Review of the Advance Income Tax Rulings Process
In a 2004 advance income tax ruling [Footnote 12] the Directorate stated that it was undertaking a review of the overall advance income tax rulings process. At that time, commentators suggested that the review was triggered by recent settlements reached by the CRA with certain film tax shelters that had obtained advance tax rulings. [Footnote 13]
Question 1
Can the Directorate provide us with an update on the status of your review of the income tax rulings process?
Response 1
The focus of the review process was on the currency of Information Circular 70-6R5, the sufficiency and effectiveness of the various caveats, disclaimers and comments that are used to restrict the application and scope of issued rulings. The circular was also reviewed for the amount of due diligence that is required with respect to supplementary information disclosed by the taxpayer but not specifically included in the issued ruling. The Directorate also reconsidered the CRA’s position with respect to ruling on questions of fact and on completed or partially completed transactions.
Question 2
Did your review result in any changes to the caveats, disclaimers and comments that are incorporated in your rulings letters?
Response 2
The Directorate has concluded that the various caveats, disclaimers and comments currently used in Information Circular 70-6R5 and in rulings letters continue to be effective in restricting the application and scope of issued rulings and has therefore decided that no changes to rulings letters are required at this time.
Question 3
There is some concern in the tax community that it has become very difficult to obtain a ruling when tax shelters are involved. Is this concern justified?
Response 3
With respect to tax shelters [Footnote 14] the Directorate will continue to provide rulings based on tax law and Department of Finance policy. However, to provide certainty and fairness for taxpayers and to maintain the integrity of an open, transparent and binding rulings process, the CRA will exercise greater diligence with respect to the representations made in tax shelter ruling requests. While there will be no general expansion of the scope of enquiry, tax shelter ruling requests may be subject to greater scrutiny and requests for additional information and explanations from the taxpayers’ representatives to ensure that the Directorate fully understands the nature and future tax effects of such rulings. The Directorate also wishes to reiterate that inasmuch as the rulings process is characterized by the voluntary and complete disclosure of all facts and information pertinent to the rulings sought by the applicant, the CRA will only be bound by the facts and proposed transactions that are set out in the issued rulings letter and will not be bound by facts disclosed in supplementary information provided by the taxpayer that are not included in the ruling letter. The Information Circular will be amended to clarify that the CRA will only be bound by facts contained in the ruling letter.
Question 4
Has the Directorate changed its position on ruling on questions of fact?
Response 4
The Directorate’s position regarding ruling on questions of fact remains as stated in the Information Circular [Footnote 15] The Directorate will continue to refuse to rule when a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the ruling request. The Directorate does not consider it helpful to rule on questions of fact that cannot be determined at the time and making the ruling subject to a caveat saying that the ruling is inapplicable if the facts prove otherwise.
Question 5
Has the Rulings Directorate changed its position on ruling on completed or partially completed transactions?
Response 5
The Directorate has changed its position somewhat with respect to ruling on completed or partially completed transactions. The Directorate has decided that it can safely rule on completed or partially completed transactions provided that two conditions are satisfied: (i) that the ruling is requested before the proposed transactions are completed, and (ii) in conformance with the Directorate’s longstanding stated policy, that the issue is not under audit. Inherent in ruling on completed or partially completed transactions is the risk to the taxpayer that the ruling will not be favourable. Taxpayers should consider that, while changes can be made during the ruling process to proposed transactions, such opportunities are foreclosed with respect to completed transactions. The Directorate would, of course, bring any information disclosed by the taxpayer involving completed or partially completed transactions that are subject to an unfavourable ruling to the attention of the audit branch.
With respect to the CRA’s audit activities, this is also a good opportunity for the Directorate to dispel the notion of some in the tax community that the issuance of a binding ruling forecloses any subsequent audit of the transactions disclosed therein. All the facts and transactions that are the subject of an advance ruling have always been, and will continue, to be subject to audit when they are completed to ensure that the facts are accurate and that the transactions have been implemented as disclosed. In accordance with the CRA’s stated position [Footnote 16] where there is a material omission or misrepresentation in the statement of relevant facts or proposed transactions as stated in the ruling letter, the advance income tax ruling will be considered invalid and the CRA will not be bound by it.