Recent developments in tax litigation, voluntary disclosures and international compliance

1. Recent developments in tax litigation, voluntary disclosures and international compliance D'Amico Family Wealth Management Group RBC Dominion Securities Inc. Wednesday, January 10, 2018 Me Paul Ryan Ravinsky Ryan Lemoine, s.e.n.c.r.l. Place du Canada 1010, De La Gauchetière Ouest Bureau 2100 Montréal (Québec) H3B 2N2 Telephone : (514) 866-3510 pryan@ravinskyryan.com

2. Recent developments in tax litigation, voluntary disclosures and international compliance Summary 1. Recent changes to Federal Voluntary Disclosures Program (VDP) 2. Recent Quebec measures to fight tax avoidance and use of tax havens (Tax Fairness Action Plan) 3. Recent Jurisprudence 3.1 CRA 3rd party requests concerning unnamed persons or groups 3.2 Limits of CRA peremptory demands 3.3 Fines and Jail sentences for Tax Evasion 3.4 Lifting of “Fiduciary Veil” for family trusts 3.5 Assessments based on estimative methods 3.6 Right to silence in criminal matters vs obligation to cooperate with tax audits

3. Recent developments in tax litigation, voluntary disclosures and international compliance 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

4. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) • Finally published on December 15, 2017 • IC00-1R6 • GST/HST Memorandum 16-5 • Takes effect on March 1, 2018

5. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) • To be grand-fathered to “old rules”: • File must be opened on or before February 28, 2018 • Name must be disclosed on or before February 28, 2018

6. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) • “Old rules” were not 100% clear • CRA sometimes applying new concepts to “old cases” • So-called “10-year rule” a “grey area” • Years for which records were available

7. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) CRA Standard Acceptance letter (2015) Our acceptance of the disclosure covers the 2003 to 2014 taxation years. Please note that the VDP has not verified the accuracy of the information you have provided in this disclosure and the Canada Revenue Agency reserves the right to open these years for audit or verification in the future.

8. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) CRA Standard Acceptance letter (2017) As well, we can reassess any tax year, not just those included in this disclosure, if we find you misrepresented the facts because of neglect, carelessness, willful default, or fraud.

9. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

10. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Old rules” (Panama Papers & al issue) • CRA and RQ currently refusing VD if Taxpayer or corporation used abroad is listed in Panama Papers or other leaks • Easy Internet search index at: https://offshoreleaks.icij.org • Exclusion applies even if no link between foreign corporation and name of Canadian shareholder

11. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) Shareholder Shareholder Shareholder Intermediary Shareholder

12. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) • Not certain that in conformity with current definition of “voluntary”, as CRA needs to demonstrate that it is likely that it would have by itself discovered the information disclosed • May depend on what additional information CRA is able to obtain through new exchange of information programs • Worth the chance of applying and contesting a refusal?

13. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) New Federal Program (Basic Principles) • CRA no longer wants VDs where it feels able to identify the issue through its own resources • Fairness to other compliant Taxpayers • VDP not aimed at rewarding non-compliance

14. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) New Federal Program (Basic Principles) • 2nd round expected in 2 years: complete end of VDP? • “Limited Program” eventually extended to disclosures made early in the audit process?

15. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) New Federal Program (Main changes) • “Complete” test completely modified to provide IN ALL INCOME TAX CASES that all years with issues must be covered, using reasonable estimates where necessary • Advisors who were involved must be denounced • Name must be disclosed and Taxpayer must sign Form RC199 before VD process (and protection) officially starts

16. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) New Federal Program (Main changes) • “Voluntary” criteria limited, to officially exclude cases such as Panama Papers & al • All relief cancelled if incomplete VD/Misrepresentation • New more competent and experienced group created to handle questions, issues and pre-VD “non-binding” discussions

17. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) Excluded cases • Post-assessment requests to adjust interest and penalties • Applications pertaining to “advance pricing arrangements” or that depend on “Competent Authority” agreement pursuant to Tax Treaties • Application by Taxpayers that are in receivership or have become bankrupt

18. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) Excluded cases referred to other CRA units • Transfer Pricing • Late Section 216 elections (one-time opportunity) • No tax owing or refund requests • Late elections where ITA provides for possible relief

19. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Limited Program” • Most cases involving “Larger Corporations” (more than $250 Millions of gross revenue for at least two of the past five years) • Cases contemplated in paragraph 20 of Information Circular • Cases where “pre-audit” letters have been sent, giving Taxpayers the opportunity to initiate a VD

20. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Limited Program” 20. In general terms, the Limited Program provides limited relief for applications that disclose non-compliance where there is an element of intentional conduct on the part of the taxpayer or a closely related party. The following factors may be considered: • efforts were made to avoid detection through the use of offshore vehicles or other means, • the dollar amounts involved, • the number of years of non-compliance, • the sophistication of the taxpayer, • the disclosure is made after an official CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to taxpayers working in a particular sector about a compliance issue). For example, a taxpayer who opened an offshore bank account in 2010 and has been transferring undeclared business income earned in Canada to that account since that time would not normally qualify under the General Program.

21. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Limited Program” Consequences • No prosecution and no gross negligence penalty • Other penalties maintained (T1135 small penalty? Beyond 6-year limit?) • No interest relief

22. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

23. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

24. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “General Program” Consequences • No prosecution • No penalties (subject to 10-year rule) • Interest relief provided • No relief for three most recent years • 50% relief for years 4 to 10 • No relief for older years (subject to “Bozzer rule”)

25. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

26. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

27. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) • Will become prohibitively expensive, when Quebec 12.5% to 25% is added • On the other side, getting caught is still even more expensive

28. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) Getting caught

29. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

30. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

31. 1. Recent changes to Federal Voluntary Disclosures Program (VDP)

32. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Voluntary” Criteria 29. Subject to the exceptions in paragraph 31, a VDP application will not be voluntary if: • the taxpayer was aware of, or had knowledge of an enforcement action (see paragraph 30) set to be conducted with respect to the information being disclosed to the CRA, • enforcement action (see paragraph 30) relating to the subject matter of the VDP application has been initiated against the taxpayer, or a person associated with, or related to, the taxpayer (this includes, but is not restricted to, corporations, shareholders, spouses and partners), or against a third party, where the purpose and impact of the enforcement action against the third party is sufficiently related to the present application; or • the CRA has already received information regarding the specific taxpayer’s (or a related taxpayer’s) potential involvement in tax non-compliance (for example, a leak of offshore banking or other information that names the taxpayer).

33. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Voluntary” Criteria 30. For purposes of the VDP, an “enforcement action” may include, but is not limited to: • an audit, examination, investigation or other enforcement action by the CRA or any other authority or administration, such as, but not limited to, a law enforcement agency, securities commission, or federal or provincial authorities; • requests, demands or requirements issued by the CRA, relating to unfiled returns, unremitted taxes/ instalments, deductions required at source; (although these actions may only pertain to one specific year, the procedure will be considered to be an enforcement action, for purposes of the VDP, for all taxation years);  • requests, demands or requirements which have been issued with reference to other tax affairs of the taxpayer, partners of the taxpayer, trusts in which the taxpayer is a settlor, trustee or beneficiary, or corporations associated with or related to the taxpayer; and/or • direct contact by a CRA employee for any reason relating to non-compliance (e.g. unfiled returns, audit, collection issues). 

34. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) “Voluntary” Criteria 31. Not all CRA initiated enforcement action may be cause for a VDP application to be denied by the CRA. Examples of this include: • a letter from the CRA inviting the taxpayer to use the VDP to correct their tax affairs; however, this letter would be a factor that could result in the application being considered under the Limited Program; or • a recent audit of a taxpayer was related to a GST/HST issue. The same taxpayer is submitting a VDP application for an amount of source deductions (payroll), which was withheld but not remitted to the CRA as required. There may be no correlation between these two taxation issues and as such, the enforcement action on the GST/HST account may not be cause to deny the VDP application.

35. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) Questions remaining • “Timing” of acceptance or rejection, now that name has to be provided at inception of process • How frequent technical issues will be dealt with, such as “double taxation” or “multiple” taxation possibilities

36. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST • Similar approach • Three categories, plus some exclusions

37. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Excluded) • Increase of ITCs, rebates and other credits, without corresponding increase of the liability for period • Elections • Person is in receivership or has become bankrupt • Post-assessment requests to reduce interest and/or penalties

38. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 1) • Wash transactions (eligible for reduced interest and penalties) • No prosecution • 100% interest and penalty relief • 4 years before date of application

39. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 2 – General Program) • Other wash transactions (which do not qualify for the general interest and penalty reduction) • Supplies to listed financial institutions • Supplies to charities and non-profit organizations • Supplies to municipalities • Other situations without “gross negligence” described in paragraphs 13 and 14 of Memorandum

40. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 2 – General Program) 13. In general terms, Category 2 provides relief for applications disclosing non-compliance or errors including, but not limited to, situations involving: • GST/HST wash transactions that are not eligible for a reduction of penalty and interest under the policy set out in GST/HST Memorandum 16-3-1 (for examples of non-eligible wash transactions, please see the memorandum); • reasonable errors; • failure to file information returns; • no gross negligence or deliberate avoidance of tax; or • over-claimed rebates.

41. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 2 – General Program) 14. For example, in January 2017, while preparing its financial statements for the year ended December 31, 2016 a registrant discovers that due to an accounting error, its GST/HST return for the quarterly reporting period ending June 30, 2016, overstated its input tax credits. The registrant had claimed input tax credits that it had already claimed in the previous reporting period. This would normally qualify under the General Program.

42. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 2 – General Program) • No prosecution • No penalties • 50% interest relief (subject to 10-year limitation and “Bozzer rule”) • 4 years before date of application

43. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) • Generally, cases involving large corporations • All other cases not in Category 1 and 2, as described in paragraphs 15 to 19

44. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) 15. In general terms, Category 3 provides limited relief for applications that disclose non-compliance where there is an element of intentional conduct on the part of the registrant or a closely related party including, but not limited to, situations where: • GST/HST was charged or collected but not remitted; • efforts were made to avoid detection (for example, participation in underground economy); • the disclosure is made after an official CRA statement regarding its intended specific focus of compliance (for example, the launch of a compliance project or campaign) or following broad-based CRA correspondence (for example, a letter issued to registrants involved in a particular sector about a compliance issue); • there had been deliberate or wilful default or carelessness amounting to gross negligence.

45. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) 16. For example, a person making supplies of consulting services which are taxable at the rate of 13% charged and collected GST/HST on the taxable supplies, and although the person was aware of their obligations regarding the GST/HST, the person chose not to register for GST/HST and never remitted the GST/HST collected. This would normally qualify under the Limited Program.

46. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) 17. Generally, applications by corporations with gross revenue in excess of $250 million in at least two of their last five taxation years, and any related entities, will be considered under the Limited Program.

47. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) 18. Additionally, in all cases, the following factors may be considered when determining under which category a VDP application should be processed: • the dollar amounts involved; • the number of years of non-compliance; • the sophistication of the registrant; and • how quickly the registrant took corrective measures to address their non-compliance upon its discovery.

48. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) 19. The existence of a situation or a single factor will not necessarily mean that a registrant is eligible only for the Limited Program. For example, a sophisticated registrant may still correct a reasonable error under the General Program.

49. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) GST (Category 3 – Limited Program) • No prosecution • Penalty relief only for gross negligence penalties (what penalties are left?) • No interest relief • ALL RELEVANT YEARS

50. 1. Recent changes to Federal Voluntary Disclosures Program (VDP) Objections and Contestations • Possible request for second Administrative Review and Judicial Review • No objection possible re: interest and penalty • Limited Program will require waiver of objection rights except for calculation issues and technical issues (ex: characterization of gain on disposal of property, taxable vs exempt supply, etc.)