TaxMatters@EY – October 2011

Recovery opportunities

If your objective is the recovery of indirect taxes, then you should be asking what areas need to be investigated to determine if taxes have been overpaid, or if refunds or credits have not been properly claimed.

As a start, consider the following:

• Billing systems – Could there be system errors that might lead to over-remittance of taxes?
• Processing of invoices – Could system or manual errors be occurring that might result in recoverable taxes not being claimed?
• Improper account mapping – Could accounts be incorrectly mapped so that input tax credits and input tax refunds are inadvertently expensed or capitalized rather than recovered?
• Expense reports – Could errors in expense templates or in the use of factors lead to the incorrect amounts of GST, HST or QST being recovered?
• Incorrect technical positions – Could the misinterpretation of legislation or administrative guidance have caused the over-remittance of taxes or missed opportunities to claim refunds or credits?
• Taxes on bad debt write-offs – Could you be forgetting to recover taxes when you are writing off an accounts receivable?
• VAT errors – Could you be incurring VAT in jurisdictions outside Canada without realizing either that you’re paying it or that it may be recoverable?

Risk aversion

Many companies are more concerned with the risk areas of indirect tax liabilities and exposures because of the financial costs and reputational damage they can cause.
When contemplating exposure, consider the following issues:

• Application of tax – Could you be applying the wrong rate of tax to your supplies as a result of not applying the place-of-supply rules correctly or not classifying items properly?
• System errors – Could system errors be occurring that are resulting in taxes being under-remitted?
• Registration – Could there be jurisdictions where you are not registered to collect tax but should be?
• Documentation – Do you have the required information in your agreements and invoices to support claims for input tax credits and refunds?
• Sales tax audit or appeal – Are you fully exploring all issues during a sales tax audit or appeal?
• Input tax credit recapture – Is input tax credit recapture being tracked and reported appropriately on your sales tax returns and schedules?
• Input tax credit allocation – Can your input tax credit allocation model stand the test of a CRA audit?

Whether it’s recovery or risk that keeps you awake at night, sometimes it is the uncertainty that causes the most anxiety. Rather than worry, engage your Ernst & Young advisor to review your systems — sometimes, a “second set of eyes” will see things that those who deal with the system day-to-day may have overlooked.

Effective 1 January 2012

Individuals under age 65 will be subject to CPP premiums on employment or self-employment income, even if they are already collecting CPP.

Individuals age 65 to 70 will be subject to CPP premiums by default, but may elect out of CPP premiums. In order to elect out of CPP on employment income, an election (Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election, which has not yet been released by the CRA) must be completed, the original filed with the CRA and copies provided to each employer. The election is effective the month following the month of filing with the CRA.

The election to opt out can also be revoked, such that the individual will again contribute to CPP. The revocation, however, cannot be applicable until 2013 (the individual must wait until at least the calendar year following their opt-out election). The revocation will be filed using the same CPT30 form, not yet released, and will be effective the beginning of the month following the month in which the signed form is provided to the individual’s employer(s).

Implications

Individuals contributing to CPP while already collecting, as indicated above, will receive a “post-retirement benefit,” which will be effective the calendar year following the premium payment, so their CPP benefits will increase each year they continue their CPP contributions.

Employers are responsible to withhold and remit CPP premiums, so an employer unaware of these changes could be liable for considerable costs in respect of failure to withhold for employees in receipt of CPP benefits. The employer is required to maintain copies of the CPT30 forms in cases where they are not withholding for an employee age 65 to 70.

Owner-managers’ remuneration planning may be influenced by these changes, as the cost of additional CPP premiums will arise if they receive employment income, but can be avoided if they receive dividends.

Receipt of benefits

In addition to these changes, a number of other changes to the CPP rules around the timing of collection come into effect in 2012.

A person age 60 or older will no longer be required to cease work to qualify for early CPP. To the end of 2011, the individual can not be working in the month before or the month in which the CPP benefits commenced, or the remuneration for those months had to fall below specified levels.

The reduction to benefits if the individual collected before age 65, and the increase in benefits for delaying past age 65, will both be increased over the next several years as follows:

• The discount for early application was 0.5% for each month early (30% if you started collecting immediately at age 60). This is being increased 0.2% annually from 2012 to 2016, so in 2016 the reduction will be 0.6% per month early (36% discount if you start collecting immediately at age 60).
• The premium for applying late (up to age 70) will be enhanced from the current 0.5% per month to 0.57% per month for 2011, 0.64% for 2012 and finally 0.7% for 2013 and onwards (42% increased benefits for waiting until age 70 to apply).

Individuals who have undertaken retirement planning relying on the current rules may need to revisit their plans, especially if their expected application for benefits is some time away, such that these changes will be phased in by their expected application dates.

Reasonable travel expenses incurred when a patient obtains medical services at least 80 kilometres away from his or her residence are eligible for the purposes of the METC, provided certain conditions are met. Reasonable travel expenses for an individual to accompany the patient on such a trip are also eligible, provided a medical practitioner certifies in writing that the patient is incapable of travelling alone.

The CRA’s longstanding view has been that reasonable travel expenses include accommodation and meals while en route to and from the place where treatment is provided, but not during the treatment period.

At the 2010 CTF Roundtable, the CRA was asked to clarify its interpretation regarding travel expenses for the purposes of the METC, and specifically whether an individual could claim the cost of parking, meals and hotel accommodations — incurred by both the individual and an attendant — during the treatment period.

In its response, the CRA indicated that, for the purposes of the METC, reasonable travel expenses include expenses for gas, meals and accommodations for the patient and attendant both for the period en route to and from the place where the treatment is provided and during the treatment period.

The Minister has confirmed that, upon a review of its position, the CRA now recognizes costs for meals and accommodation while at a medical facility as eligible medical expenses for the METC if it is reasonable in those specific circumstances for the patient to remain at the facility.

The Minister also stated that a patient who is an outpatient at a medical facility and is staying at a hotel may claim meal, accommodation and parking costs for the purposes of the METC. Eligible costs may also include meals and accommodation for an attendant, provided the patient is certified as being unable to travel alone.

Background

On 8 September 2006, the taxpayer made a request to the Minister to have the interest waived in respect of a tax debt that arose in 1989-90. The Minister denied the’ request on the grounds that the 2005 amendment to the waiver of penalty or interest provisions in subsection 220(3.1) of the Act limited his discretion to a 10-year period after the taxation year in which the original tax debt arose.

Subsection 220(3.1) states:

Request for judicial review

The taxpayer made an application to the Federal Court Trial Division (FCTD) for judicial review of the Minister’s decision, arguing that the phrase “in respect of that taxation year” refers to each year during which interest accrues on an outstanding tax debt, no matter when the debt arose.

The FCTD dismissed the taxpayer’s application, noting that the term “taxation year” was interpreted in Montgomery v MNR (95 DTC 5032 (FCA)) to mean a year, either fiscal or calendar, for which tax is computed. The FCTD also agreed with the ruling in Telfer v Canada (Revenue Agency) (2009 FCA 23) that the time limit in subsection 220 (3.1) is for the 10 calendar years after the relevant taxation year — namely, the year of assessment.

Taxpayer successfully appeals

The FCA allowed the taxpayer’s appeal. It cited the well-known passage from Canada Trustco Mortgage Co. v. Canada, ([2005] 2 S.C.R. 601, 2005 SCC 54) at paragraph 10, in which the Supreme Court of Canada set out the proper approach for interpreting taxation statutes:

The FCA found that subsection 220(3.1) could be interpreted in more than one way, and therefore delved into its history, context and purpose. The Court concluded that the Minister’s interpretation would lead to a harsh result that would be contrary to its purpose of allowing taxpayers to ask for relief against penalties and interest and allowing the Minister to grant such relief where appropriate. The Montgomery case was distinguished, while the Telfer case was not mentioned.

The Court also noted that Parliament knows how to draft sections that have a forward-looking effect — for example, subsection 220(3.201) — and could have used similar language if that was its intention.

As a result, the FCA allowed the taxpayer’s application for judicial review, and referred his application for interest relief back to the Minister for reconsideration. While the Court held that the Minister possesses the ability to waive the interest in question, the decision of whether to do so remains at the Minister’s discretion. Having incurred the costs of a first- and second-level ministerial review, an FCTD judicial review and an appeal of the result to the FCA, the taxpayer still needs to convince CRA that a waiver of interest would be just and equitable.

The taxpayer won the battle, but he still has to win the war.

Observations

Although the Crown has not sought leave to appeal this decision to the Supreme Court of Canada, there may be some pressure exerted on the Department of Finance to reword subsection 220(3.1). This would be unfortunate.

As the FCA points out, the broader interpretation promotes fairness, and does not place an unnecessary administrative burden on the Crown. The Minister would only have to know the amount of the original tax debt upon which interest accrued, and what payments have been made and when. From there, the interest is determined by a simple mathematical calculation.

Tax Alerts

• 2011 Issue No. 32 - Taxation of students 2011–12
  If you’re a student, you want to stretch your budget as far as you can. When it comes to personal income tax, there are a lot of good ideas that can help you save money, whether you’re studying full time or part time.
• 2011 Issue No. 33 - The new Japan–Netherlands tax treaty
  After protracted negotiations, the new treaty is on track to become effective as of 1 January 2012. In our alert, we take a closer look at the ramifications for Canadian investors, who historically have tended to structure a significant number of their international investments through Dutch holding companies.
• 2011 Issue No. 34 - GlaxoSmithKline set down for trial at Supreme Court of Canada
  The Supreme Court of Canada has set a date of 13 January 2012 for trial in the GlaxoSmithKline transfer pricing case. This will be the Supreme Court’s first transfer pricing case, and it is expected to provide valuable guidance on transfer pricing principles. The Court will hear the Crown’s appeal of the Federal Court of Appeal’s decision in favour of Glaxo Canada, as well as the taxpayer’s cross-appeal on the lower court’s decision to send the case back to the Tax Court of Canada.

Budget 2011 and partnerships
In the September 2011 issue of CAmagazine, Ernst & Young Associate Partner Jennifer Smith and Senior Manager Byron Beswick note that corporate partnerships should review the impact of the budget partnership proposals from both tax and financial reporting standpoints, identify which elections and designations should be made under the rules, and consider various strategies to mitigate the impact of the rules.

Business immigration alerts and updates
For the latest information on Canadian and US business immigration issues from Egan LLP, a business immigration law firm allied with Ernst & Young LLP in Canada, visit EganLLP.com.