Personal Services Businesses and Government IT Consultants

The Canada Revenue Agency (“CRA”) is in the process of auditing and reassessing IT contractors that provide services under long term contracts to various government departments.  The CRA’s position is that these contractors were employees for tax purposes and any corporations were personal service businesses (the “Rulings”).  If the Rulings stand, the Rulings will impact the IT contractors as follows.  First, the CRA will remove the corporate tax rate reductions on income.  Second, the CRA will deny the small business deduction.  Third, the CRA will deny the expenses claimed.  Last, the CRA may impose gross negligence penalties.   

We are representing a number of IT contractors who have been reassessed and have objected to the Rulings.  It appears that the CRA are attempting to group these objections and place these objections on hold.  In the interim, the CRA has selected a few of the objections and is proceeding to the Tax Court of Canada with these hand-picked objections.  We believe that – if the CRA are successful in the Tax Court – the CRA will attempt to use these hand-picked cases to persuade the other IT contractors to abandon their objections in whole or in part and consent to the Rulings.  If the CRA is not successful in Tax Court, the CRA may appeal the Tax Court’s decision or take the position that these are fact-based cases and, therefore, the Tax Court’s decision is not binding on the outstanding objections.

We believe that the determination as to whether a worker is an employee, incorporated employee or independent contractor is a fact-driven determination.  Although some cases are similar, they are not the same.   Each case is different and an independent decision-maker should consider the unique circumstances of each case in order to make the correct determination in fact and law.  In these circumstances, we believe that the CRA’s attempt to group the IT consultants’ objections and bind the IT consultants is not appropriate.  In addition, the CRA’s strategy is not in the IT consultants’ best interest.

We believe that every case would benefit from an independent analysis of the IT consultants unique facts and a review of the potential strategies.  This way, the IT consultant can determine whether they should wait for the conclusion of the CRA’s test cases or whether the IT consultant should forgo the objection stage (and the CRA’s attempt to hold the objection) and appeal the matter directly to the Tax Court in accordance with subsection 169(1) of the Income Tax Act. 

We welcome the opportunity to meet with other IT consultants to discuss their file and recommend a custom strategy.  We believe that all IT consultants interested in defending their filing positions will benefit from the application of communal knowledge to each unique case.  If you are interested, please contact Kristina Anderson at 416.218.5263 ext 112 or info@atxlaw.ca to schedule a consultation. 

Canada Revenue Agency (finally) warns Canadians about (detax) tax protester schemes

The Canada Revenue Agency (“CRA”) has assessed a number of taxpayers who have participated in the detax schemes.  In addition, the CRA has imposed 50% subsection 163(2) gross negligence penalties.  We think that - in many cases - the imposition of the subsection 163(2) gross negligence penalties is wrong in fact and law.  

We are in the process of representing taxpayers to dispute the correctness of the subsection 163(2) gross negligence penalties.  The detax “interpretation of the law” has been promoted for some time.  CRA has finally issued a press release warning taxpayers about detax and other types of tax protester schemes.  We are not sure what took so long.  

The interesting sections of the CRA’s press release, along with our comments, are as follows.

The CRA cautions all Canadians to be aware of individuals who try to convince them to not pay their taxes.

Taxpayers should be aware that tax protestors who promote intentional tax evasion are seeking a personal financial benefit at the expense of the taxpayer and of all Canadians. 

In our experience, taxpayers who participated in the detax scheme were persuaded that the scheme was legal and not contrary to the law.  It is not that the detax promoters persuaded these taxpayers that they should willfully evade tax or that the tax legislation was unjust.  Instead, the detax promoters  persuaded these taxpayers that the law allows for a refund of tax paid.

Canada has one of the highest rates of compliance in the world. However, individuals who try to evade or avoid taxes by participating in tax evasion schemes will be detected and addressed accordingly. That means you will lose the high fees you paid up front for the bad advice you’ve received from the promoter, and once your tax return is processed  the CRA will reassess income tax and interest, and charge penalties. In some cases, you could be prosecuted for tax evasion.

As discussed, the CRA is routinely imposing 50% gross negligence penalties.  It appears that - at this time - the CRA is not deleting the penalties at the objection stage.  In order to dispute the penalty, taxpayers will likely need to retain a tax lawyer and appeal the penalty in the Tax Court of Canada.    

If you have doubts about certain tax arrangements, you should get advice from an independent tax professional, someone who is not connected to the scheme or promoter. If it sounds too good to be true, it probably is.

It is not advisable or appropriate for taxpayers who participated in the detax scheme to obtain advice from the tax promoters, accounting professionals involved in the detax scheme or the CRA.  We believe that all of these parties have a vested interest in the outcome and, therefore, taxpayers will not receive independent information and advice.  

We recommend that taxpayers call our firm to obtain independent advice from a tax lawyer and discuss their options.  

Canada Revenue Agency “Detax” Update

In or about 1995, the “detax” or “untax” movement has been moving through Canada.  Since that time, detax organizations have been gaining profit holding seminars that spread the detax philosophy.  Generally speaking, detaxers believe that the they are “natural persons” (as oppose to government created “artificial personages”) and that “natural persons working in their own capacity, under a private contract, for their own benefit” can structure their affairs in a tax exempt manner i.e., detaxers believe they don’t have to pay tax.

Our firm has long held that detax philosophy/argument is wrong in law.  The Courts have confirmed our interpretation of the law.  The CRA has successfully charged and prosecuted some of the detax promoters under paragraph 239(1)(d) of the Income Tax Act (“ITA”) for tax evasion and under subsection 464(a) of the Criminal Code for counselling others to commit fraud by evading income taxes.  

Consider: R. v. Porisky, 2012 D.T.C. 5037, R. v. Sydel, 2006 BCPC, CA Magazine Article, March 2002, Detax man cometh, CTV.ca, January 19, 2012, Tax-dodging guru convicted on evasion charges

We believe that the CRA’s decision to charge detax promoters for tax evasion and counselling others to commit fraud was fair and reasonable.  However, we are disappointed and concerned that the CRA has recently sent notices of reassessments to unsuspecting detax participants imposing 50% gross negligence penalties under subsection 163(2) of the ITA.  It appears that the detax promoters misled these taxpayers and that these taxpayers were under the innocent mistaken belief that the detax philosophy was correct.  In these circumstances, we believe that the CRA’s decision to impose 50% gross negligence penalties is wrong in law and that these taxpayers should dispute the imposition of this penalty.  

We encourage detax participants who have recently received notices of reassessments or notices of confirmation that impose gross negligence penalties to call our firm to discuss their tax matter.

Canada Revenue Agency Targeting Restaurants, Waiters & Waitresses

Canada Revenue Agency (“CRA”) has completed a two-year pilot project targeting restaurants, waiters and waitresses.  It is reported that the initial CRA pilot project targeted 4 restaurants in St. Catharines, Ontario uncovering $1.7 million in unreported tips.  Although the CRA has not advised whether it will expand the pilot project, we believe that the CRA will likely expand the project to other cities and provinces.

CP24 has reported on the pilot project in its article entitled Taxman cracks down on waiters, waitresses.

The Ottawa Sun has reported on the pilot project in its article entitled Taxman’s pilot project flushes out unreported tips by waiters, waitresses.

The Vancouver Sun has reported on the pilot project in its article entitled Taxman mulls action on unreported tips.

Nota bene.  CRA projects of this sort are not unique.  The CRA has recently targeted the tax treatment of housing sales and restaurant zapper software (previously reported in this blog).  We recommend that taxpayers with unreported income discuss their options - including, but not limited to, the potential use of the Voluntary Disclosures Program - with a tax lawyer.

Announcement: CRA Corporate Filing Issue & Extension of Time

The Canada Revenue Agency recently sent our firm the following announcement.*

Due to a service disruption on June 29th with the Corporation Internet Filing service, corporate tax returns due June 30th will be considered filed on time if transmitted before midnight on July 6th.  No taxpayer information was compromised as a result of this disruption and taxpayer information remains secure. The Canada Revenue Agency apologizes for any inconvenience this may have caused and appreciates your use of our e-file services.

We recommend that readers refer to the service disruption and the CRA’s extension of time when filing so that no late-filing penalty will apply. 

*Please note that our firm cannot confirm the accuracy of the above-noted announcement. 

Department of Finance Draft Tax Court of Canada Legislation

We have discussed the Department of Finance’s (“Department”) proposed changes to the Tax Court of Canada Act.  The Department posits that these changes will improve tax disputes between taxpayers and the Canada Revenue Agency increasing efficiency and access to justice.  Although we agree - along with the Ontario Bar Association - that the tax dispute process and procedure would benefit from some change, we believe that the Department should not implement some of the proposed changes and the Department should be very careful in implementing some of the other proposed changes.  Our view is on all fours with the Ontario Bar Associations submissions which we helped draft.  

On June 8, 2012, the Department released draft legislation to change the Tax Court of Canada Act.  The Department’s press release indicates that the draft legislative proposals take the comments it received from stakeholders into consideration.  In particular, the Department released 2 documents: (1) Legislative Proposals Related to Improving the Caseload Management of the Tax Court of Canada; and (2) Explanatory Notices to Legislative Proposals to Amend the Income Tax Act Related to Improving the Caseload Management of the Tax Court of Canada.  The Department invites stakeholders to provide comments on the draft legislation within 30-days i.e., on or before July 9, 2012.

We have requested that the Department provide copies of all submissions it received from stakeholders through the Access to Information Act.  We expect to receive disclosure shortly.  In addition, we are in the process of reviewing the Department’s draft legislation and working with the Ontario Bar Association to provide a response.  

We expect to provide readers with another update shortly.

New ATX Law Article - Understanding Director’s Liability & Due Diligence

The Tax Court of Canada’s decision in Buckingham v. Her Majesty the Queen was appealed to the Federal Court of Appeal (“FCA”).  The FCA recently released its reasons for judgement.  The courts’ decisions have provided valuable insight and generated discussion within the tax community.  The Canadian Tax Foundation recently published ATX Law’s article entitled The Due Diligence Defence in Directors’ Liability Tax Disputes.  

Taxpayer Relief Update

In Bozzer v. Her Majesty the Queen (“Bozzer”), Federal Court of Appeal held that the taxpayer relief provisions contained in the Income Tax Act allow the Minister of National Revenue (“Minister”) and Canada Revenue Agency (“CRA”) to cancel interest accrued in any taxation year ending within ten years before the taxpayer’s application for relief, regardless of when the underlying tax debt arose. 

The Minister and the CRA have, in some circumstances, attempted to disregard the common law.  We have been waiting for the CRA to announce its response to the Bozzer decision.  

Today, the CRA distributed a news release entitled Taxpayer relief deadline is December 31, 2011.  This news release confirms that the CRA will follow the Federal Court of Appeal’s decision in Bozzer.  In addition, the CRA announced that it will adopt this change for requests for taxpayer relief made under the Air Travellers Security Charge Act, Softwood Lumber Products Export Charge Act and the Excise Act.

The CRA’s Administration of the Tax-Free Saving Account

The CRA’s Taxpayers’ Ombudsman reported that several taxpayers contacted the Taxpayers’ Ombudsman office complaining the Tax-Free Savings Account (“TFSA”) rules related to withdrawals and over-contributions were confusing.  In addition, the Taxpayers’ Ombudsman noted several media reports describing taxpayer confusion regarding the TFSA rules.

In these circumstances, the Taxpayers’ Ombudsman conducted an investigation to determine whether the CRA’s TFSA information and administration complied with the Taxpayer Bill of Rights. In particular, the Taxpayers’ Ombudsman investigation focused on whether the CRA had provided taxpayers with complete, accurate, clear, and timely information and whether taxpayers who had inadvertently over-contributed to their TFSA and penalized were treated fairly.

The Taxpayers’ Ombudsman released a special report entitled “Knowing the Rules: Confusion about the rules governing the Tax-Free Savings Account”. The report stated that “[t]he CRA should have been more proactive in informing Canadians about the tax consequences of the TFSA”. In light of this finding, the Taxpayers’ Ombudsman recommended that the CRA:

1. take steps to make Canadians more aware of the information it provides about the TFSA on its Web site, in print, and elsewhere;

2. continue to update the information available on the TFSA and be proactive in informing Canadians about how to find the tax rules governing the TFSA; and

3. continue to work with the financial services sector to ensure that the CRA’s information products about the TFSA are widely available.

Dealing with the CRA? Here are 8 small things you should know

Read ATX Law’s recent article published by the Globe and Mail entitled Dealing with the CRA?  Don’t Panic.