Comments to Quebec government on proposed changes relating to aggressive tax planning.
In the following March 31, 2009, letter to the Quebec Ministry of Finance, TEI President Vincent Alicandri urged Quebec to modify its proposals for "mandatory early disclosure" and "preventive disclosure" of aggressive tax planning schemes (planifications fiscales agressives). TEI's comments were prepared under the aegis of TEI's Canadian Income Tax Committee whose chair is Rod Bergen of The Jim Pattison Group. Contributing substantially to the development of TEI's comments was Steve Perron of CGI, Inc. Also contributing to the comments were Denise Deriger of Pratt & Whitney Canada Corporation; Michel Ethier of Quebecor, Inc.; Chantale Lauzon of Aveos Fleet Performance, Inc.; Lucie O'Dowd of Standard Life Assurance Co.; Serge Vanier of Imperial Tobacco Canada Limited; and Louise Vignoul of Paladin Labs, Inc. TEI Tax Counsel Jeffery P. Rasmussen served as staff liaison on this project. The comments were submitted in French and English. (Mr. Perron also served as the translator of the comments.) The French version is available on TEI's website at www.tei.org.
On January 30, 2009, the government of Quebec launched a consultation project on aggressive tax planning (ATP). The consultation document (1) describes the scope of the ATP problem in Quebec and Canada generally, outlines current legislative and administrative tools to curb over aggressive and abusive transactions, and proposes additional steps to enhance the Quebec government's ability to deter, detect, and challenge such transactions. On behalf of Tax Executives Institute (TEI), I am pleased to provide the following comments.
Tax Executives Institute is the preeminent association of business tax executives. The Institute's 7,000 professionals manage the tax affairs of 3,200 of the leading companies in Canada, the United States, Europe, and Asia and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians constitute 10 percent of TEI's membership, with our Canadian members belonging to chapters in Montreal, Toronto, Calgary and Vancouver, which together make up one of our nine geographic regions. Our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Quebec and Canada generally. In sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling and retailing, real estate, transportation, financial services, telecommunications and natural resources (including timber and integrated oil companies). TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies, to reduce the costs and burdens of tax compliance and administration to our common benefit.
The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency. We are convinced that the ad ministration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government.
During the past decade, provincial and federal Canadian governments have identified and challenged ATP and ATP schemes and transactions. (2) In some cases, the Quebec government has interdicted specific transactions by implementing new legislation; in other cases, the Ministere du Revenu du Quebec (MRQ) has clarified the interpretation and application of Quebec's tax legislation to specific transactions. TEI supports the government's objective of curbing or deterring illegitimate transactions, which can undermine confidence in the fairness and integrity of the tax system, reduce government revenues, and ultimately shift the tax burden to already compliant taxpayers. In addition, we applaud the government's decision to launch a consultation process rather than hastily adopt misguided anti-abuse provisions.
Regrettably, the extant provincial and federal tax laws engender substantial confusion about the line between acceptable and aggressive tax planning, especially for large companies that engage in numerous transactions. Hence, it is essential that the tax laws be clear, consistent, predictable, and fair in order to ensure that taxpayers can manage their businesses intelligently and assess their tax liabilities in accordance with the government's tax policy. Regrettably, some of the proposals in the consultation document will impede legitimate commercial transactions and arrangements. As a result, we offer a number of suggestions to improve the government's proposals.
Creation of a Central Audit Unit for Detecting and Deterring ATP
The 2008-2009 Quebec Budget Speech announced the implementation of a specialized unit within MRQ to combat ATP. By establishing such a unit, MRQ auditors will have additional resources to rapidly analyze various transactions and develop expertise to distinguish ATP schemes from legitimate tax planning. TEI believes that the creation of a specialized unit within MRQ will assist the government in combating ATP. In addition, the ATP unit can work with similar "tax avoidance" audit groups at the federal and provincial levels, thereby promoting interjurisdictional cooperation and enhancing coordinated efforts to identify ATP, especially those involving cross-border transactions. If the unit is properly implemented and administered, the tax audits of large corporations should be more efficient, thereby reducing the cost and burden of tax audits for taxpayers and MRQ alike.
Although TEI supports the creation of a central audit unit devoted to identifying ATP, a fundamental prerequisite is that taxpayers and MRQ have clear guidance about the nature, scope, and type of transactions that are considered ATP. Absent clear definitions, taxpayers will be unable to comply with their reporting and disclosure obligations. Moreover, taxpayers would be subjected to Draconian penalties under the proposed early mandatory disclosure and "preventive disclosure" regimes. Finally, absent clear guidance, the scope, number, and degree of disputes between taxpayers and MRQ may increase substantially because an "ATP" unit may determine that certain transactions are proscribed ATP schemes even though they are clearly permitted under the applicable legislation and jurisprudence. To ensure that taxpayers and MRQ auditors have clear guidance, MRQ should issue notices describing the transactions that it considers ATP. (3) This guidance is important for the operation of mandatory early disclosure rules and is essential under a "preventive disclosure" regime.
Indeed, clear guidance from MRQ identifying such transactions would make the broad-based mandatory early disclosure regime unnecessary because (1) it would deter most taxpayers from entering into the transactions and (2) auditors could simply ask taxpayers whether they had engaged in any identified transaction. Thus, we recommend that the mandatory early disclosure rules be abandoned and that MRQ develop and issue a list of transactions that it considers ATP. In the event that the government proceeds with the proposals in its consultation document, we have the following comments to improve their administrability.
Mandatory Early Disclosure Rules
Section 4.1.1 of the consultation document describes a mandatory early disclosure regime that the government might adopt. Two categories of transactions would be subject to the disclosure requirements: confidential transactions (i.e., those where the taxpayer is precluded from disclosing the transaction to other taxpayers or to tax administrators) and transactions with "conditional remuneration" for the tax adviser or the ATP scheme's promoter.
A. Exclude legitimate arrangements and transactions from the mandatory early disclosure rules
TEI acknowledges that arrangements or transactions where the remuneration of the adviser is conditioned on the taxpayer's obtaining a certain level of tax benefit might be indicative of ATP. Some arrangements with contingent (or conditional) remuneration for the tax adviser, however, are clearly not ATP, especially where (i) the claim, arrangement, or transaction will be closely scrutinized by the auditors or (ii) the arrangement with the adviser relates to a post-return filing action by the taxpayer. Thus, the following commonplace compliance practices and processes should not be subject to an early disclosure requirement:
* Contingent sales tax recovery reviews
* Contingent reviews to identify Scientific Research & Experimental Developmental (SR&ED) credits and deductions
* A review and analysis of post-assessment interest charges
* Post-filing tax return reviews
External tax advisers are frequently hired to conduct these activities for conditional remuneration. Because of their expertise, the advisers can quickly identify errors and enhance the taxpayer's compliance. For example, a contingent sales tax compliance review is often undertaken to identify unclaimed QST input tax credits on payments to suppliers. At the same time, the adviser will often identify systemic processes that should be improved in order to minimize assessments for failure to charge or collect the proper amount of sales tax. These engagements are often performed on a conditional remuneration basis because the recovery provides a means of financing the arrangement at no out-of-pocket cost to the taxpayer. In effect, the conditional remuneration expands the taxpayer's limited resources, provides access to expertise, and generally improves rather than retards compliance. Finally, in many cases the tax adviser's work product, e.g., a claim for additional SR&ED credits, is often closely scrutinized by MRQ (or other tax administrators) before the claim is paid to the taxpayer.
B. Mandatory disclosure at an easily identifiable date
Section 4.1.1 states that "early disclosure would have to be made within a very short deadline. Accordingly, a taxpayer would be required to file this disclosure no later than 30 days after the transaction begins to be carried out." TEI submits that the proposed disclosure date of "30 days after the transaction begins to be carried out" is (i) unclear and (ii) in many cases, too early. Regrettably, it is often unclear when a "transaction begins to be carried out." Does the transaction begin when the engagement with the adviser or promoter is first approved, the date when the transaction is approved by the board of directors, the date when the first cash movement required by the transaction is made, the date when the first tax benefit of the transactions is generated (or claimed), or some other date?
To ensure that the date triggering the disclosure is easily determined by taxpayers and MRQ, TEI recommends that the disclosure be required to be filed by the due date for filing the tax return for the taxation year that includes the first tax benefit of the ATP scheme or arrangement.
C. Clarify that the required "confidentiality" is a condition imposed by the adviser for the benefit of the adviser; establish a minimum fee for confidential transactions
The proposal to require mandatory early disclosure of "confidential transactions" seemingly applies to all transactions regardless of (i) the amount of the tax benefit and (ii) the beneficiary of the condition of confidentiality. Since most external legal and accounting advisers provide advice to taxpayers under conditions of confidentiality, every transaction for which the taxpayer seeks advice would potentially be subject to mandatory early disclosure. Hence, TEI questions the need for and workability of a broad-based mandatory early disclosure regime. As important, the proposal should not extend to ordinary accounting and legal advice sought by taxpayers in order to comply with their tax obligations. To provide a boundary between mandatory early disclosure of ATP schemes and other tax advice that would not be subject to early disclosure, we recommend that the Quebec legislation clarify that a transaction is considered to be offered to a taxpayer under conditions of confidentiality only if the adviser places a limitation on disclosure by the taxpayer of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of the adviser's tax strategies. (4) In other words, a taxpayer should always be free to seek advice from its advisers about its tax planning strategies or transactions without being subjected to the mandatory early disclosure requirement. What Quebec properly seeks to limit is the adviser's repeated selling of the same ATP scheme because the taxpayer is bound to a condition of confidentiality imposed by the adviser for the benefit of the adviser. (5)
In addition, TEI recommends that the government consider establishing a minimum adviser fee of, say $250,000 per transaction, for confidential corporate transactions subject to the mandatory early disclosure rule. Establishing a minimum adviser fee would reduce the number of disclosed transactions and focus MRQ's audit resources on material transactions.
D. Penalties for late disclosures--suspension of the period of limittion for an undisclosed transaction
Section 4.1.2 proposes a $10,000 penalty for failure to file the required early disclosure statement on a timely basis. The penalty would increase by $1,000 for each day it is late, subject to a maximum of $100,000. In addition, section 4.1.3 states that "the period of limitation applicable to the tax consequences arising from the undisclosed transaction would be suspended until the time the prescribed form for disclosure of the transaction is filed."
The magnitude of the proposed penalty for failing to file the disclosure on a timely basis underscores the importance of (i) providing unambiguous guidance about what transactions are--and are not-subject to disclosure and (ii) prescribing a welt-defined date for filing the disclosure. Although a nondisclosure penalty regime and the suspension of the period of limitation on assessments may be necessary to combat ATP, safeguards should be adopted to ensure that only noncompliant taxpayers are penalized. Adopting TEI's recommendations for providing (i) clear guidance on the nature and types of transactions subject to the ATP disclosure rules (e.g., through a notice of a "listed transaction"), (ii) exceptions from the "conditional remuneration" for ordinary tax adviser engagements, and (iii) a clear, consistent date for mandatory disclosure would help minimize unnecessary disputes and erroneous penalty assertions.
General Anti-Avoidance Rule (GAAR) and "Preventive Disclosure" Mechanism
A. Expanded limitation period for transactions subject to GAAR --"preventive disclosure" mechanism to avoid an expanded limitation period
Under current rules, MRQ can reassess most taxpayers within three years of the day a notice of original assessment is sent. For a corporation other than a Canadian controlled private corporation, the normal limitation period is four years from the day of the original assessment. Section 4.3.2 of the consultation document asserts that, because of the sophistication of transactions subject to GAAR, "it would be appropriate to give to the Minister an additional period of three years to enable him to make a reassessment when it applies the GAAR." Accordingly, for transactions subject to GAAR the period of limitations would be either six or seven years. To avoid the application of the expanded period of limitations, taxpayers could make a "preventive disclosure," which would "include a complete and detailed description of the facts (including such a description of the transaction or series of transactions disclosed, its objects and effects) accompanied by all the relevant documents allowing Revenu Quebec to thoroughly analyze it."
TEI objects to the proposed expansion of the period of limitations for transactions subject to GAAR. In addition, we have serious reservations about the administrability of the "preventive disclosure" mechanism.
First, if the one-year assessment period is considered together with the period for reassessments, the period of limitations in Quebec is already 40 percent longer than that of comparable jurisdictions (e.g., three years in the United States compared with up to five years in Quebec for large corporations). In addition, where necessary to complete an audit, MRQ will request, and most large corporate taxpayers will grant, a reasonable extension of the period of limitations. Thus, MRQ auditors already have sufficient time to identify and reassess questionable transactions. This is especially so for large corporations where the risk of non-detection is remote because of nearly continuous government audits.
Second, as the consultation document notes, GAAR was adopted as a means of distinguishing aggressive tax planning from legitimate transactions. The federal statute and Quebec equivalent are drafted as broadly as possible in order to counter any form of potential tax avoidance and the application of GAAR is constantly evolving as federal and provincial auditors assert the rule and the courts interpret and apply it to various facts and circumstances. Indeed, a significant compliance challenge for business taxpayers is determining whether GAAR might apply to a transaction in a new or unforeseen fashion. A transaction that passes scrutiny under GAAR today might be objectionable tomorrow, with or without slightly different facts or circumstances. Consequently, permitting MRQ to reassess potential GAAR transactions for up to six (or seven) years following an original assessment is tantamount to extending the period of limitations for all but the most mundane transactions. (7)
Next, the number of significant transactions in a large complex, corporate tax return against which MRQ might assert GAAR is so large that the "preventive disclosure" mechanism is unworkable. Although the goal of reducing the uncertainty an expanded period of limitations creates for taxpayer is laudable, the effect would actually be counterproductive to the goal of eliciting meaningful taxpayer disclosures. Since taxpayers cannot predict how GAAR might be applied to a transaction or series of transactions, they would be required to disclose all significant transactions in the return in order to minimize the number of instances where the period of limitations might be extended. Hence, complying with the proposed preventive disclosure requirement would impose a significant administrative burden on taxpayers and strain MRQ's audit resources without providing any assurance that the period of limitations would not be expanded.
TEI understands the government's objective in proposing the expansion of the period of limitation. We also appreciate the effort to ameliorate the uncertainty created for taxpayers by an expanded statute of limitations. But, as noted earlier, MRQ auditors already have one of the longest periods available to taxing authorities for re assessing tax returns. More important, the adoption of a mandatory early disclosure regime (for what we recommend should be a narrower than proposed category of specified transactions) combined with tax audits by well-trained auditors with specialized resources will enable the MRQ to successfully identify and challenge questionable transactions. The Ministere des Finances du Quebec will then be in a position to establish a process for quickly identifying ATP and, where necessary, proposing legislation to protect Quebec's tax base.
If, contrary to TEI's recommendation, the government adopts a proposal to expand the period of limitation for transactions challenged under GAAR or implements a "preventive disclosure regime, then the government should also:
1. Establish a minimum dollar threshold (or materiality level) for determining when transactions must be disclosed as potentially subject to a GAAR challenge. For example, a transaction producing less than $50,000 of tax benefit in any one tax year or less than $100,000 over all the tax years affected by the transaction should not give rise to an automatic extension of the period of limitations even if it is challenged under GAAR or not reported under the preventive disclosure rules.
2. Publish a list of transactions (i.e., adopt a "listed transaction" procedure comparable to U.S. "listed transactions" approach) that the government considers offside under GAAR. The list should be updated periodically as new transactions are identified.
3. Publish an "angel" or "white" list of transactions that are clearly contemplated by the Quebec legislation and thus not subject to disclosure or to an expanded period of limitations. For example, most group loss transfer or consolidation transactions are considered routine and non-abusive. The angel list should also be updated periodically as MRQ gains experience with various transactions.
Finally, the consultation document notes that taxpayers can invoke the advance ruling process to obtain a determination from MRQ whether a pending or proposed transaction is subject to GAAR. The advance ruling process though is costly, time consuming, and cumbersome. If the government proceeds with its proposal to expand the period of limitations for transactions subject to a GAAR challenge, it should also commit to providing a reasonably timely--even expedited--response to a taxpayer's request for an advance ruling. Specifically, where a taxpayer submits a complete and accurate description of its transaction and an analysis explaining why "the transaction would not produce a tax benefit resulting directly or indirectly from an abuse of the provisions of the Taxation Act," MRQ should respond within four months of the taxpayer's submission. If MRQ refuses to rule on a transaction (as opposed to issuing an unfavourable ruling) or does not rule within the specified time frame, then the transaction should be outside of the extended reassessment period and penalty regime.
To deter the use of ATP schemes, section 4.4.4 of the consultation document states that "it is necessary to significantly alter the risk/reward ratio that currently is clearly favourable to the taxpayer."
The consultation document, however, omits discussion of two of the more significant deterrents to ATP schemes. The first is the risk of damage to a company's reputation from public disclosure that it engaged in tax shelter activity. The second is financial: nondeductible interest on tax assessments and underpayments of instalments. In many cases, the cost of nondeductible interest is more than three times the normal cost of financing for creditworthy companies. Hence, the risk of assessment and the potential for its public disclosure are significant deterrents to many taxpayers.
Next, although we do not support, and have many concerns about, a mandatory early disclosure regime, we acknowledge that a penalty may be appropriate where a taxpayer fails to disclose a transaction subject to the rules. The penalty would encourage compliance with the disclosure requirement and thus supplement the current penalties that deter false or fraudulent statements. We believe, however, that in many circumstances the proposed $10,000 penalty (or up to $100,000 for a late or unfiled disclosure) will be excessive and disproportionate to the amount of tax benefit in the transaction. We recommend that the penalty be reduced to $1,000 (or up to $10,000 for a late or unfiled disclosure) for transactions where the tax benefit is less than $100,000.
Finally, we disagree with the proposal to establish a penalty for failing to comply with the "preventive disclosure" rules. The application of penalties to tax avoidance transactions subject to GAAR was considered and rejected by Parliament. Indeed, penalties are only effective in deterring misconduct when the taxpayer knows with certainty what the proscribed behaviour is and knows that the application of the penalty is certain and consistent. The substantial uncertainty in determining when GAAR applies makes it unsuitable as a basis for imposing a penalty. Courts have recognized this and refused to apply penalties when GAAR applies. (8) Hence, we recommend against creating a separate penalty where GAAR is asserted to challenge an ATP transaction or where the taxpayer fails to disclose a transaction under the proposed "preventive disclosure" rules. The range of transactions against which GAAR might be asserted is simply too large for taxpayers to be able to comply with the "preventive disclosure" regime and avoid the penalty.
TEI appreciates the opportunity to provide comments on the ATP consultation and would be willing to meet with the Ministry to discuss our submission as well as other steps the government may consider to eliminate ATP in Quebec.
TEI's comments were prepared under the aegis of the Institute's Canadian Income Tax Committee, whose 2008-2009 Chair is Rod Bergen. If you should have any questions about the submission, please do not hesitate to call Mr. Bergen at 604.488.5231 (or Bergen@ jp-group.com), or Sherrie Ann Pollock, Vice President for Canadian Affairs at 416.955.7373 (or firstname.lastname@example.org).
(1.) Aggressive Tax Planning, Finance Quebec (January 2009).
(2.) According to section 1.1 of the consultation document, the expression "aggressive tax planning" or "ATP" is a generic reference to tax avoidance excluding tax evasion. The expression "ATP scheme" refers to a specific tax avoidance plan.
(3.) Section 3.1.1 of the consultation document describes the U.S. system for "reportable transactions," including listed transactions. TEI's recommendation that Quebec establish a "Notice system" is comparable to the process for designating a "listed transactions" discussed at page 61 of the consultation document.
(4.) See the definition of conditions of confidentiality in U.S. Treas. Reg. [section] 1.6011-4(b)(3)(ii).
(5.) In ordinary circumstances, the beneficiary of the "confidentiality" of legal, accounting, or tax advice is the client-taxpayer, not the adviser.
(6.) TEI's recommendation is based on the comparable U.S. reportable transaction rule, which is discussed at pages 60-63 of the consultation document. The minimum fee thresholds for confidential transactions by corporations and all other taxpayers are set forth in footnote 126 on page 61.
(7.) The proposed extension of the period of limitations, with or without the preventive disclosure regime, would substantially expand the scope and amount of uncertain tax positions reported in public financial statements by Quebec companies.
(8.) See, e.g., Copthorne Holdings Ltd. v. The Queen, 2007 DTC 1230.
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|Author:||Bergen, Rodney C.|
|Date:||Mar 1, 2009|
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