ITNEWS-34-General Anti-Avoidance Rule and Audit Issues/Concerns

General Anti-Avoidance Rule and Audit Issues/Concerns

Question 1

Can the CRA provide an update on some statistics regarding GAAR?

Response 1

The GAAR statistics as at June 30, 2005 are as follows:

It should be noted that GAAR has also been used as a secondary position in specific tax shelters/projects: RRSP strips, cash-leverage donations, and Barbados spousal trusts. Because of the large number of taxpayers involved in these arrangements, only the arrangement (versus each taxpayer) is referred to the GAAR Committee. Therefore, these multi-taxpayer reassessments are not reflected in these GAAR statistics.

Question 2

Can the CRA provide some current examples of the types of cases in tax avoidance where GAAR is being considered/applied?

Response 2

Here are some specific examples where GAAR is a concern:

• Certain international financing arrangements used to create interest expense or import interest expense from other tax jurisdictions (subsection 95(6) could also be a consideration in these arrangements).
• The avoidance of subsection 85.1(4) on the disposition of shares of a foreign affiliate according to subsection 85.1(3). Subsection 85.1(3) provides that where a taxpayer has disposed of shares of a foreign affiliate of the taxpayer to another foreign affiliate of the taxpayer for shares of the capital stock of the acquiring affiliate, the transfer is treated as a “rollover” for Canadian income tax purposes. Subsection 85.1(4) provides that subsection (3) is not applicable in respect of a disposition that is part of a series of transactions or events for the purpose of disposing of the share to a person (other than a foreign affiliate) with whom the taxpayer was dealing at arm’s length. The CRA is identifying cases whereby transactions involving sales to arm’s length persons are undertaken to circumvent the application of subsection 85.1(4). In addition to GAAR, subsection 95(6) will also be considered.
• The use of stock dividends to:
  • create capital losses to offset capital gains
  • create subsection 164(6) capital loss carry back
  • avoid “kiddie” tax
• Non-Resident trust issues:
  • Barbados Spousal Trust Arrangements, whereby property is transferred to a Barbados spousal trust tax free and sold back to the Canadian spouse in order to create a bump in the cost of capital property relying on the Barbados treaty capital gain exemption.
  • Shifting property to offshore trusts having Canadian beneficiaries in order to shelter income and future gains from Canadian tax using treaty provisions.
• Treaty issues, including treaty shopping to avoid tax on the disposition of taxable Canadian property or to reduce Part XIII withholding tax on interest/dividends/royalties, etc.
• Leveraged cash donation arrangements
• RRSP strip arrangements
• Surplus stripping – domestic and non-resident

Question 3

What are other compliance issues that are of primary concern for the CRA at the present time?

Response 3

Other compliance issues that are CRA’s primary concerns at the present time include:

• Canadian taxpayers shifting the international portion of their business to a related offshore entity in a tax jurisdiction with a relatively lower tax rate. We are concerned with the transfer prices being used, the subsequent transfer price of goods sold to the offshore corporation and the residency of the offshore entity.
• Canadian businesses transferring intangibles assets to related tax haven corporations. The CRA is concerned with the sale price of the intangible, value of royalties charged and the residency of the related corporation.
• Foreign tax paid: foreign tax credits created/claimed improperly.
• Crown charges: royalties paid to Canada or a province, other than a prescribed amount (i.e. subparagraph 1211(d)(ii) of the Regulations).
• Loss continuity: errors in the loss pools and the propriety of the application of losses in reducing taxable income of other years.
• All gifting arrangements that result in inflated charitable donations tax credits/deductions.