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February 21, 2022
Finance Canada releases proposed measures: avoidance of tax debts and audit authorities
On 4 February 2022, Canada’s Department of Finance (Finance) released draft legislation to amend the Income Tax Act (ITA) and the Excise Tax Act to reflect certain measures announced in the Canada 2021 federal budget, although some significant measures, such as changes to the Canadian transfer pricing regime and modernization of the general anti-avoidance rule, were not addressed. Interested parties are invited to provide comments on the proposed amendments by various dates. For further details, see EY Global Tax Alert, Finance Canada releases draft legislation for 2021 budget measures, 10 February 2022.
The following Tax Alert explains in further detail the income tax proposals included in the draft legislation, concerning the avoidance of tax debts and audit authorities.
Avoidance of tax debts
Section 160 of the ITA states that the Canada Revenue Agency (CRA) can assess a person (the transferee) for some or all of the tax debt of another person (the transferor) when the following four criteria exist:
When these four criteria are satisfied, the transferee is liable to pay the lesser of (1) the transferor’s tax debt at the time of the transfer and (2) the value of the property the transferee received from the transferor less the value of any consideration the transferee paid to the transferor for the property at the time of the transfer.
Section 160 of the ITA is amended following recent Federal Court of Appeal (FCA) and Tax Court decisions in Eyeball Networks Inc. v. Canada and Damis Properties Inc. v. The Queen, respectively, by adding subsection (5), which according to the explanatory notes “introduces new anti-avoidance rules to address abusive planning which seeks to circumvent the application of section 160.”
Further, the new section 160.01 of the ITA includes a third-party civil penalty regime for planning activity related to circumventing the application of section 160. This provision uses language similar to the existing third-party civil penalties in section 163.2, particularly the requirement of “culpable conduct” on the part of the third party. The penalty would be the lesser of (1) the total of CA$100,000 plus the planner’s fees; and (2) 50% of the tax that is attempted to be avoided through the planning.
Section 231.1 of the ITA provides the CRA with broad powers to examine records of taxpayers that may be relevant for audit and for the administration or enforcement of the legislation. The provision authorizes an auditor to enter a taxpayer’s business premises to “inspect, audit or examine” the books and records of a taxpayer, and in that context to require the “owner or manager of the property or business and any other person on the premises” to give the auditor “reasonable assistance” and answer “proper questions relating to the administration and enforcement” of the ITA. A separate provision, section 231.2, gives auditors the power to compel taxpayers as well as third parties to provide documents and answer certain questions in writing. If a taxpayer fails to provide the required information, the CRA may seek a compliance order from the Federal Court pursuant to section 231.7(1).
Due to a recent FCA decision, where the CRA was unsuccessful in having the courts support its use of section 231.1 to require functional interviews of a number of the taxpayer’s employees in the context of a transfer pricing audit, the Government introduced draft legislation modernizing and expanding the CRA’s audit powers as follows:
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada), Ottawa
EY Law, Montreal
EY Law, Toronto
EY Law, Calgary