Question 1
Has the CRA proposed to levy, or has it levied any third-party civil penalties under section 163.2 of the Income Tax Act?
Response 1
On one occasion so far, the CRA has levied a “penalty for participating in a misrepresentation” under subsection 163.2(4). Other third-party penalty situations are currently under review, but no proposals to apply civil penalties in these cases have been issued as of the date of this conference.
Question 2
What guidelines do field auditors follow in applying these penalties?
Response 2
Information Circular 01-1 Footnote 2 outlines the CRA’s guidelines and processes for applying the third-party civil penalties. In addition, the CRA has issued Communiqué AD-03-1 to provide further guidance for CRA personnel.
The auditor must complete a penalty report in every case where the penalty is proposed. The report sets out the criteria being considered in each case recommending a penalty, including any information or explanations from the third party that may mitigate or counter the imposition of the penalty. The penalty report will be available on request at the objection stage.
The CRA intends to strictly control the application of the penalties. To this end, the CRA established a Headquarters review committee. The committee is composed of senior representatives from the CRA and from the departments of Finance and Justice.
Question 3
Please provide an update on the activities of the Transfer Pricing Review Committee.
Response 3
To date, there have been seventeen referrals considered by the Committee. Six of those referrals recommended a recharacterization of income under paragraph 247(2)(b) of the Income Tax Act. These files have been sent back to the field for discussion, and the cases are still ongoing. Penalties have been recommended in five other cases; two of those have already been reassessed, and the other three have just been referred back to the field. There was no action taken on the other six cases.