge intragroupe • Visa et autres aspects légaux à considérer Pour consulter le programme ou pour vous inscrire s.v.p. cliquez ici. Pour toutes informations supplémentaires s.v.p. contactez le bureau de Montréal au 514 939 6323 ou par courriel à adminmtl@ctf.ca   Prochains événements : Le mardi 14 mai 2013: TAX STRATEGIES FOR EXECUTIVE COMPENSATION (en anglais) (Ottawa) (demi-journée) Le jeudi 16 mai 2013: FAIRE AFFAIRE AUX ÉTATS-UNIS : STRUCTURES DE FINANCEMENT AMÉRICAINES (Québec) (demi-journée) Pour les jeunes fiscalistes: Le vendredi 10 mai 2013: PERTES SUPENDUES (Midi-conférence) (Montréal) Le jeudi 30 mai 2013: ACTIONS ACCRÉDITIVES (Petit-déjeuner fiscal) (Québec) FONDATION CANADIENNE DE FISCALITÉ ***** Register before May 4th to benefit from the Early Bird rate  Journée d'études fiscales Employee Mobility - Assignments Abroad  Wednesday, May 29, 2013  8 :20 a.m.  –  4 : 45 p.m. Followed by a cocktail reception sponsored by Stikeman Elliott  McGill University, Faculty of Law 3644 Peel Street Montréal [Register online] [Registration form - PDF] (Take advantage of our early bird rate by registering before May 3rd, 2013) add to calendar This year, the theme for the Canadian Tax Foundation's annual Journée d'études fiscales, is employee foreign assignments. Speakers at this conference will be discussing the various taxation considerations which arise, both from the perspective of the employee and of the employer, when Canadians choose to temporarily or permanently move their place of work abroad. Various aspects of taxation will be analyzed during the course of the day by experts in the field. Topics covered at the Journée d'études fiscales will include: (certain presentations will be in English) • Tax considerations for the employee and employer corporation            > Impact on retirement savings vehicles            > Cost of relocation to or from Canada            > Planning the repatriation            > Tax equalization            > Death and inheritance taxes • Using a special purpose corporation for employee services           > Examples of methods of operation           > Potential benefits and taxation considerations • Taxation issues when considering a move to a developing country • Administrative issues to consider          > Source deductions          > Mechanisms for intra-group charge back • Visas and other legal considerations To consult the program or to register, please click here. For any additional information, please contact the Montréal office at 514 939 6323 or by email at adminmtlctf.ca

Are multinational companies a public good? If not, why are taxpayers subsidizing their global marketing strategies?

The story is that the Canadian government recently set up food trucks in Mexico in order to promote "Canadian cuisine," which the National Post pictures as follows:

Above: poutine. Below: tourtière, both from Quebec.
(the article says only QC has any sort of cultural food identity. Sorry BC!)  

These national icons are being served from this truck:

Don't judge this book by its cover.

So, the Canadian government has gone to Mexico with a van decorated with fresh fruits...to sell gravy-and-cheese-slathered french fries and meat pie.

To be sure I'm not against either of these foods in principle (so long as the latter is served with maple syrup) and I'm not against Canadians...whether individual or corporate... setting up shop in Mexico to sell the hapless public yet more creative combinations of salt-sugar-fat. (Neither would I be opposed to Mexico imposing Pigouvian taxes on this activity, to compensate for the costly externalities visited upon the public health.)

But I very much object to taxpayers subsidizing the venture. I get that all countries try to promote their culture and in the process increase exports of their goods & services (or is it really the other way around). But as industrial policy goes, this has to be the bottom of the barrel.  If McCain Foods Inc cannot get the word out about its wonderful french fries, I simply cannot see how it becomes the  public's responsibility to provide it with free advertising. 

Last week we learned that corporate tax expenditures more or less equal corporate tax revenues raised in the US.  I haven't seen similar number crunching for Canada (working on it), but I expect for multinationals at least the story is very similar. If you then add these straight up subsidies, are we getting to a place where multinationals constitute a net drag on the fisc? If yes then we should be asking ourselves: when did we decide that multinational corporations are a public good that must be financially supported by other taxpayers? 

Is there anyone out there still clinging to the sense that a free market economy must mean something other than government subsidies for favored industries?

Canadian Tax Foundation conference: "Abusive Tax Planning"--May 1 in Montreal

The Canadian Tax Foundation will hold a lunchtime conference on May 1st in Montreal on The Fight Against Abusive Tax Planning at the Federal Level and the New Quebec Rules with respect to Non-Resident Trusts, with updates by the CRA and Revenu Québec. The event will be held from 12 to 2pm at the Center Sheraton, Salons 4 & 5, 1201 René-Levesque Blvd. West, Montréal. From an email alert: 

Mr. Dan Rivet, (Manager / GAAR and Inter-provincial Tax Avoidance Section at the CRA) will discuss the various types of abusive tax planning schemes that are currently being audited by the CRA and the success that the CRA has had in its fight against abusive tax planning both at the domestic and the international levels. 

Mrs. Agathe Simard (Director General – Direction principale de la lutte contre les PFA at Revenu Québec) will be discussing the new Québec measures that require the filing of tax returns by all non-resident trusts who hold immovable property in Québec.

En français, I expect--you can check out the program at the link above and register online.

Canada Revenue seeks source data on tax evasion from the ICIJ to bring "appropriate action"; What role due process?

Tax authorities are embarrassed by the ICIJ leak and they want the source data before anything more embarrassing hits the front page news and/or to show they really are serious about cracking down on offshore tax evasion.  As a result I am not surprised to see the Canada Revenue Agency attempt to prise the data from the CBC:

...It is my understanding that a leak of large amounts of data potentially exposing cases of offshore aggressive tax avoidance and possibly tax evasion is the catalyst for these stories. I also understand that your organization may be in possession of some or all of this data. 

You will know that the Canada Revenue Agency has already been in touch with your organization to underscore the importance of this information to our continuing efforts on behalf of Canadians to combat offshore aggressive tax avoidance and evasion. 

I would expect that both the CBC and you, as its president and CEO, have an interest in ensuring that appropriate action is taken if individuals are not respecting their tax obligations. Taking action against individuals who are not respecting their tax obligations is in the best interest of the public and law abiding Canadians. The provision of the data that your organization has in its possession would allow the CRA to pursue cases where this is occurring without in any way infringing on your journalistic mandate. 

I again respectfully request that you provide to the Canada Revenue Agency all of the data the CBC received through its collaboration with the International Consortium of Investigative Journalists so that the Agency may review and take action according to its mandate. I understand that the CBC is reluctant to provide this data, citing concerns with journalistic independence and protecting sources. I can assure you that the Canada Revenue Agency has not asked for the source of the information and will treat any information you provide with strict confidentiality in the same manner it treats all taxpayer information it receives. 

I sincerely hope that you will respond positively to this request and agree to provide this information so that the CRA can carry out its responsibilities.

Lots of loaded language there but it's clear the CRA can't compel the CBC to hand over the data, and is appealing to the CBC's sense of responsibility to society to make sure that tax cheats are brought to justice.  Notice the CRA doesn't confine itself to the data that implicates Canadian taxpayers--they want "all the data." I wonder why they don't offer the temptation of the newly-authorized whistleblower rewards. But is it not the case that the CBC, and the ICIJ, have obtained this information illegally? And if so, what are the ramifications for bringing criminal action in Canada?

The ICIJ received a hard drive in the mail containing millions of lines of personal financial data on individuals and companies that presumably were entitled to confidentiality under existing national laws--laws presumably similar to those that currently protect Canadians' financial data from being given out to unrelated third parties. Recall the CRA's “Declaration of Taxpayer Rights," which states that every Canadian:

“can expect [the CRA] to protect and manage the confidentiality of your personal and financial information ... Only employees who need your information to administer programs and legislation have access to your information. We also take other steps to protect your information and make sure it is kept confidential. For example, we follow government-wide and internal policies on the security of information and privacy.”  

The Declaration is simply an agency statement and lacks the force of law, but many of the rights it details, including the right to privacy and confidentiality, are “legislated” rights, that is, they are contained in the Charter, the Act, other statutes, or the common law.  Legislated rights do have the force of law so Canadians have mechanisms to seek redress in cases of breach of confidentiality or privacy by the CRA. Presumably, other countries have similar confidentiality rules and taxpayers have rights in those countries, too. Have these not been (and are they not being) violated by the sender of the hard drive, the ICIJ, the CBC, and the other journalists?  Of course, the CRA would be entitled to data on Canadian taxpayers from the taxpayers themselves and from relevant third parties under domestic law, but this is the major sticking point of the international tax system today: barring automatic information exchange from other governments, it is hard for the CRA to find money hidden offshore without resorting to extra-legal means of obtaining information.

So if we think the people exposed in the ICIJ leak have violated Canadian law, we must also recall that they have due process rights under that law. Would prosecution of Canadians using such illegally-obtained information pass internal due process requirements? I think the answer is probably yes, and I wonder if Canada might diverge from the US in the ability to use ill-gotten evidence in a criminal prosecution.

The reason I think that Canada could use the data as evidence in a criminal prosecution is that even though every Canadian "has the right to be secure against unreasonable search or seizure," and even though this Charter protection has been interpreted to require law enforcement authorities to seek prior judicial authorization for a proposed search and seizure if the target has a reasonable expectation of privacy with respect to the information sought, the case of Schreiber v. Canada says that the rights and freedoms enumerated in the Charter are guaranteed only against interference from actions taken by the federal or provincial governments of Canada.  Following the Schreiber decision, it seems that even tax information obtained illegally would be admissible against Canadians, so long as it wasn't the Canadian government that was responsible for the illegal action that exposed the behavior.  

In the United States, the result might be different. The cases of United States v. Wolf (1984) and U.S. v. Phillips (1979) suggest that information requested from another government by the IRS would be inadmissible as evidence against a U.S. citizen if it was seized by the foreign government in contravention of U.S. law (even if the seizure was allowed under foreign law).  Turning that around, I am not sure what happens if the IRS tries to use information that a private citizen produces in contravention of foreign law, but perhaps the cases suggest that if the information is produced in a manner that also violates US law, it could not be used as evidence in a criminal prosecution. If anyone reading this could shed more light on the subject, I'd be grateful for the insight.

Relatedly, I've been wondering what happens to the ICIJ, the CBC, etc. themselves, if they expose names and financial information about anyone that turns out not to be engaged in anything illegal? Maybe this seems improbable but it bears recalling that it is not illegal to own an account in another jurisdiction, including in the Cook Islands. What is illegal is failing to fulfill disclosure obligations under the laws of any jurisdiction that claims sovereign rights over you. That kind of information is perhaps not on the hard drive, so mistakes could be made in exposing people to public scrutiny who are not engaged in anything illegal. Thus the CRA makes the leap from data on a hard drive to evidence that Canadians are shirking their tax obligations, but it's certainly possible that not all the data points in that direction. That may be why the ICIJ has not made the source data public as Assange did--perhaps there is some sense that disclosure of all the data on the drive might not necessarily be "in the best interest of the public and law abiding" population, of Canada or otherwise.

In any event this story continues to unfold and as usual raises more questions than I can readily answer. I will be very interested to see how things proceed in terms of the CBC or the ICIJ releasing the source data to any tax authorities.

Bridge Over the River Detroit

Surprise--despite determined efforts to stop the process, the US has pushed through approval for the new Detroit-Windsor Bridge.  As you may know the new bridge is opposed by Matty Maroun, who controls much of the current cross-border traffic between these two cities via his ownership of the Ambassador Bridge. From the WSJ blog:

The Detroit-Windsor bridge would be the third international connections between the two cities, joining the 84-year-old Ambassador Bridge and the 83-year-old Detroit-Windsor Tunnel. Those two links are the busiest, and second-busiest, border crossings in North America, respectively, funneling tourists and trade between the two countries.

Canada agreed last year to provide as much as $550 million to build the new six-lane bridge, which would relieve congestion at the border. Under the deal, the private sector will cover the rest of the costs, sparing the already stretched Michigan taxpayers from having to pony up. 

The cross-border financing deal was a big issue and Maroun wanted to take the question to voters via a referendum with the help of some sympathetic funders, but apparently, he failed. Of course, there is the matter of staffing all the booths--that's going to be tough on the US side given sequester-driven cuts.

Finance minister annoyed about transparency, on his way to Davos

Canada's Finance Minister Jim Flaherty is annoyed with having a Parliamentary budget watchdog that asked too many questions and sought too much budget transparency, going beyond the job description:

What the government wanted was “a sounding board, a testing board,” said Mr. Flaherty, before heading to Davos, Switzerland, on the weekend for the World Economic Forum.

That's rich!  Too much transparency is bad for politicians. Easier to do your thing in elite networks behind closed doors.  All that disclosure is going to ruin everything.

FATCA Forum this Saturday-Toronto

If you're following FATCA, and more specifically the Canadian response thereto, you might be interested in a forum being held on the subject this Saturday in Toronto, specifically at UofT's Victoria College, 91 Charles Street West (doors open at 10am). I'll be there to try to work through some of the international law angles, and to learn a bit more about how Canadians perceive both the regime and their governments' response to date. You can find more details here.

Activists seek Canada Tax Gap Estimate

There is a movement afoot to get Canada to get on the "Tax Gap" bandwagon, and make an estimate about how much is lost in tax revenues to tax evasion. As far as I know only the US and the UK even try to estimate this, and the UK's estimate has been criticised as laughably low, while the US estimate is hampered by shoddy data. Still, it's an exercise worth undertaking I think. If the government won't do it, do we have some enterprising accountants or economists willing to give it a go in Canada?

Porisky strikes again!

You may recall the infamous Canadian tax protestors Russ Porisky and Elaine Gould, whose efforts have landed them in jail (blogged here earlier this year).  Their latest victims are a dentist and her (American) husband, who pleaded guilty this week to evading almost a million dollars in personal taxes and to helping numerous "students" (mostly dentists) do the same. The Ontario Superior Court Justice Colin McKinnon hearing the case said the “preposterous” tax scheme “shows remarkable hubris and contempt for the rule of law.” Dentists, you can't use these schemes to avoid paying your taxes. Learn from the masters: you have to set up a double Irish/Dutch sandwich for that.

Canada's tax evasion problem in need of resources & leadership

Senator Percy Downe has issued a call to the Harper government to put some money and some effort into curbing Canadians hiding their assets overseas to escape taxation:

Sen. Percy Downe said the vacancy [at the head of the CRA] gives Prime Minister Stephen Harper the opportunity to elevate the job to the “importance it deserves” — to provide the resources to crack down on Canadians who stash money in havens to avoid paying taxes. 

...“It’s either a resource problem or a leadership problem and this is an opportunity for the prime minister to identify it as a problem and correct it,” said Downe. “I don’t want to see someone parked there to manage the status quo …. It’s time to shake up the status quo.” 

Former CRA commissioner Michel Dorais said it's a question of resources:

“CRA is a big collection machine and the money collected is directly proportional to the money invested. The determination of where to put the effort is a combination of ministerial direction, priorities of its clients, direction from the board of management and management decisions of the CEO/commissioner. If one of those three components is weak, the whole thing can breakdown rapidly.”

But the Senator says it is a question of will, not resources, becuase more resources put in will yield more revenues out.  The story quotes a "former CRA executive" who said “wherever you look you’ll find money.” Info on offshore accounts not being fully pursued by the CRA is a case in point:

In 2007, the government was given a list of 106 Canadians with secret accounts worth more than $100 million in a bank in Liechtenstein. They were among a longer list of clients taken from the bank by a former employee and later acquired by the German government, which shared the information with countries whose citizens were on the list. 

By April, Downe said CRA had assessed only $16.5 million owing in back taxes, interest and penalties on the money hidden in Liechtenstein. Of that, they collected only about $5 million and “not one penny has been assessed in fines.” 

“By its own admission, since CRA received this information five and a half years ago, not one of these Canadians who have hidden their money abroad to avoid paying taxes in Canada has stood before a judge,” said Downe.

More at the link.

Canada negotiating on FATCA

Possible advancement on the FATCA front?  From Davies Ward:

The Canadian Department of Finance announced on November 8th that negotiations are being held between Canada and the United States on an agreement to improve cross-border tax compliance through enhanced information exchange under the Canada-United States Tax Convention. The changes would support the provisions of the United States Foreign Account Tax Compliance Act (FATCA). 

The announcement is welcome news to Canadian financial institutions and investment funds. They have been waiting to see whether they will be required to enter into individual agreements with the U.S. Internal Revenue Service to avoid becoming subject to the onerous new withholding taxes FATCA will impose on non-participating financial institutions. ...

The announcement does not include any details ... The talks appear to be in their early stages, as is evident from the fact that Canada is not mentioned at all in a separate announcement released by the U.S. Treasury Department on the same date. 

No details, early stages, who knows what will happen.  I am not sure why we are still in early stages when we apparently had the same news six months ago and nothing seems to have moved since then; then again, I can't find the Nov 8th 'announcement' of which DWVP speaks, so I am working in the dark here.  Here, however, is the US Treasury's press release.  It says:

The U.S. Department of the Treasury today announced that it is engaged with more than 50 countries and jurisdictions around the world to improve international tax compliance and implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). 

 ...The Treasury Department has already concluded a bilateral agreement with the United Kingdom.  Additional jurisdictions with which Treasury is in the process of finalizing an intergovernmental agreement and with which Treasury hopes to conclude negotiations by year end include: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.

So either DWVP missed the mention of Canada or the US added it in later.  If the latter, that's also very interesting.  Davies Ward has this cute little picture to denote what negotiating with the US on FATCA looks like, but somehow I feel like this might not  capture the mood, quite, so I added a caption to help it along:

Its possible the lady on the right plans to turn that finger-bang on
her smiley-faced compatriot if things don't go well here.

Recall that the Finance Minister has been very vocal in his opposition to FATCA.  About a year ago, KPMG reported:

... Jim Flaherty has sent a letter to several major U.S. newspapers expressing Canada's concerns about the far-reaching implications of the extraterritorial U.S. Foreign Account Tax Compliance Act (FATCA) and the "nerve-wracking" effect that the Foreign Bank Account Report (FBAR) reporting rules has on Canadians. The letter, dated September 16, 2011, criticizes the broadness of the U.S. rules that would essentially cause Canadian banks to become "extensions" of the Internal Revenue Service (IRS). Flaherty also notes that the rules raise privacy concerns for Canadians who may not be aware that they needed to file U.S. tax returns. 

It is unclear what effect this Canadian political pressure may have on the U.S. administration of the reporting requirements and penalty regime that apply to Canadian residents. ...

Not much effect, I think-- it looks like the US will plow ahead and if you want an agreement you'll have to go knocking and then likely have to give something up to get it.  As I have said before, in the case of Canada, which already shares tax information on an automatic basis with the US, I am not sure what sorts of concessions the US means to extract here.  It is possible that the concessions could be unrelated to tax--it could be anything, really, bringing FATCA agreements fully into the category of the age-old practice of using unilateral regulation as little more than a means for diplomatic strong-arming.  

The cost to Canadians of pension splitting

We had a lively discussion over Lisa Philipp's paper today, during which a question arose regarding the cost of pension splitting to the budget, i.e., how much does pension splitting cost as a matter of tax expenditure analysis?  Note for non-Canadian readers, the pension splitting issue is as follows: Canada has individual filing only, no joint filing.  But for various reasons, in 2007 Canada introduced what amounts to joint filing with respect to private pension income, i.e., one spouse can deduct and the other include up to half of an annual pension income stream (some restrictions apply)--this is not for a federal pension income but strictly for income generated from private retirement savings.  A ready answer to the TEA question was not immediately found, but I've since had a look at the Tax Expenditures and Evaluations 2011 Report, found the data and made this handy chart:

So we can see that pension income splitting created a $840 million hole in the budget in 2007 and it has increased since then to about $925 million.   In class someone pointed out that pension splitting rule incidentally increased the value of a related tax benefit, namely the pension income credit, i.e., the amount of pension income a taxpayer is allowed tax-free (currently $2,000).  Sure enough the TEA report explains in fn 39: "The introduction of pension income splitting in 2007 increases the number of individuals claiming the Pension Income Credit and thus increases the value of this tax expenditure (i.e. spouses who previously did not have pension income)".  Putting the two pension benefits together yields this:

So we can see the cost of the credit increased by about $110 million in 2007, dropped a bit in 2009 and by 2011 was again about $100 million higher than it was in 2006.  It therefore seems plausible to attribute about $100 million of the credit's cost to the pension splitting rule, bringing the total TEA cost of the latter to about a billion per year.

That is about 0.4% of the total annual budget (which is currently about $245 billion) or about 4% of the annual budgetary deficit (currently about $26 billion).  Not huge perhaps, but not to be dismissed as nothing, either, especially when we know there is scant policy here: this is a straight up tax giveaway for Canadians with private pensions, i.e., higher income retirees.  Political pandering?  A quick scan of the TEA list shows it is in the league, TEA cost-wise, of the working income tax benefit and the medical expense tax benefit.  I am now very curious how many Canadians share the pension splitting benefit, both alone and in comparison to other tax expenditures.  I don't know how to find that though, so will leave the discussion right here.

Monday: Lisa Philipps on Income Splitting at McGill

Professor Lisa Philipps will be at McGill this Monday, where she will present a paper as part of our Tax Policy Colloquium Series.  Her paper, entitled Income Splitting and Gender Equality: The Case for Incentivizing Intra-household Wealth Transfers, is a chapter in Challenging Gender Inequality in Tax Policy Making: Comparative Perspectives (Kim Brooks, Asa Gunnarsson, Lisa Philipps, Maria Wersig, eds., Oxford: Hart Publishing Inc, 2011).

It opens as follows:

In this chapter, I examine the problem of income splitting under an individual tax unit and Canadian legal developments that have expanded the scope for such tax planning by spouses. Income splitting poses a dilemma for tax policy analysts concerned with gender equality because, left unchecked, it opens a back door to joint taxation, with its troubling impact on labour-market incentives for secondary earners, who are mainly women. Yet ignoring intra-familial transfers in order to prevent income splitting may disrespect women's individual agency over property to which they hold legal title, and it may close off a potential source of economic power for those who do the bulk of the unpaid work in a household. This tax policy dilemma engages fundamental, normative debates about the meaning of gender equality and whether it is possible to enhance women's access to markets while also valuing and compensating their unpaid contributions. 

The Colloquium is open to all.  If you will be in Montreal tomorrow, I invite you to join us at 11:35 am at the McGill Law Faculty, Chancellor Day Hall Room 202, 3644 Peel Street.

Montreal budget standoff: what a governance crisis looks like

Mayors of montreal's island suburbs are refusing to endorse Montreal Mayor Gérald Tremblay's 2013 municipal budget and the budget-approval process, due to " the deteriorating climate at Montreal city hall" according to the Gazette.

Radio Canada yesterday seemed to frame this pushback as a response to the increasing public mistrust of government in the midst of the Charbonneau commission that is finding corruption rampant all the way up the feeding chain of Quebec political office. It was in French so I may not have perfectly understood the report, but I would think that yes, when you're finding out daily just how high the cost of corruption is and that apparently all of your elected officials are interested in having their cut, when those same officials come round asking for tax dollars you don't feel so keen.

At some point, government has got to be accountable.

Here in Quebec, we have perhaps the highest tax burden in North America, and it appears we are using a lot of that money to line the pockets of all too many of our elected leaders.  Tax and development experts have long argued that if you could only get the masses paying taxes, they will demand their governments be accountable to them for how those taxes are used (this has been the argument for salient taxes like the VAT, which everyone feels the pain of daily).  This shameful abuse of taxpayers ought to get people into the streets banging pots.

Canada's decision on Glaxo coming soon!

Prepare yourselves--the Supreme Court will soon release its decision in the Glaxo SmithKline case.  The case record is here.  But as a quick reminder, here are the basics of the dispute:

• Glaxo Group and Glaxo Canada entered into a License Agreement giving Glaxo Canada the right to market Zantac, the active ingredient of which is ranitidine
• The agreement required Glaxo Canada to buy its ranitidine from a member of the Glaxo Group, Adechsa, a nonresident company. 
• Under that supply agreement, Glaxo Canada paid about five times as much per kilo for its ranitidine supply as its generic brand competitors paid for theirs (Glaxo Canada paid between $1,512 and $1,652 per kilo, while two generic brand competitors paid non arms' length suppliers between $194 and $304 per kilo).  
• Even at the inflated price, Glaxo Canada stood to earn a 40% profit margin on the sales of Zantac.
• The Minister deemed Glaxo Canada's purchase price to be greater than that which "would have been reasonable in the circumstances if ... [Adechsa] and ... [Glaxo Canada] had been dealing at arm's length," and therefore reallocated Glaxo Canada's profits under ITA s. 69(2) using $300 as the appropriate price for ranitidine.
• Glaxo Canada argued that any reasonable business person would enter into the supply agreement with Adechsa in order to obtain the benefit of the license agreement with the Glaxo Group.
• The trial judge assessed the license agreement and the supply agreement separately, and upheld the Minister's assessment but allowed an adjustment of $25 per kilogram to reflect the price of processing the ranitidine, therefore setting the arm's length price at $325 per kilo.
• The Federal Court of Appeal decided that the license and supply agreements should have been assessed together and determined that Glaxo Canada’s business circumstances were not comparable with the generic brand competitors because the question at issue was “whether that arm’s length purchaser would be able to sell his Ranitidine under the Zantac trademark." The FCA therefore found that the Tax Court erred in not considering the license agreement as a circumstance, and sent the matter back to trial court to decide whether the price was reasonable under the circumstances (following Gabco).
• On appeal, the SCC is to determine (1) whether the Federal Court of Appeal erred by applying the reasonable business person test to the interpretation of subsection 69(2) of the Income Tax Act; and (2) whether the Federal Court of Appeal erred in interpreting subsection 69(2) by failing to apply the arm’s-length principle on a transaction-by-transaction basis and on the basis that members of the multinational group are operating as separate entities.

My own view is the Gabco reasonable business person test was wrongly applied, and the license and supply agreement must be viewed separately under any coherent transfer pricing assessment, otherwise the taxpayer is free to create any pool of agreements they want to and tie them all together to justify any price--in other words, there would never be any comparables and you might as well not have a transfer pricing regime at all.      But the case deals with repealed s. 69(2) and not the current standard (ITA 247), so even if the SCC rules against the government here and delivers Glaxo a big win by letting it hide royalty payments in its supply agreement, there is likely still a chance that Canada could have a coherent arms' length rule under current law.

Keep in mind that Glaxo settled a similar transfer pricing dispute in the US for $3.4 billion back in 2006 pending a trial that was to begin in 2007; the bulk of the issues in that dispute involved Zantac, but the issue was the deductibility of royalties connected to marketing intangibles rather than the price paid for ranitidine.  The IRS said that GSK conceded over 60% of the total amount at issue in that case.

Tax decisions by Canada's newest SC Justice

Richard Wagner, a Montreal native and a graduate of uOttawa Law, was sworn in today as Canada's newest Supreme Court Justice,* and I asked one of my student to find me his tax decisions.  It's a very short list, of just eight cases (out of a total of 508 decisions (150 rendered at the Superior Court of Quebec and 508 at the Court of Appeal, though the latter were signed, not always authored, by the Justice):

Productions Merveilles inc c Montréal (Ville), 2006 QCCS 213
Municipal Taxation; Real estate transfer tax
 A common-law couple (Productions Merveilles), both lawyers, tried to avoid a transfer tax that is usually incurred when selling immovable property (i.e., real estate). Each party owned a company with an independent active business. Property was transferred between the two companies. The couple argued that due to their personal relationship, identical corporate infrastructure (e.g., same business address), and shared benefit, they share the same patrimony and therefore these transactions should meet the standard of “closely linked entities” (defined as having control of at least 90% of shares) and be exempt from the transfer tax.  Judge Wagner rejected the shared patrimony argument and found they had a joint venture, decision in favor of the City of Montreal. 

Peintres Filmar inc c Lapointe, 2007 QCCS 1491
CRA search and seizure
Filmar claimed false business expenses to evade taxes. The CRA proposed amnesty if the fraudulent invoices were surrendered. Filamr complied, but only partially. After realizing that disclosure was only partial, the CRA further extended its amnesty in an effort to gain Flimar’s full cooperation. When Filmar refused to comply, the CRA obtained a search warrant and seized documents.  Filmar claimed his Charter rights were abused (section 7: “right to life, liberty and security”; section 8: “unreasonable search and seizure”; and, section 24(2): “exclusion of evidence that would bring the administration of justice into disrepute”).  Justice Wagner disagreed: the seizure was valid, the CRA’s actions were in compliance of the applicable laws, Filmar’s non-compliance invalidated any limitations on seizures, and furthermore the CRA was reasonable, and even generous, in its dealings with Filmar. 

Bromont (Ville) c Québec (Cour du Québec), 2011 QCCA 482
Rejection for leave to appeal
IBM sought to exclude certain assets from its municipal base (tax expenditures for industrial use of a facility). The city of Bromont disputed IBM’s assessment. The Quebec Administrative Tribunal ruled in Bromont’s favour. The Court of Quebec reversed. The Superior Court found that part, but not all of IBM’s exclusions should be allowed.  Appeal denied: the Superior court’s decision was reasonable; there is neither an issue of interest, nor one that creates controversy. 

Re Garippo, 2011 QCCA 1143 (with Justices Hilton and Morissette)
Rejection, without reasons, for leave to appeal 

Construction Louisbourg ltée c Québec (Juge de la Cour du Québec), 2011 QCCA 1636 (with Justices Doyon and Dufresne)
Affirmation of Superior Court’s decision to allow the search and seizure of commercial documents in a criminal tax investigation, citing public interest as the reason for upholding the lower court’s judgement.

Banque Nationale du Canada c Agence du revenu du Québec, 2011 QCCA 1943 (reasons by Justice Dalphond; signed by Justices Wagner and Bouchard)
Banque Nationale managed a bankrupt company’s assets, during which money allocated for taxes was not paid.  Held: Banque has a fiduciary relationship, through a constructive trust, with Revenue Quebec and must pay part of the unpaid amount. 

Cantley (Municipalité) c Jinlili International Trading Ltd, 2012 QCCA 1151 (with Justices Hilton and Kasirer)
Short joint decision concerning how fees wrongly incurred by the municipality should be refunded. 

Pellan c Québec (Sous-ministre du Revenu), 2012 QCCA 1632 (reasons by Justice Biche; signed by Justices Wagner and Bouchard)
Jurisdictional matters
A group of soldiers filed a class action, claiming that they were wrongly assessed by Revenue Quebec for income earned while serving overseas.  The Superior Court declined jurisdiction and said the action should have gone through the Court of Quebec (provincial court).  Appeal Allowed: the Superior Court was a valid vehicle for the claim.

Nothing too earth-shattering here, though the government or agency prevailed in most cases.  It's a very small sampling size, so I am not sure we can read too much into that.  Interestingly enough, among his many accomplishments, Justice Wagner was President of the Quebec Bar's Construction Law Section.  We've got lots of problems with the construction industry here in Quebec.  Too bad we haven't had an Al Capone moment.  Maybe we still will.

* I note a bit of an oddity here with respect to the swearing in.  I've got a SCC press release in my inbox that says the following:  "OTTAWA, October 12, 2012 – The Honourable Mr. Justice Richard Wagner was sworn-in as a judge of the Supreme Court of Canada before The Right Honourable Beverley McLachlin, Chief Justice of Canada, and the judges of the Court in a private ceremony on October 11, 2012. A formal welcome ceremony will take place on a date to be announced."  Nowhere on the web can I find any information at all about this swearing in ceremony or the formal ceremony to come, indeed I cannot even find the press release itself on the SCC website or on the Canada News Centre press release site, where they ostensibly post all government press releases as they emerge.  So now I am curious, why is there a private swearing in, and a "formal welcome ceremony"?  And is it really not news that a new SCC Justice has just been sworn in?  Canadian court & media watchers, please advise of this custom.