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September 2013

An Update on Misrepresentation of a Tax Matter by a Third Party, and on Base Erosion, Profit Shifting ("BEPS"). David W. Chodikoff, Tax Partner (With the assistance of Simon Robertson, Student-at-law) Phone: (416) 595-8626 E-mail: dchodikoff@millerthomson.com. September 2013. OVERVIEW.

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September 2013

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  1. An Update on Misrepresentation of a Tax Matter by a Third Party, and on Base Erosion, Profit Shifting ("BEPS") David W. Chodikoff, Tax Partner(With the assistance of Simon Robertson, Student-at-law)Phone: (416) 595-8626E-mail: dchodikoff@millerthomson.com September 2013

  2. OVERVIEW • Introduction • Topic 1 – Misrepresentation of a Tax Matter by a Third Party • Topic 2 – “BEPS”

  3. Topic 1 – Misrepresentation of a Tax Matter by a Third Party • Where are we today and what it means to you – section 163.2 of the Income Tax Act • What is a 3rd party penalty? • Penalty imposed on a planner, preparer, or valuator • While the taxpayer likely benefited from the planner or preparer’s work, they do not pay the penalty • Accountants need to be concerned because they often act for clients in these capacities

  4. Misrepresentation of a Tax Matter by a Third Party (con’t) • “Preparer” Penalty section • Section 163.2(4) Penalty for participating in a misrepresentation: Every person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person (in this subsection, subsections (5) and (6), paragraph (12)(c) and subsection (15) referred to as the “other person”) that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person for a purpose of this Act is liable to a penalty in respect of the false statement.

  5. Misrepresentation of a Tax Matter by a Third Party (con’t) • “culpable conduct” means conduct, whether an act or a failure to act, that • (a) is tantamount to intentional conduct; • (b) shows an indifference as to whether this Act is complied with; or • (c) shows a wilful, reckless or wanton disregard of the law.

  6. Misrepresentation of a Tax Matter by a Third Party (con’t) • Section 163.2(5) Amount of penalty: The penalty to which a person is liable under subsection (4) in respect of a false statement is the greater of (a) $1,000, and • (b) the lesser of • (i) the penalty to which the other person would be liable under subsection 163(2) if the other person made the statement in a return filed for the purposes of this Act and knew that the statement was false, and • (ii) the total of $100,000 and the person’s gross compensation, at the time at which the notice of assessment of the penalty is sent to the person, in respect of the false statement that could be used by or on behalf of the other person.

  7. Misrepresentation of a Tax Matter by a Third Party (con’t) • Section 163.2(6) Reliance on good faith provision: For the purposes of subsections (2) and (4), a person (in this subsection and in subsection (7) referred to as the “advisor”) who acts on behalf of the other person is not considered to have acted in circumstances amounting to culpable conduct in respect of the false statement referred to in subsection (2) or (4) solely because the advisor relied, in good faith, on information provided to the advisor by or on behalf of the other person or, because of such reliance, failed to verify, investigate or correct the information.

  8. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon v. The Queen, 2012 TCC 287 [Guindon – TCC] • Facts: • Appellant was a lawyer who practiced mainly in the areas of family law and wills/estates • The Appellant was not a tax practitioner, nor did she have any experience with tax law • In addition to being a lawyer, the Appellant was the president of a registered Canadian charity involved in a program by which taxpayers could acquire timeshare units for a fraction of their value and donate them to charities • In exchange for donating the timeshare units to charity, the taxpayers would receive tax receipts in the amount of the units’ actual values

  9. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – TCC (con’t) • Facts (con’t): • The Appellant signed and issued the tax receipts herself • The legal deeds to the timeshare units were never finalized to be conveyed to taxpayers • The charitable donation tax credits issued for ostensible donations of timeshares were entirely disallowed by the CRA and the program was found to be a scam • In addition to disallowing individual taxpayers’ claims for charitable tax credits, the CRA assessed the appellant for penalties under s. 163.2 of Income Tax Act for making false statements • The CRA took the position that the appellant knew or ought to have reasonably known that the tax receipts contained and constituted false statements

  10. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – TCC (con’t) • Issues: • Is s. 163.2 of the ITA a criminal provision that attracts Charter protections and that should be prosecuted in a provincial criminal court? • If not, was the appellant guilty of “culpable conduct,” such that the imposition of penalties under s. 163.2 was warranted, in the circumstances? • Decision: • A finding under section 163.2 could lead to true penal consequences • The provision is therefore criminal or penal in nature, to which Charter protections do apply

  11. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – TCC (con’t) • Decision (con’t): • The section 163.2 penalty is different from gross negligence penalties under subs. 163(2) since its purpose is to go beyond sanctions in an administrative proceeding • The penalty could be assessed against a false statement that was never acted upon or never intended to have been acted upon by use of the broad verb “could” in the legislation • Since the purpose behind section 163.2 is to suppress injury to the public interest, it is a quintessentially criminal provision • The penalty under section 163.2 is unlimited, which supports this conclusion

  12. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – TCC (con’t) • Decision (con’t): • Justice Bedard went on to consider whether the appellant was guilty of culpable conduct • Although the appellant had no experience in tax law, she nonetheless signed the charitable tax receipts without knowing the status of the timeshare projects or determining the legal validity of the receipts • She was therefore guilty of culpable conduct that otherwise justified the imposition of a penalty against her • The CRA appealed this decision to the FCA

  13. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon v. The Queen, 2013 FCA 153 [Guindon – FCA] • Issues: • Did the TCC make a mistake in finding that s. 163.2 of the ITA is a criminal provision, and therefore the individual should be prosecuted in a provincial criminal court and have access to Charter protections? • Decision: • TCC did not have the jurisdiction to find that this section of the Act was a criminal offence. • Guindon did not serve the provincial or federal government with a notice of constitutional question.

  14. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – FCA (con’t) • Decision (con’t): • While this appeal was decided on a technicality, the court made several observations. • Section 163.2 does not create a criminal offence. • Conduct that goes against the proper working of the tax system must be deterred. The penalty imposed by this section is a simple way to deter that activity and maintain order. • A large financial penalty does not mean that the Charter will automatically apply. • A large penalty can be necessary to avoid a “cost of doing business” calculation.

  15. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – FCA (con’t) • Decision (con’t): • The assessment of a penalty can be appealed to the TCC. • At the appeal, the Minister must demonstrate the facts justifying the penalty. • The individual can also seek relief against a harsh penalty from the Minister, under section 220(3.1), who can exercise her discretion to cancel the penalty or reduce it. • The Minister’s discretion on such an application must be based on the purposes of the Act, the fairness purposes of section 220(3.1), and a rational assessment of the circumstances.

  16. Misrepresentation of a Tax Matter by a Third Party(con’t) • Guindon – FCA (con’t) • The assessment against Guindon was restored. • The regime of massive fines imposed by the CRA, along with no Charter protections, remains. • Guindon filed for appeal at the Supreme Court of Canada.

  17. Topic 2 – BEPS • BEPS: Base Erosion and Profit Shifting • Why all the attention? • Political problem: tax fairness. • Governments concerned about lost tax revenue. • Very profitable companies paying little tax on profits.

  18. BEPS (con’t) • A “new” issue • The concern • Two different jurisdictions, two definitions of income. • The possibility of double non-taxation • Profits shifted between jurisdictions to achieve favourable tax rates. • The digital economy and profits from intangibles (like intellectual property)

  19. BEPS (con’t) • International Organizations Lead the Charge • G20 finance ministers ask the OECD for a report on the topic. • OECD produces report that analyzes data and statistics. • OECD presents an Action Plan on Base Erosion and Profit Shifting.

  20. BEPS (con’t) • OECD Action Plan on BEPS • 15 action items • Neutralize hybrid mismatch. • Establish CFC rules. • Prevent base erosion through interest deduction. • Reform tax treaties, permanent establishment, and transfer pricing. • Common template for tax and profit reporting. • Disclosure of tax aggressive tax planning arrangements. • Development of a multilateral instrument.

  21. BEPS (con’t) • G20 Agrees with the OECD’s Action Plan • Both the G20 Finance Ministers and the country leaders agree with the Action Plan’s approach. • The leaders also agree to swift implementation of the Action Plan.

  22. BEPS (con’t) • Where are things going? • World leaders are engaged • Certain multinational enterprises have reacted to criticism • The Government of Canada has previously addressed some of these concerns

  23. BEPS (con’t) • What do accountants need to know • Jurisdictions under “watch” • Structures that will be attacked • Potential positives from a uniform global tax system • DIGITAL

  24. Conclusion – Key Points • Misrepresentation of a Tax Matter by a Third Party • If you have represented individuals who developed tax shelters, or have marketed any shelters: • A) Be ready for an assessment • B) Be prepared to get legal advice to assist you • BEPS • This issue is on government agendas, and there will be more international investigations. • As a result, crossborder and offshore tax planning must consider the domestic and multilateral push for changes. • Great care must be taken for any activity that involves GAAR or aggressive tax planning.

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