Do you know what the 10 most common and costly mistakes made by companies filing their Scientific Research and Experimental Development (SR&ED) claims are? Ryan Pernia talks about this in his guest post on Espresso Capital's blog.
Do you know what the 10 most common and costly mistakes made by companies filing their Scientific Research and Experimental Development (SR&ED) claims are? Ryan Pernia talks about this in his guest post on Espresso Capital's blog.
On February 11, 2014, the Federal Minister of Finance, Jim Flaherty, presented the majority government’s budget. This Tax memo discusses the tax initiatives proposed in the budget.
Dan Rivet, Senior Consultant
Tax Controversy and Dispute Resolution
We are pleased to announce that Dan Rivet has joined PwC as a member of the Tax Controversy and Dispute Resolution team.
Dan brings a wealth of knowledge and experience having spent 20 years at the Canada Revenue Agency (CRA), his last position as CRA Manager – GAAR, Inter-Provincial Tax Avoidance and Technical Support Section. Dan’s career has focused on the area of Tax Avoidance and Aggressive Tax Planning (ATP). Some career highlights include:
Please feel free to reach out to Dan with questions or to welcome him to PwC!
By: Nick Pantaleo
Snitching can be an easy way to reveal a truth, save someone from him or herself or even help solve a crime.
But at times, people can struggle with whether snitching is the right thing to do. A snitch can feel guilty for having betrayed someone’s trust if that individual is a friend, family member or business associate. Alternatively, there may be a fear of being ostracized by mutual friends and relatives. Sometimes snitching may not give the other person a chance to own up: “Mom, Nick broke it.” “Jimmy, don’t tell on your brother.” “Sure Mom – like Nick was going to admit to breaking the lamp.”
The movie Scent of a Woman included a sub-plot about snitching. The main story line revolves around a retired Colonel, played superbly by Al Pacino, fighting his demons with the help of a high school student, Charlie, who has his own troubles. Charlie saw a couple of fellow students setting up a prank to be pulled on their prep school's headmaster. Following the prank, the headmaster presses Charlie to name names, offering as an “incentive” a letter of recommendation virtually guaranteeing his acceptance to Harvard. Charlie remains silent as a matter of principle. In the closing scenes, before the entire student body and with the headmaster threatening to expel Charlie for his silence, the Colonel launches into a passionate defense of Charlie while questioning the integrity of a school that would reward someone for informing on his classmates.
Canada’s new whistleblowing program
In the March federal budget, the government announced the introduction of the Stop International Tax Evasion Program. Already referred to by many as a whistleblowing or snitch program, it’s intended to be similar to programs in some other countries, like in the United States. It will reward individuals for providing information of major international tax non-compliance if it leads to the collection of outstanding taxes.
Although the Canada Revenue Agency is still working out the details, a description of the program is already up on its website.
The program will involve the CRA entering into a contract with the informant. The eligibility requirements include the following:
A program we need?
Personally, I am not in favour of this sort of program. Not because I have bad memories from my school yard days of having snitched on someone or having been the victim of a snitch. And not because I think whistleblowing is wrong or that whistleblowers should not be protected.
I do not believe a government should or needs to reward its citizens for doing the right thing. Far more Canadians do far more important things for their fellow citizens, including giving up their life, for little or no benefit or reward.
The explanation on the CRA’s website for why informants should come forward under the current ILP is that they “are helping to ensure that all taxpayers are paying their fair share of taxes and this benefits all Canadians.” Exactly, although I suspect that of the 24,000 referrals the CRA apparently receives annually under the ILP, many are from jilted spouses, vindictive business associates and disgruntled former employees.
I also have a problem with the scope of the program.
Whereas the current ILP is clearly directed at suspected tax evasion, the budget papers describe the new program as a way for “…the CRA [to] target high-income taxpayers who attempt to evade or avoid tax using complex international legal arrangements.” The CRA website states that the initiative will “encourage individuals to provide information identifying international tax evasion and avoidance.” [emphasis added] In other words, the new program is not just directed at tax evasion.
What’s wrong with that? Well, two things. First, the program risks further blurring the distinction between tax evasion and avoidance. Second, for many, all avoidance is a bad thing and little attention is given to acceptable versus abusive tax avoidance.
Evasion v. avoidance
Already in Canada and globally, many in the media and in government and non-government organizations use these words loosely, often describing or treating both as if they are the same thing.
But they are not the same.
It is wrong to treat tax avoidance as if it is like evasion but it is worse to marginalize tax evasion by confusing it with avoidance. There is no defense for tax evasion.
On the other hand, there is a general principle that all taxpayers have the right to manage their affairs in a manner that results in them paying the least amount of tax. So, unlike evasion, tax avoidance is defensible.
Acceptable v. abusive tax avoidance
Many are troubled that there is such a thing as acceptable tax avoidance.
It is easy to understand this feeling given the daily media reports of tax avoidance, in particular but not exclusively, by multinational corporations feeding a growing perception that it’s costing many governments significant revenue at a time of when they are enduring high deficits and debt levels. I mean, when people suggest that this loss of revenue results, for example, in fewer schools and hospitals being built, well, it even makes my mother question what I do for a living.
Tax avoidance is acceptable if it is not abusive; i.e., avoidance is acceptable if it does not rely on an interpretation that is inconsistent with or an abuse of the tax rules. But it can’t be a simplistic or frivolous interpretation of the rules. Otherwise we are talking evasion, not avoidance.
The really hard part is drawing the line between acceptable and abusive avoidance. It’s difficult to know where to draw the line between acceptable and abusive tax avoidance because tax rules are complex, especially when domestic rules intersect with those of other countries. Experienced taxpayers and tax advisors and the CRA struggle all the time as to where to draw the line. Ultimately, the courts decide the matter if the taxpayer and the CRA are at an impasse. And if the government does not like the courts’ interpretation, they can change the law.
What about aggressive tax avoidance?
Adding to the confusion is the fact that many refer to aggressive tax avoidance. I have no idea what that means, other than it is something broader than abusive avoidance. In Canada, there is an ultimate test for determining abusive avoidance – it is set out in the general anti-avoidance rule. There is no equivalent tax rule for determining what aggressive means. So while all abusive avoidance transactions can be described as aggressive, not all aggressive avoidance transactions are abusive.
Still, taxpayers need to be aware of the possible reputational risk and the increased accountability associated with such aggressive tax avoidance – something to which multinational corporations such as Starbucks, Amazon, Google, and Apple can attest. As well, taxpayers need to be aware of the increased pressure being exerted by both developed and developing countries to change domestic and international tax laws to mitigate the impact of such transactions (for example, the OECD current study, Addressing on Based Erosion and Profits Shifting).
Narrow the scope of the program – better yet, drop the idea
A government-sponsored whistleblowing program should be a last resort in a civil society. It is an admission of failure to enforce the country’s laws. Canada is not there yet.
The CRA has the tools and legislative and investigative powers to pursue and prosecute tax evaders. For example, Special Investigations must have better forensic tools and more perspective to deal with tax evasion than ordinary citizens blowing whistles that will invariably divert CRA attention from areas that can better use their limited resources.
Targeting avoidance under the Stop International Tax Evasion Program is more problematic because not all avoidance is bad. Moreover, here again, the CRA has tools it needs to identify and pursue abusive international tax avoidance transactions. And the tools are getting better: improved cooperation and collaboration with other tax authorities (for example, through the Joint International Tax Shelter Information Center); increased exchange of information with a strong global initiative towards “automatic” information exchanges; enhanced disclosure and reporting by taxpayers and financial institutions; and recently announced funding measures to, among other things, establish a dedicated team to direct and oversee the implementation of such measures. In fact, the Act already provides the tax authorities with considerable investigatory tools, including the ability to compel others to provide information relevant to the administration of the Income Tax Act in relation to taxpayers.
With the current ILP already generating thousands of calls, what the CRA does not need is the prospect of receiving even more calls from people who come across avoidance transactions. Because the CRA has to administer the law as is and not as some believe it should be, many of the avoidance transactions will turn out to not be abusive. People will then wonder why their “leads” are not resulting in higher tax revenue and this will lead to further questions about the integrity of the tax system and the ability of the CRA to police it.
Frankly, the Stop International Tax Evasion Program is something Canada can do without.
By: Nick Pantaleo
We are almost through the late winter / early spring ritual of federal and provincial governments bringing down their annual budgets – actually, Quebec’s budget was in November following the election of the PQ minority government – except for Ontario, which will be releasing their budget on May 2nd.
With the governments contending with a still fragile global economy, slow economic growth and generally high deficits, many weren’t expecting to receive a lot of goodies – and they weren’t disappointed.
What PwC said and what governments did
PwC’s federal budget submission cautioned about relying on measures governments have typically relied on in the past to raise revenue; namely, increasing corporate and personal income, capital and payroll-type taxes, all of which have a negative impact on economic growth and job creation. The federal government listened to that message and did not raise income tax rates.
We also recommended that the government work with the provinces to re-evaluate the efficiency and sustainability of the current mix of revenue generating measures, including conducting a review of the personal income tax and GST/HST systems (in particular, the inefficiency of the myriad of tax expenditures embedded in the system), to improve the way Canada raises tax revenue while protecting those who are most vulnerable. Unfortunately, they have not heard that message – at least not yet.
As for the provincial budgets, most continue to break ranks around rates.
Personal tax rates were raised for high income earners in B.C. - the NDP promises to impose a further increase if they win next month’s election - and Quebec and across all tax brackets in New Brunswick.
As for corporate tax rates, New Brunswick raised the main rate by 2 percent to 12 percent – disheartening because they have been one of the provincial champions of low corporate tax rates. New Brunswick made no mention of its 2011 promise to lower the small business (SB) rate to 2.5% by 2015, while Nova Scotia decreased its SB rate to 3% and PEI increased its rate to 4.5%. Meanwhile, B.C. stepped up its 1% corporate tax increase by one year with the NDP promising another 1 percent increase and the reinstatement of a capital tax on financial institutions if they win the next provincial election. Saskatchewan has deferred further corporate tax decreases, no longer committing to a 2015 implementation date and Manitoba will raise the capital tax rate on financial institutions from 4 to 5 percent. Ontario is the last big province to be heard from but its fiscal situation remains dire – it has a new Premier and a minority government that has already promised to defer further reductions, so all bets are off.
The upshot of all this, as shown in the table below, is that we are not close to seeing that uniform, across-the-country general corporate tax rate drop to 25%, something federal Finance Minister Jim Flaherty was seeking. If anything, the gap will widen.
Of course, not shown in the table are the many tax credits provinces have to entice businesses to set up shop in their province. It all makes for a confusing and pretty inefficient corporate tax structure for Canada with each of the provinces doing what they think they must and because they can. On the other hand, it also means continued opportunities for provincial tax planning.
Many businesses were hoping that the government’s initiative to consider a formal system of group taxation would help make the tax system more efficient for corporate groups. However, the federal government announced in their budget that “feedback from the consultation exercise and discussions with provincial and territorial officials have not produced a consensus regarding how the Government could move forward in a way that would improve the tax system………[hence t]he Government has determined that moving to a formal system of corporate group taxation is not a priority at this time.”
Cynics will see this as another example of the federal and provincial governments’ failure to steer the boat in a single direction for the good of the country. Regardless, businesses have a right to be disappointed with this decision.
Two years have passed since a number of companies and business organizations made submissions to the government (see PwC’s submission), all mostly in favour of a formal system. Moreover, while the budget papers noted the provincial and territories’ concerns over the potential of reduced revenues and the likely upfront costs for all governments, as PwC noted in our budget submission, this was something that many businesses were sensitive to and were prepared to help the government resolve.
One of the lessons learned from the consultation process is that the provinces and territories are not happy with the current “informal” system of group taxation because they do not know what it is costing them. The government promises to work with them on that – hopefully with the input from businesses. Hopefully, as well, provinces will not take unilateral action in the meantime.
No easy answer. Corporate tax is an enigma.
It has the highest marginal cost in terms of raising government funds and its burden for the most part fall ultimately on labour. It isn’t an insignificant part of a province’s total tax revenue stream, but it is the most volatile, other than perhaps resource royalties. For example, Ontario’s corporate tax revenue prior to the financial crisis in 2007-8 was about $13 billion (19% of total tax revenue) and immediately dropped to under $6.7 billion the year after. What government can tolerate such a decrease in one year?
In many respects, the corporate tax challenge we face in Canada is similar to that being experienced globally, most recently manifested in the OECD’s report on Base Erosion and Profit Shifting, except ours is self-inflicted.
Makes one wonder why the provinces are in the corporate tax game. Wouldn’t they be better off leaving that to feds in exchange for a greater share of GST/HST revenue? It would also make life easier for corporations carrying on business in different provinces.
Maybe in a perfect world that would happen, but as a former colleague told me early in my career, “it’s not a perfect world”.
On March 21, 2013, the Federal Minister of Finance, Jim Flaherty, presented the majority government’s budget. This Tax memo discusses the tax initiatives proposed in the budget.
By: Nick Pantaleo
The Harper Government has made much of its pre-budget consultations sessions in prior years and 2013 is no exception.
Having not participated in one before, I have been curious as to how productive the sessions are. Not so much from the perspective of how many actual budget measures have come from such sessions – after all, the government is inundated with all sorts of proposals from all sorts of groups. Rather, I just wondered about the nature of the discussions.
So, when I was invited to attend a recent session I happily accepted. And I am glad I did.
It was good group of participants with different backgrounds. There was a social/community worker, a stay-at-home mom, an educator, a local politician and representatives from large and small businesses and the local chambers of commerce.
Each individual was impressive. Each showed an obvious passion for what they do, their community and the country. Their ideas were grounded and focused; aimed at improving conditions for businesses and for those less fortunate. For example, there was excellent input from the educator and business representatives as to how to improve the skills of Canadian workers and to better match them to job market opportunities.
The government MPs in attendance, which included one cabinet minister, seemed genuinely engaged and impressed. Being politicians, I expected to have to endure some chest-thumping but they were generally restrained and receptive to new ideas.
I was the only (tax) accountant in the group – at least I was the only one to admit to being one. But, no one admitted to being a lawyer!
Below is my opening statement to the group, which focused on our tax system and the challenge I see Canada having in the future to raise revenue. I thought my comment on relying more on consumption taxes would go over like a lead balloon....but, I was surprised that there were strong proponents of the idea in the group. However, it was also clear that there would have to be a lot more work on this – particularly in convincing the politicians.
All in all, it was a worthwhile session and one that you should participate in if you get the chance. If nothing else, having the chance to hear and speak to different people will give you a fresh perspective.
Opening Statement – 2013 Pre-Budget Consultation
Thank you for inviting me to this pre-budget consultation.
My name is Nick Pantaleo. I am a chartered accountant and for over 25 years I have served as a corporate tax advisor.
From December 2007 to December 2008, I served as a member of Finance Minister Jim Flatherty’s Advisory Panel on Canada’s System of International Taxation.
I will speak briefly to suggested changes to Canada’s corporate and personal income tax and GST/HST systems, which I believe will help strengthen and grow Canada’s economy while protecting those who are most vulnerable.
Corporate income tax
Competitive corporate tax rates are fundamental to creating a globally competitive business environment. The government is to be congratulated for reducing the federal corporate tax rate to its current level and for encouraging the provinces to do the same.
Corporate income, capital and payroll-type taxes have a negative impact on business investment and hence, economic growth and job creation, and therefore should not be increased.
I support the recommendation made by the Canadian Institute of Chartered Accountants, to adjust the capital cost allowance rates of depreciation for all business assets to reflect their true economic life. This will encourage additional investment and increase productivity.
Some organizations recommend extending the temporary accelerated depreciation rates for manufacturing and processing beyond 2013, or making it permanent. In the current economic environment and in light of similar measures being taken in the U.S., this measure should be extended into 2014. However, other industries (for example, retail, telecommunications, etc.) should be considered for this as well.
In addition, depreciation classes should be updated to ensure they are properly capturing assets used in high value-added service sectors such as telecommunications.
The government has made a number of improvements to the corporate tax system, including introducing measures to broaden the corporate tax base.
Additional measures should be adopted to further enhance the competitiveness of the corporate tax system, simplify it to minimize compliance costs for large and small businesses and to facilitate the administration and enforcement by the Canada Revenue Agency.
For example, the government should:
Personal income tax
A comprehensive review of our personal income tax system is long overdue.
High personal tax rates have a negative impact on savings by Canadians - savings they will need in the future to offset the impact of reduced government spending in areas such as pensions and health care – and investment. It is also a disincentive to work and to upgrade job skills. Combined, these factors negatively impact productivity and growth.
Some, including Roger Martin and James Milway in their recent book, Canada: What it is, What it Can Be, also point out that low income families and retirees incur high marginal tax rates because financial assistance they receive under various government programs are “clawed back” as their income increases. Addressing this problem – by smoothing out the claw-back effect as well as looking at the design of the various programs, as Messrs Martin and Milway suggest – would help reduce poverty and reduce income inequality.
The current number of personal tax expenditures (i.e., deductions, rebates, tax credits, etc.) is in need of a review.
In a perfect world many would be eliminated and tax rates reduced accordingly. This would greatly simplify the tax system. While this may be too daunting a task, nonetheless, individual expenditures should be reviewed to ensure they are cost effective and properly targeted to those that need them the most.
For example, the Canada employment credit cost $2.0 billion in 2011. It is available to all employees regardless of their income level. Is it appropriate or affordable that this credit, and credits such as the fitness and public transit tax credit (costing $115M and $150M, respectively), be available to high income earners?
The savings in eliminating or reducing the cost of various expenditures could support lower personal tax rates, particularly for low-middle income families. It could also simplify the personal tax system.
Lower personal tax rates can be achieved by actually reducing rates or broadening the current income tax brackets (i.e., raising the threshold levels).
In today’s economic environment, including its changing demographics (for example, the decrease in the number of workers relative to retired individuals), the traditional response of increasing income tax to fund government spending is due for a re-evaluation.
Many countries place greater reliance on consumption taxes while Canada still relies more on income taxes – in 2010, about 47% of Canada’s total tax revenue came from corporate and personal taxes v. an average of 33% for all OECD countries.
A recent C.D. Howe Institute paper reveals that the marginal cost of raising revenue by increasing federal (and provincial) corporate and personal tax rates is very high in comparison to consumption taxes. This means that large economic gains could be obtained by changing Canada’s tax revenue mix to put a greater reliance on consumption taxes.
Greater reliance on consumption taxes would result in a more sustainable and less volatile revenue stream and would potentially be more robust in terms of being less susceptible to tax avoidance.
This does not mean that GST rates should or would have to be increased. The GST system also includes numerous tax expenditures. These expenditures are in the form of goods and services that are exempt from GST.
Many exemptions exist for a very good reason: to mitigate the burden on low-middle income families.
But, as the University of Toronto economist, Michael Smart, noted in a recent paper, there is a significant cost to such a policy, which is that most of the benefit of these expenditures accrues disproportionately to high income families because they spend a larger absolute amount on tax exempt items, such as food, than low income families.
Reducing some of these exemptions, while providing low-middle income families with enhanced GST income tax credits or rebates, would be a more effective alternative than increasing income tax rates to raise revenue.
Reducing such exemptions could also help reduce personal income tax rates.
Thank you for your attention.
I look forward to our discussion.
Nick Pantaleo, FCA
January 19, 2013
While corporations face increasing pressure to be more profitable and move risk, functions and assets to different locations around the world in order to gain tax efficiencies and be more competitive, tax administrations are looking to raise revenues. As a result, governments around the world are becoming more aggressive with respect to tax avoidance, risk assessments and auditing. International norms of tax behaviours are beginning to be challenged.
In this panel discussion at the PwC / Tax Executives Institutes International Tax Day opening plenary session on November 21, 2012, John Preston, PwC’s global Tax Policy leader, David Swenson, PwC’s global leader of Tax Controversy and Dispute Resolution (TCDR) and Marc Vanasse, leader of PwC Canada’s TCDR team discuss global tax controversy and tax policies.
In this episode Brandi Scales gives employers and employees insight into what risks they may face through frequent cross-border travel, how these risks can be reduced through procedure and policies and what can be done to manage and monitor the business traveller population.