Tax and Estate Planning Blog : Moodys LLP and SNC Law

In the tax profession, there are a number of issues that bug me. For example, the absence of a tax specialist designation in Canada to help the public distinguish between non-tax specialists and tax specialists bugs me. I first wrote about this issue in our July 11, 2011 blog. The fact is that I've held this view for well over a decade.....it's important to ensure that the public is better served.

Another issue bugs me. Why is it that many professions are regulated, like cosmetology, but tax return preparation is not? Notwithstanding that Moodys' professional services do not really include Canadian tax compliance (we prefer to work with the client's existing tax preparers), the tax preparation industry is a large one and is unregulated. Anyone who wants to prepare tax returns for a fee in Canada is free to do so. Over the years, I've seen some very poorly prepared tax returns that were ticking time bombs for the client / taxpayer. In other cases, the professional preparer simply made errors. In many cases, I believe, the tax laws have simply become too complex for the average tax preparer to understand unless they are a tax specialist. Thank goodness for good tax software. Unfortunately, though, tax software is not fool-proof and requires the astuteness of the operator to ensure that there are no errors.

One would argue, however, that a shrewd consumer will always be able to determine a tax preparer's qualifications to handle their needs, and therefore, regulation is not needed. I don't buy that logic. In many cases, I've seen sophisticated people simply select the cheapest service provider thinking that the tax preparer is on equal footing with other more qualified but more expensive providers.

I can only guess, since I don't have the statistics at my fingertips, that untrained tax preparers cost the Canadian government tremendous amounts of inefficiencies. This is in addition to the cost to the consumer in the form of missed tax deduction and credits, not to mention the cost of errors and the time and money subsequently expended to resolve, including the potential assessment of penalties and arrears interest by the Canada Revenue Agency (“CRA”). Further, I believe that the non-regulation of the tax preparation industry in Canada makes it easier for inappropriate aggressive tax avoidance to occur (like certain charitable tax shelters). 

In the US, the government obviously believes that regulation of the tax preparation industry is important. Today, a paid preparer of US tax returns must register for a "PTIN.” Similar registration requirements exist in Australia. The UK also appears interested in exploring an enrollment or certification system for tax preparers.

At the 2010 STEP National Conference, The Department of Finance was asked whether or not a US style tax preparer registration system was looming for Canada. The answer provided made it seem like the Government of Canada was not interested. However, at a recent tax conference that I was a speaker at, I participated in a Roundtable Q&A session with the CRA. One of the questions dealt with "tax intermediaries." Based upon the answer provided, it is obvious that the CRA is watching the US, Australia and UK experience closely and might be interested in a similar registration system for Canada.

Stay tuned.....I don't think we've seen the end of this story. Hopefully we see a positive result soon.

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As many regular readers of our blog or our Twitter feeds (@RoyBerg1, @Moodystax) already know, applications for the 2011 US OVDI ended on September 9, 2011. However, there has been no shortage of activity regarding non-compliant US citizens. Yesterday, our firm received some news from a highly-placed source regarding some further activity. Apparently, a very influential US body has drafted a letter that should be made public later this week. The letter advocates lenient tax treatment for US Citizens residing in Canada who are not current with their filing obligations.

Here is what we believe to be the case:

1.      The letter is addressed to President Obama, Secretary of State Clinton and Ambassador Jacobson.

·         Notably absent on the distribution list are Secretary of Treasury Geithner and IRS Commissioner Shulman.

·         We believe the omission of Geithner and Schulman indicate that the issue is being framed as a diplomatic matter and not as a tax matter.

2.      The letter purports to advocate the following relief for US Citizens residing in Canada for X years provided they are compliant with Canadian tax filing and reporting obligations:

·         Full abatement of the penalty regime under the IRS Amnesty Program;

·         Penalty relief for those who missed participation in the Amnesty Program; and

·         Ability to renounce US Citizenship without the imposition of the Exit Tax.

What we do not know is the effect, if any, the letter will have.

If the letter does manage to effectuate change to the current protocol then that would be great news. The work that practitioners have undertaken so far for their non-compliant US clients may place them in an expedient position to be compliant with their tax affairs. However, it is puzzling to think how the lobbied for changes could be implemented without causing significant other fallout. For example, if the letter effectuates change, would non-compliant US citizens be rewarded for waiting out the previous voluntary disclosure programs? Tricky issues.

We continue to monitor this space closely and will communicate any changes as they become available.

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On October 31, 2011 (on the fifth anniversary of the income trust amendments) the Department of Finance released a package of income tax and sales and excise tax technical amendments. While most practitioners, including our firm, are still working through the package there are two proposed amendments that are worthy of an early comment.

1.                  Subsection 15(2)

It is proposed that subsection 15(2) be amended to clarify that a partnership can be connected with the shareholder of a particular corporation if that partnership does not deal at arm’s length with, or is affiliated with, the shareholder. The proposed amendment applies in respect of loans made and indebtedness arising after October 31, 2011. This amendment is important and noteworthy given the fact that it was questionable from a read of the existing law as to whether or not partnerships could be connected with the shareholder of a particular corporation. Accordingly, taxpayers and their advisors will need to take a fresh look, in light of this proposed amendment, as to whether or not partnerships will be connected with a corporation thereby causing subsection 15(2) to apply to such loans or indebtedness. To the extent that subsection 15(2) will apply, such loaned amounts may be included in the connected shareholder’s income. 

2.                  Personal Services Business Corporations

The Department of Finance is proposing a significant change for a personal services business carried on by a corporation. Prior to the announcement of these technical amendments, it may have been advantageous for a person, who would otherwise be considered to be an employee, to incorporate their employment services. Such a corporation is commonly known as a Personal Services Business corporation.   Prior to the introduction of the eligible dividend regime, it was not advantageous to have a Personal Services Business corporation since such a corporation would automatically be taxed at the highest corporate tax rate and all expenses (with certain limited exceptions such as salaries to the shareholder) would not be deductible. With the introduction of the eligible divided regime in 2006 and declining corporate tax rates, having a personal services business corporation’s income being taxed at the highest corporate rate and later distributing such surplus as an eligible dividend could provide, in some cases, a significant tax deferral.

The proposed amendment introduced in yesterday’s technical amendments will eliminate any such deferral opportunities by causing any income earned by a corporation from a personal services business to be taxed at a combined Federal-Alberta rate of 38% (as compared to the normal highest corporate rate for 2011 of 26.5%; 25% for 2012). The proposed amendment applies to taxation years that begin after October 31, 2011. Such an amendment should discourage any taxpayer from entering into a personal services business corporation relationship. 

Follow us on Twitter @Moodystax for further updates on these technical amendments.

New GAAR Decision

On October 28, 2011 the Tax Court of Canada released a decision – Global Equity Fund Ltd. v. Her Majesty the Queen. This decision is the latest decision in which the General Anti-Avoidance Rule (“GAAR”) was at issue. The firm that defended the taxpayer has written a good summary blog on the decision and you will find it here. Readers are encouraged to read this interesting decision. Moodys LLP were the tax advisors for the taxpayer in the structuring of the transactions at issue. The taxpayer’s victory was the only “win” of the three similar cases decided by the Tax Court in 2011.

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