Spring 2014 Auditor Generals Report Aggressive Tax Planning
On May 6, 2014, the Auditor General ("AG") released his spring report.1 Chapter 3 of the AG's report dealt with the CRA's approach to aggressive tax planning ("ATP"), focusing on how the CRA manages its ATP program as well as how the Department of Finance responds to requests for new legislation to combat ATP. Overall, the AG concluded that the CRA's ATP program had tools to detect, correct and deter non-compliance. However, there is a need to evaluate the National Risk Assessment Model ("NRAM"), weaknesses in ATP performance measurements and a need to improve the monitoring of training.
The CRA has identified ATP as one of its highest compliance risks and administers an ATP program to identify tax avoidance arrangements and products and to administer the general anti-avoidance rule ("GAAR"). The AG's report identified four types of tax plans that were used for the AG's evaluations, namely:
Offshore insurance: Allows businesses to swap their Canadian insurance portfolio with a foreign portfolio using a foreign affiliate to generate income that is not taxable in Canada ($9.8B cost to the fisc between 2006 and 2013 with no anti-avoidance measures yet in place); RRSP strips: Allowed individuals to "strip" funds tax-free from locked-in RRSPs, then receive income tax receipts significantly greater than their contribution ($22M cost to the fisc - stopped by Budget 2011); Stock dividend value shifts: Creation of artificial capital losses to offset a capital gain arising on property dispositions ($3.5B cost to the fisc - successfully challenged by the Crown in court); Tech wrecks: Made it possible to transfer tax losses between unaffiliated corporations, so named because of the proliferation of tax losses in the tech sector ($3.5B loss to the fisc - stopped by Budget 2013). These arrangements were identified within the CRA by field auditors as well as within the CRA's Rulings Directorate.2 The AG findings were as follows:
The CRA has not fully evaluated whether it detects high-risk large business files: The AG recommended that the CRA develop systematic processes to identify high-risk files. For example, in 2010-11, the International and Large Business Directorate phased in a large business program, requiring all large businesses to be assessed annually under the NRAM. In response to the AG's recommendation, the CRA agreed that the NRAM must be evaluated by reviewing audit results and confirmed that evaluation would be completed by 2014-15...
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