CRA to Pursue Canadian Multi-Nationals: Is Your Company Prepared for a Tax Audit?
CompassTAX - Sept 2005
By Diana Matwichuk, CompassGUIDES Tax Specialist
International business is thriving and Canadian multi-national corporations (MNC’s) are actively participating in this trend, but a recent Canada Revenue Agency (CRA) announcement will soon be raising concerns in these circles.
The CRA is on a mission to tax that international business, and the likelihood that Canadian MNC’s will have a tax audit is now higher than ever.
Minister of National Revenue, John McCallum, announced on August 9, 2005, “the creation of 11 centres of expertise across Canada in an ongoing effort to address aggressive international tax planning.”
The CRA goes on to explain that the initiative is to be funded by “an annual $30 million investment announced in the 2005 Federal Budget to enhance the CRA’s compliance activities.”
This would indicate that it has been determined that there is enough potentially taxable international activity through foreign subsidiaries of Canadian MNC’s to provide a rate of return that would warrant such a sizable financial commitment. It is unclear whether the CRA already has this supporting information, or whether they suspect it to be true.
This direction may actually result in an exodus of MNC’s from Canada as they realize the potential for taxation on their international business activity.
Centres of Expertise
The CRA’s planned centres of expertise will establish teams of experts, to include audit professionals from all areas of international tax, special audits and tax avoidance. Located in major cities across Canada, the objective of these centres will be to address international tax planning and “abusive use of tax havens”.
It is clear that the CRA will comb the organization for the best and brightest international auditors and assemble them in the Centres of Expertise. These particular auditors may be a whole different kettle of fish compared to what we are accustomed to.
How does the CRA find out about potential foreign business activity initiated by Canadian MNC’s? Rest assured that it is a multi-faceted approach.
Forms T1134-A and T1134-B were introduced 4-5 years ago to gather information about foreign subsidiaries of Canadian MNC’s. Prior to these forms, there was virtually no requirement to report any information at all about foreign subsidiaries. There has possibly been a flood of these submissions in the past few years, providing the CRA with a database of information to investigate.
As well, ongoing tax audits likely unearth evidence of mind and management of international business from within Canadian corporations. Assignee OETC claims and transfer pricing are also likely links which alert the CRA of potential international business activity. In a web-based world, it is easy for the CRA to make these connections (see our previous article on this topic: Visiting Grandma – Sending Assignees through the Electronic Curtain).
International Corporate Structure
Canadian MNC’s often find that their corporate structure involving foreign subsidiaries starts to show signs of age after a few years. What was intended to be an arm’s length arrangement, with the mind and management of the foreign subsidiary wholly outside of Canada, gradually slips into a more relaxed state. E-mails and faxes may surface with directives from Canada to the foreign subsidiary, actually showing that the mind and management is indeed in Canada.
Preparing for the Tax Audit
The first step in preparing for the inevitable tax audit actually takes place at the outset, when corporate structure is being established. Be realistic. If it is evident that mind and management of your company’s international business will be in Canada, then it is not advisable to conduct business from a low-tax jurisdiction.
On the other hand, if it is possible to keep mind and management of those operations outside of Canada, thus allowing for a corporate structure that can capitalize on the benefits offered by an international tax haven, be diligent about following protocol. Policy regarding the avoidance of providing business directives should be strictly adhered to in order that the CRA have no evidence to pursue.
In our April 2005 issue of CompassPOINTS ( Defending Your Assignees Against the Tax Audit – Some Winning Strategies), we provide advice on dealing with a tax audit. Expanding on that list, it is important to:
- Contain the issue and ensure confidentiality
- Ask for clear questions from the auditor
- Pay attention to documentation
- Seek professional advice
- Treat the auditor with respect
- Respond promptly to questions
Impact on Canadian MNC’s
As a direct result of the CRA’s Centres of Expertise and the inevitable tax audits that they will generate, Canadian MNC’s may experience decreased productivity, and may have to incur additional legal and accounting costs. There will also be the potential for penalties and interest
Executives of MNC’s should be aware of this CRA intention to closely monitor and investigate international business activity so that they can take precautions, review corporate structure and ensure that internal communications protocol is being adhered to. At CompassTAX, we provide advice on setting up and reviewing existing corporate structure for international business, with the international tax perspective forefront. We also advise on protocol and procedures to ensure that mind and management of foreign subsidiaries remains outside of Canada.
Assignment Managers may want to alert others in the company of these plans, as assignees could ultimately be affected if a CRA audit were to ensue.
At CompassTAX, we develop cost-effective assignment tax programs for Canadian companies sending employees around the world and bringing international consultant expertise to their Canadian projects. These Assignment Tax Programs provide detailed advanced tax planning, including policies, procedures and employment contracts, which serve to minimize costs and mitigate any risk of litigation.
CompassTAX™ also offers clients with international assignees pre-departure and re-entry tax planning with a view to minimizing tax and providing experienced tax representation with the Canada Revenue Agency (CRA). CompassTAX™ specializes in all areas of cross-border taxation for consultants coming to Canada temporarily, Canadians moving back to Canada, and individuals living outside Canada with Canadian business ties.
The author wishes to thank Peter Simpson, CA for his contribution to this article .