Tax

by Jason Rosen

Tax Court of Canada – The Book of Documents

What is a List of Documents?

Before we can dive into the book of documents, we must briefly discuss the list of documents (“LOD”), which is a mandatory litigation step pursuant to the Tax Court of Canada Rules (General Procedure) – specially rule 81. The LOD is a list of all documents that a party has in their power, possession or control that they plan on relying on at the inevitable hearing.

This list is generally organized chronological order starting with the earliest dated documents and ending with the documents most closely dated to the day the list of documents is made. The Parties must provide this list to the other side well in advance of trial so that the opposition can have adequate time to inspect the documents and prepare their examination questions on discovery.

The Parties submit a joint request for a litigation timetable which would include the date that the LOD must be exchanged by and filed with the Court.

 

What is a Book of Documents?

The book of documents (“BOD”) as it is known, relates to the discovery stage of a Tax Court matter (or any court matter for that reason). While this is not a formal step in the dispute resolution process, it is common practice to exchange the BOD at least thirty (30) days prior to the examinations for discovery (whether in writing or orally). The BOD contains all the relevant documentation that a side will be using to help prove their case or will be using to help demolish arguments made by the other party. Any documents that are going to be referred to at the hearing must be included in the previously mentioned LOD, produced in the BOD or by way of undertaking following the examinations for discovery.

Each party must prepare four copies of the BOD ahead of trial. One copy for yourself to keep, one copy for the judge, one copy for the opposing counsel, and the last copy will stay in the witness box to assist them in answering the questions asked by counsel.

 

What is a Joint Book of Documents?

A joint book of documents (“JBOD”) is highly advisable for parties who have the ability to be civil with one another, as a JBOD can help save your client or yourself (if self-represented) a sizeable amount of money. A JBOD involves both parties to a dispute agreeing on which documents should be produced within the book, and which documents are unnecessary and therefore do not need to be included. The parties submit one joint book, rather than each party submitting their own book of documents. All the previously mentioned rules for the LOD and BOD still apply when the book is made jointly. Overall, this is a fantastic method to save money when practically possible by the cooperation of both parties and is greatly appreciated by the Court (and the environment).

 

Overall, the requirements relating to the list of documents and book of documents may seem simple but are quite complex. Failure to properly file and serve the list of documents and/or produce the book of documents can have a detrimental impact on the potential success of your Tax Court of Canada case (or any level court case for that matter). If you have any questions or need any assistance, please feel free to call us toll free at 877-921-8423 or email us at info@rktaxlaw.com.

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

 

Related Articles:

• Tax Court of Canada – Settlement Conference
• Navigating the Tax Court of Canada
• How to Object to a Notice of Assessment or Reassessment

by Jeff Kirshen

The Tax Court of Canada – Settlement Conferences

Hearings are expensive. Not only is it expensive for the taxpayers but it also consumes an immense amount of court time and resources. This is why the Tax Court of Canada (the “TCC”) strongly encourages taxpayers to settle their disputes with the Canada Revenue Agency (the “CRA”) before the issue makes it to a hearing. At the TCC, disputes may be settled through settlement conferences. Settlement conferences have been increasingly popular as the TCC has sought to encourage disputing parties to reach an agreement without a hearing.

The TCC may require parties to attend a settlement conference through its authority under Rule 126.2(1) of the Tax Court of Canada Rules (General Procedure). The TCC may compel parties to consider the possibility of settling any or all of the issues, either under the court’s own initiative or at the request of a party.

 

How to Prepare for a Settlement Conference

Prior to the settlement conference, both parties must confirm that a written offer of settlement has been made and that a written reply has been provided.

At least 14 days before a settlement conference, each party is required to submit a settlement conference brief to the court. The brief should be less than 10 pages, unless the parties apply for and obtain permission from the court by informal communication with the Registry.

The settlement conference brief must contain:

• An explanation of the party’s theory of the case;
• A statement of the material facts that the party expects to establish at the hearing of the appeal and how they will be established;
• A statement of the issues to be determined at the hearing; and
• A statement of how the law and authorities that the party will rely on at the hearing of the appeal.

The purpose of the brief is to present a concise summary of a party’s case. The brief is provided to the opposing party and the TCC to review.

A substantial amount of preparation is required prior to attending a settlement conference. Not only do settlement offers have to be presented, but the offer must be grounded in a correct application of the law to the facts and within a reasonable degree of compromise. More importantly, a party walking away from a favourable settlement offer may face greater cost consequences in certain circumstances. Therefore, it is very important for taxpayers to dedicate a significant amount of time to prepare for settlement conferences.

 

Attending the Settlement Conference

There are no standard processes for settlement conferences. Judges are often free to dictate the process how they see fit.

During the settlement conference, parties will discuss the relevant facts and law and seek to reach a compromise. In some instances, the settlement judge will provide an opinion on the legal issue and present views on the relative strengths and weaknesses of each party’s case. Furthermore, the judge may offer a settlement proposal for the parties to consider.

It is very important that parties be willing to compromise during the settlement conference. Otherwise, the TCC may impose adverse cost awards on a party where it deems that the conduct of the party to have impeded on the efficient functioning of the settlement conference.

 

The Pros of Settlement Conferences

The primary purpose of settlement conferences is to encourage parties to reach an agreement to settle their dispute without incurring further legal costs, draining judicial resources, and clogging up the significant backlog of cases after the COVID-19 pandemic.

However, there are also benefits to attending settlement conferences even when the parties do not reach an agreement.

A settlement conference can help parties obtain an objective, independent view of their case from the presiding judge. Often, what one side may think to be a winning case is far different in the eyes of a neutral party. Similarly, the settlement conference can also validate and reinforce one side’s position. Regardless of the results of the settlement conference, parties can be confident that they’ll walk out of the negotiations with a better understanding of the case.

Even if a full settlement is not reached, the case can often be expedited through the TCC by clarifying the issue and reducing the number of issues in dispute. This is favourable for all parties, including the justice system, because the case would require less documents to review, less witnesses to interview, and less time spent in trial.

 

At Rosen Kirshen Tax Law, we have represented countless clients during and after settlement conferences. If you have a file in the Tax Court of Canada, we can help negotiate a favourable settlement for your case. Contact us today to schedule an appointment with our team of experts. We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.

by Jason Rosen

Cryptocurrency and the OECD

The Organization for Economic Co-Operation and Development (the “OECD”) recently released its long-awaited report on global regulatory frameworks for the taxation of cryptocurrencies. In it, they outline current and emerging issues with the global taxation of virtual currencies and offer guidance on policy development for its tax treatment and associated reporting standards.

Tax policy remains a hot topic in the cryptocurrency space, especially with the approximate market capitalization of these currencies hitting an all time high at USD 390 billion as of October 2020. As such, the OECD’s report is a welcome reminder to governments of the importance of maintaining consistent, coherent, and transparent tax policies. In Canada, cryptocurrencies are treated similar to commodities for taxation purposes. This means that income from cryptocurrency transactions may be classified as business income or capital gains depending on the level of activity with the cryptocurrency.

 

Cryptocurrency Recommendations

The OECD’s new report cover three main areas:

1. Key definitions and concepts in cryptocurrency such as blockchain and crypto assets.
2. Emerging issues related to the taxation of cryptocurrencies such as the rise of stablecoins, central bank digital currencies (CBDCs), evolution of consensus mechanisms in blockchain technology, and development of decentralised finance.
3. Policy recommendations developed from a comparative review of 50 jurisdictions’ tax policies as they relate to cryptocurrencies.

One key recommendation from the report is that policy makers should consider the tax consequences of cryptocurrency across different stages of its lifecycle, from mining to disposal. Currently, countries around the world tax the various life cycles of owning cryptocurrency differently, which causes difficulty when tracking (and taxing) transfers of the currency over different jurisdictions. For example, the Internal Revenue Service in the United States of America treats the rewards developed from a mining transaction as ordinary income whereas Australia’s tax office treats this activity as a capital gain, if the mining operation is not a business. These areas of non-alignment create a tension when it comes to enforcing a jurisdiction’s regulatory framework, especially as it relates to existing tax treaties and residency requirements.

Other important recommendations from the report include encouraging policy makers to outline the rationale behind the taxation of certain events or definitions of taxable assets. These rationales can ensure consistency when interpreting the law in the fast-changing cryptocurrency space. Likewise, the OECD recommends that consideration be given to individuals who are occasional or small traders who do not pursue the activity in a business capacity. Simplified rules for these types of individuals could improve compliance and ensure clarity.

When designing all these new policies, especially as they relate to emerging technology such as CBDCs and stablecoins, the OECD emphasizes that policy makers ensure that the tax treatment of cryptocurrency be in line with the tax treatment and policy objectives of other non-virtual assets.

Countries are expected to review the OECD’s guidelines as a first step in its policy-making process. It is yet to be seen how Canada will incorporate these new guidelines into its tax policies.

 

If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general and are being audited by the CRA or have questions, contact our office today. Expert tax law advice can help ensure that you are meeting your reporting requirements. Additionally if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.

by Jason Rosen

What is a CRA Net Worth Audit?

Has your CRA auditor informed you that your audit will be a Net Worth Audit? Are you wondering what that means? We previously wrote about Net Worth Audits and Assessments which you can find here. This blog provides more information about net worth audits, what they are, why they occur, and what can be done to fight them.

 

Net Worth Audit

Generally, a standard audit consists of reviewing a taxpayer’s accounting records (i.e., bank statements) as well as other related records. However, in cases where the CRA finds the taxpayer’s records insufficient, the CRA may initiate a Net Worth Audit. Once initiated, the CRA will consider a multitude of factors to arrive at a taxpayer’s taxable income. This can include a review of bank records, assets, and liabilities, along with accounting records. In a way, the CRA is assuming the taxpayer’s unreported income when utilizing a Net Worth Audit. The CRA justifies this type of audit when they claim there is any indication of irregularity or insufficiency in the financial affairs and records of the taxpayer.

The auditor may even increase taxable income if they feel that a taxpayer’s respective tax returns do not support his or her lifestyle (also referred to as a CRA lifestyle audit). This can result in a financial gift from a parent turning into taxable income, or even unidentified bank deposits being termed income. The overall goal of a CRA Net Worth Audit is to increase a taxpayer’s taxable income. If the taxpayer’s books and records are in poor shape, it will be much easier for them to do so.

 

When will CRA use the Net Worth Audit Method?

The CRA refers to a Net Worth Audit as an indirect verification of income. The CRA may rely on the Net Worth Method, if:

• Your books and records are inadequate and indicate potential errors;
• You mix personal and business income into one bank account. For instance, one account may be used for both personal and business transactions;
• The income you reported does not support your lifestyle;
• If the business you are in is in an industry where tax evasion is common; and/or
• If comparable businesses report higher income then your business.

These are all factors that the CRA may rely on to initiate a Net Worth Audit.

 

How do you challenge a Net Worth Audit Tax Assessment?

CRA auditors have immense discretion. Additionally, there is a reverse onus in tax law, meaning that it is on the taxpayer to prove his or her income (as the Canadian tax systems is a self-reporting system). In practice, auditors are allowed to assume facts that a taxpayer must then rebut.

A taxpayer can successfully challenge a net worth assessment by preparing detailed responses and explanations to each assumption of the auditor. The taxpayer’s goal is to demolish the auditor’s assumptions. This is normally done with explanations and documentation rebutting each assumption.

If your audit has been concluded, you may continue to fight the assessment by filing a Notice of Objection and/or appealing to the Tax Court of Canada. The best method to dispute the Net Worth Audit is have your books and records reconstructed to show the difference between the CRA auditor’s accounting and factual assumptions. Providing detailed and accurate records of your finances is key.

 

At Rosen Kirshen Tax Law, we have represented several clients during and after a Net Worth Audit. If a taxpayer wants to appeal a Net Worth Audit tax assessment, we can file a Notice of Objection, challenging the assessment before a CRA Appeals Officer. If you are going through a CRA Net Worth Audit, or have had one completed that you disagre with, and you need assistance, contact us today! We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Why you Should Keep your Receipts

Keeping your receipts, regardless of the field it pertains to, is a prudent and highly advisable practice. In the area of tax, this practice becomes even more important. In the event you should be audited, reassessed, or be the subject of a processing review, the Canada Revenue Agency (“CRA”) will request (and frankly demand) that the appropriate receipts be provided to verify the information you filed on your tax return is accurate. Keeping your record books accurate will help to ensure the process is as painless as possible.

 

Where do I Keep my Records?

The CRA has stated that you must keep your records at either your place of business (for any business records) or at your residence, unless the CRA has given you express permission to keep them elsewhere. If you would like to obtain the CRA’s permission to keep your records elsewhere, you will need to write to your local tax services office.

 

How long do I have to keep records for?

The record keeping requirement stems from paragraph 230(4)(b) of the Income Tax Act. This section states that every person carrying on business and/or every person who is required to pay taxes shall keep all records and books that are necessary to verify the information until the expiration of six years from the end of the last taxation year. In theory, if you are filing your 2020 return, you should keep the documents until 2026. However, this rule does have some caveats. The six-year requirement for keeping documents relates not only to the original tax year in which you file, but also relates to the tax year in which you are claiming a certain expense/deduction, etc.

Looking at our previous example, when filing your 2020 tax return, the minimum requirement for keeping the relevant documents is 2026. However, if you plan on carrying a business loss forward to use in a future year (say 2030), then the relevant documents to prove the business loss must be kept until 2036. The six-year requirement not only relates to the original year the return was filed, but more importantly, it relates to the year in which the taxpayer plans to use that document.

 

Can I Destroy the Records before the Six-year period Expires?

If you want to destroy the records prior to the retention period expiring, you must request permission from the CRA to do so. In order to obtain this written permission, either yourself or your authorized representative must do one of two things:

• Complete the Form T137 (Request for Destruction of Records); or
• Apply in writing to your local Tax Services Office.

 

In what Situations does the Six-year limitation Period not Apply?

The six-year limitation period does not apply to all possible situations. Some situations in which a different limitation period applies includes:

• When your records and supporting documents concern long-term acquisitions and disposal of property, the share registry, or other historical information that would have an effect on the sale, liquidation or wind‑up of the business, you have to keep them indefinitely.
• If the CRA wants you to keep records for a period longer than six years, a CRA official will let you know how long to keep them either in person or by registered mail.
• If you file an income tax return late, you must keep your records for six years from the date you file that return.
• If you filed an objection or an appeal, you must keep all necessary records until the latest of the following dates:
  • the date the objection or appeal is resolved;
  • the date for filing any further appeal has passed; or
  • the six-year record keeping period has passed.

 

What if I don’t have my Receipts?

All is not lost if you did not keep all of your receipts. That being said, it does make proving your expenses much more challenging. You may attempt to use other methods of proving the expenses, such as bank and credit card statements. The CRA, however, will likely have a hard time accepting your expenses claims. In these types of situations, you should seek the assistance of a professional.

 

Overall, the CRA requirements for record keeping seem simple, but are quite complex. Failure to retain your records for the appropriate period can have a detrimental impact on the successful defence of any audit, processing review, etc. If you are going through a CRA review, and you need assistance with proving your receipts and expenses, contact us today!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Bill C-208 – New Rules for Intergenerational Wealth Transfers

On June 29, 2021, Bill C-208 received Royal Assent. It represents a significant change to the Income Tax Act (“ITA”) for intergenerational wealth transfers. The private member’s bill amended sections 84.1 and 55 of the ITA, providing more flexibility to intergenerational transfers of small businesses, family farms or fishing corporations. For business owners, Bill C-208 may allow access to new tax-efficient strategies when the time comes to pass down the torch to the next generation.

 

Basics of Wealth Transfer

There are two main ways for business owners to pay themselves out: by selling equity (capital gains) or issuing dividends. In Canada, taxpayers may obtain more favourable tax treatment on capital gains than on dividends. They may also be eligible to claim the lifetime capital gains exemption to reduce some or all the tax payable on the sale of qualified businesses.

 

Section 84.1

Section 84.1 of the ITA is a specific anti-avoidance rule intended to prevent surplus stripping, a tax strategy where business owners pull out their earnings as capital gains rather than dividends. The law deems certain transactions involving related parties (a non-arm’s length transaction) as a dividend instead of a capital gain.

One popular method of passing on a business is through the use of a holding corporation. For example, parents sell their shares of a qualified small business corporation to a holding corporation owned by a child or a grandchild. Under the old rules, the transaction would be classified as a non-arm’s length transaction and would be captured by the s.84.1 anti-avoidance provision. The parents would have to pay dividends tax and lose the advantages associated with capital gains. In contrast, had the parents sold to a holding company owned by third parties, the sale would’ve been classified as an arm’s length (unrelated) transaction and deemed a capital gain.

The amendments in Bill C-208 intended to address the application of s. 84.1 on transactions between parents and their children or grandchildren. It effectively provides an exemption to section 84.1 of the ITA where three criteria are met:

1. The business is a qualified small business corporation or a family farm or fishing corporation within the meaning of s. 110.6(1) of the ITA;
2. The purchaser corporation is controlled by one or more children or grandchildren of the taxpayer who are 19 years of age or older; and
3. The purchaser corporation does not dispose of the subject shares within 60 months of the transaction (other than for reasons due to death).

If the transaction meets the three criteria, the transaction would be assessed as a capital gain rather than a dividend and allow the parents to tap into significant tax savings.

Bill C-208 also include additional rules such as limiting a business owner’s access to the lifetime capital gains deductions for corporations with taxable capital employed in Canada over $10 million. Furthermore, the rules also require the business owner to obtain an independent assessment of the business’s fair market value. In the end, there remain many uncertainties in the wording of the new bill, and taxpayers should be vigilant when planning the sale of their family business.

 

Section 55

Subsection 55(2) of the ITA is a specific anti-avoidance rule that would apply to certain transactions involving the transfer of a corporation’s cash or property. Before the amendment, the rule converts tax-free inter-corporate dividends into a capital gain in some circumstances. There were exceptions to this rule for related persons, but it did not apply to siblings. However, Bill C-208 effectively expanded the related person exception to provide additional tax savings to transactions involving siblings.

 

Summary

Bill C-208 introduced new amendments to the ITA to provide small business owners with new tax-efficient strategies for passing on their business to the next generation. Under the new rules, parents may be eligible to report the transaction as a capital gain, as opposed to the transaction being deemed a dividend under the old rules. Furthermore, the amendments relaxed transactions between siblings, adding greater flexibility for transactions within the family.

However, on July 29, 2021, the Department of Finance also indicated its intentions to release further legislative amendments that “honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes”. Taxpayers should be wary as these new amendments may change the applicability of Bill C-208.

 

Are you seeking to transfer your small business to your children? Contact us today to schedule an appointment with our team of experts! Rosen Kirshen Tax Law will provide you with the expert advice you need to minimize your tax exposure!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.

by Jason Rosen

Mark Laurin and My Private Circle

Previously, we wrote about Mark Laurin, CPA, and his involvement with the Edge Software, Edge of Command, Highshare, SecureShare, Advanced Cloud Solutions Inc. (“Edge”) investment. Our earlier blog posts can be found here and here. This blog post seeks to highlight Mr. Mark Laurin’s new business venture, My Private Circle (“MPC”).

 

Edge Franchise Dispute

In summary, Edge was marketed to investors as a cloud-based software business that would be offered to small businesses domestically and abroad. Investors had the opportunity to invest in Edge thus providing themselves with franchise(s) from the business. By investing in Edge, investors expended their personal funds by paying an up-front cost and all of whom executed promissory notes for significant funds. These up-front costs and promissory note amounts varied depending on which year an individual invested, and in which form of the business they invested in for that respective year. Upon paying the up-front expenses and executing the promissory notes, the investors obtained certain rights and requirements.

Based on the above, investors claimed corresponding capital cost allowance (“CCA”) deductions on their tax returns along with other expenses including marketing expenses, publicity expenses, interest expenses, among others, depending on the investment year.

Unfortunately, based on the structure of the transactions and the tax treatment of the deductions claimed, the CRA alleged that Edge was a tax shelter, that the proper forms should have been filed, and that all of the deductions claimed by the investors associated with Edge were improper.

As a result, all of the deductions claimed by the investors on each of their tax returns were disallowed in their entirety. The CRA assessed gross negligence penalties on the amounts disallowed and opened tax years that were statute-barred due to the alleged misrepresentations.  Due to these situations, our firm has been representing 20+ Edge franchisees through the CRA Audit Division and CRA Appeals Division process, most of whom now find themselves before the Tax Court of Canada. Due to our experience that the CRA Appeals Division is not able to be impartial or independent in group audits like the CRA’s audit of the Edge investments, we have fast tracked our clients to the Tax Court of Canada to have their matters heard before an independent and impartial third-party reviewer. Unfortunately, those Edge franchisees who are not represented by us remain at the CRA Appeals Division awaiting Appeals Officers to be assigned. In our experience with these situations, it could take up to two (2) years for the same.

Our memorandum detailing the highlights of the dispute process for the Edge franchise can be found here.  

 

My Private Circle

Sometime in 2016, several Edge franchisees received a letter from the Surete du Quebec – Criminal Investigation Branch stating that an on-going fraud and police investigation has been launched in regards to the Edge of Command and Edge Highshare Franchises.

The letter further stated that since the 11^th of March 2016, bank accounts used to deposit, directly or indirectly, cheques from franchisees have been frozen by court orders. This was supposedly to protect franchisees from depositing further funds into a fraud scheme managed by Mark Laurin and associates.

Following this investigation, it has come to our attention that Mark Laurin has commenced a similar business venture under the name My Private Circle.

Among other services, MPC alleges to offer the following:

• Send & Receive Secured E-mail and SMS;
• Secure File Exchange & Encrypted Cloud Storage;
• Full Management Control;
• Secure Chat, Voice & Video Calls;
• Delivery/ Read Status & Message Destruction;
• Choice of Server location;
• Private Server Licensing;
• Real-Time Translation; and
• Account Authentication by E-mail.

If this product offering seems familiar for some readers, that is because the Edge investment also focused on offering integrated monitoring, data management and backup & recovery solutions for the small business market. Indeed, MPC’s website under the tab “All Features” states that the following:

“MPC is a Secure Global Communications Hub for business and professionals to easily and efficiently collaborate with colleagues and clients.”

Importantly, you will notice that MPC’s home webpage has their address as the following:

1060 Guelph Street,

Lower South Unit,

Kitchener ON N2B 2E3

This is the same address listed on the SecureShare homepage website. Furthermore, Mark Laurin is the director for both corporations and the MPC transmission slips note to courier all documents to Advanced Cloud Solutions Inc.

 

Similarities Found in Edge and MPC Disclosure Documents

In their disclosure documents, MPC claims that their product portfolio “seamlessly integrates” file/photo transfers, voice/video/test messaging as well as other functions revolving protection of privacy.

Furthermore, it claims that “flexibility is the key to MPC Product Portfolio in terms of product and price.” It goes on to list the different product offerings including MPC personal account, MPC – personalized (small business edition) and MPC – personalised (Enterprise Edition).

This language is strikingly similar to the statements found in the Edge Disclosure Agreement. In particular, the Edge disclosure document also states that “Edge Solutions seamlessly integrate productivity monitoring, digital backup and recovery, advanced file management functionality and other functions. It also states that “flexibility is key to the EDGE advantage in terms of product and price” and then proceeds to list the various product offerings of Edge.

In other words, the MPC disclosure statement replaced the Edge “storage” functions and offerings with the supposed MPC “security” functions and kept the other language the same.

That said, arguably the most salient similarity between the MPC and Edge disclosure statements can be found in the “Earnings and Operating Cost Projections for the Franchise”. Rather than providing any actual historical data or sales figures, both disclosure statements proceed to state the following:

One question you are probably asking yourself is, “How much money can I expect to earn as a Franchisee? There are many variables and factors that make it impossible to answer that question with any certainty.

Without making any specific projections or forward looking information, the Franchisor expects that recruiting Partners and Resellers within the Franchisor’s Territory will significantly increase potential sales. Furthermore, the Franchisor recommends the hiring of an experienced, professional manager to oversee the commercialization of the (MPC Product Portfolio or Edge Solution).

 

Potential Audit

Based on the above, and the government’s pursuits thus far, if you are a franchisee or investor of MPC, there is a high probability that your tax returns will be audited by the CRA in the future for the years in which you claimed deductions related to your investment with MPC.

Indeed, the costs relating to becoming a franchisee of the MPC business remain the same as Edge. In particular, franchisees are expected to paying for initial franchise fees, license fees and marketing costs all of which they claim can be deducted.

While we cannot say for certain, it is likely that the CRA will take issue with the deductions and will deny the same while imposing gross negligence penalties on the investors, as they did with Edge.

If you invested in MPC or Edge, or are being audited by the CRA, call us today for more information about how we can help.

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

An Update Regarding John Scholz

Previously, we wrote about the Canada Revenue Agency (CRA) auditing certain taxpayers who were involved with John Scholz in alleged “strips” of RRSP registered plans resulting in an “advantage”. In essence, the CRA was assessing for “advantages” received from the transfer of taxpayer’s registered plans to Western Pacific Company, the subsequent purchase of Red Hill Capital Inc., and the direct repayment of the value of their registered plan from John Scholz of Northland Services Inc. following the purchase of the shares. Please review our earlier blog post on Joern (John) Scholz and the related audit for a deeper analysis of “advantages” and “Registered Plan Strips” here.

 

Conditional Prison Sentence and Fine for Tax Fraud

On September 26, 2019, the CRA announced that Joern (John) Scholz, a financial advisor based in Port Carling (and the advisor related to the registered plan strip scheme above) was found guilty of one count of fraud over $5,000 under the Criminal Code. Specifically, Mr. Scholz was convicted for the evasion of federal income tax and goods and services tax/harmonized sales (GST/HST) and subsequently sentenced to a conditional jail sentence of two years less a day.

A CRA investigation revealed that Mr. Scholz operated an investment counselling business where in which he did not report any of the commission fees received from his clients on his individual tax returns for the 2011 to 2013 taxation years.

By failing to report his commission fees, Mr. Scholz did not to report/pay the following amounts:

• Failed to report taxable income totalling $2,149,730 (2011 -2013);
• Failed to pay and evaded $605,355 in federal income (2011 – 2013);
• Failed to file GST/HST returns (2011 – 2015); and
• Failed to remit GST/HST totalling $445,789.

 

CRA Appeal of Sentence Successful

On July 13, 2021, the CRA announced that it was successful in overturning the conditional sentence imposed on John Scholz. Instead, John would be sentenced to three years imprisonment. This recent prison sentence determined at the Court of Appeal for Ontario overturns the initial conditional sentence issued on September 26, 2019. Mr. Scholz was initially sentenced to a conditional jail sentence of two years less a day, including 200 hours of community service and 12 months of house arrest. However, it was determined at the Court of Appeal that a prison sentence was warranted as Mr. Scholz’s fraud and tax evasion constituted a large-scale fraud on the taxpayers of Canada.

Additionally, Justice Ian V.B Nordheimer, the judge presiding over the appeal found that the trial judge made the following two errors when handing down the conditional sentence:

• Imposing a sentence “outside the range” for major frauds; and
• “Failed to follow the necessary and analytical proceeds and consider all of the factors required”.

 

Tax Evasion can be a Criminal Offence and Result in Heavy Fines 

Mr. Scholz prison sentence is a stark reminder that tax evasion is a criminal offence. Falsifying records and claims, willfully not reporting income, or inflating expenses can result in prosecution and jail time. Furthermore, if a taxpayer is found guilty of tax evasion, both the Income Tax Act and Excise Tax Act have court fines ranging from 50% to 200% of the taxes evaded and up to five years in prison. A conviction for tax fraud under the Criminal Code can result in up to 14 years in prison.

As such, it is critical that taxpayers understand the difference between tax avoidance and tax evasion. Generally, if the arrangement is consistent with the intent of the law, then it is tax avoidance. Alternatively, if the arrangement is inconsistent with the intent of the law, then it is tax evasion. More importantly, it is critical that taxpayers are aware that the CRA will investigate individuals for tax evasion even if they unknowingly relied on dishonest accountants or advisors.

 

The CRA states that they remain focused on maintaining the integrity of Canada’s tax system and aggressively cracking down on tax evasion and false claims. Unfortunately, this may result in innocent taxpayers who were deceived by their advisors being caught in the cross – fire. Professionals at Rosen Kirshen Tax Law have significant experience representing taxpayers in such cases in front of the CRA and the Tax Court. If you have recently dealt with John Sholz and/or concerned that you may be audited, call us today! We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Exporting Vehicles and the Agency-Principal Relationship

The cost to purchase vehicles (especially luxury vehicles) is frequently much cheaper for Canadian consumers than consumers in other countries. Sometimes vehicles in Canada retail for between just 25%-50% of what the exact same make and model would cost in another jurisdiction. While there are various reasons that contribute to this price discrepancy (known in market terms as a “grey market”), this variance creates an opportunity for Canadian businesses to export these vehicles at a profit.

However, recently an increasing number of Canadian vehicle exporters have been subjected to audits by the Canada Revenue Agency (CRA) for one specific reason: the CRA has alleged the Canadian vehicle exporter to be an “agent” for a foreign “principal”. Where the CRA is successful in establishing agent/principal relationship between the vehicle exporter and its foreign buyers, the vehicle exporter can lose entitlement to Input Tax Credits (ITCs) claimed on the purchase of the exporter’s inventory.

The difference in a business’ characterization as a legitimate business or an agent/principal relationship is a legal distinction that depends on a factual analysis of key components of the relationship between a vehicle exporter and its buyers. Though nuanced, for a Canadian vehicle exporter this distinction can be the difference between operating a lucrative, profitable business and the loss of all (or substantially all) profits earned.

This blog entry will discuss how the CRA conducts factual analyses of a principal/agent relationships and what is necessary for Canadian vehicle exporters to establish to avoid this designation.

 

What is an Agent/Principal Relationship?

If the CRA alleges that your business amounts to an agent/principal relationship, they are essentially saying that your business (the “agent”) exists only to serve the interests of an off-shore party (the “principal”) and does not offer legitimate services of its own.

The effect of this designation is to disallow the exporter’s claims to ITCs, or credits issued by the Canadian government to offset the incurrence of HST on the vehicles purchased in Canada for international export. In many cases, this would greatly reduce (or negate) the profits earned by the exporter.

 

Hallmarks of an Agent/Principal Relationship

In order to evaluate whether an exporter is a legitimate business or merely an agent to a foreign principal, the CRA must conduct an analysis into the nature of the relationship between the exporter and its buyer(s). The analysis considers two main sets of criteria in evaluating the relationship:

• the “essential qualities” of a principal/agent relationship; and
• other “indicators” of a principal/agent relationship.

“Essential qualities” of a principal/agent relationship are: (i) whether the parties have consented to having the agent act on behalf of the principal; (ii) whether the agent has the authority to act on behalf of the principal in a legally binding manner; and (iii) whether the principal exerts some degree of control over the actions of the agent.

If these qualities are determined to be present in the relationship between an exporter and a foreign buyer, it is likely that the CRA would determine that a principal/agent relationship exists. This would have the effect of barring any claim to ITCs on the part of the exporter.

Other “indicators” of a principal/agent relationship include:

• if there is limited assumption of business risk on the part of the exporter;
• whether the accounting practices of the exporter suggest a principal/agent relationship;
• the payment history between the parties;
• if the exporter makes any alterations to the vehicles;
• whether the exporter uses the vehicles prior to export;
• the substance of the contractual payment relationship between the exporter and buyer; and
• the nature of the vehicles’ ownership.

The CRA uses these two sets of criteria conjunctively to issue a factual determination as to whether an exporter is in substance just the agent of a foreign principal.

 

What do I do if my Business gets Audited?

As outlined above, if your vehicle exporting business is selected for audit, the CRA will be conducting an in-depth factual analysis into all aspects of your business to issue its determination. As the CRA’s audit powers are only increasing, it is imperative that if your business is audited, you prepare a complete and circumspect defense and/or rebuttal to the CRA’s position.

Any single misstatement or missed deadline could be the difference between an entirely successful defence and the loss of all profits during the audit period. As principal/agent relationships are factual determinations based on nuanced legal arguments, it is often a prudent decision to retain a tax lawyer to defend yourself during the audit process or to carefully plan your business affairs prior to being audited to mitigate the risk of the CRA determining that your business is nothing more than a principal/agent relationship.

 

If you would like to know more about how a lawyer can assist you through the audit process or with planning your business in general, contact a tax professional at Rosen Kirshen Tax Law today! We are here to help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

The Canada Revenue Agency Post-Pandemic

With Canada’s vaccination rates on the rise, many taxpayers are wondering when the Canada Revenue Agency (“CRA”) will get back to its regular business. Currently, almost all audits were halted before they even started though high risk audits were allowed to continue. CRA collections released all legal action against taxpayers and has not yet restarted going full force in its collections activities. The Tax Court of Canada just reopened its doors and has started setting down hearings beginning in September.

So the question becomes, when will CRA restart their audit program in full, and when will they start collecting the billions in taxes they are owed that remains unpaid?

 

The Canada Revenue Agency Post-Pandemic

Though there has been no official guidance, it is likely that the CRA beings to resume its normal operations in September. Barring another deadly wave in the pandemic of course. What this will mean is that all audits that were previously scheduled or cancelled will resume. Hundreds of thousands of taxpayers will be subject to new audits, and CRA auditors will be under pressure to achieve results. These upcoming audits will likely be more difficult to deal with since the auditors will have a set result in mind because the CRA sorely lacks funds.

CRA collections will also likely reopen their offices and will begin contacting taxpayers to arrange for payment of their tax debts. They will also start to take legal action to collect the debts. They will seize bank accounts, garnish wages, issue requirements to pay, and potentially lien property or other assets of value. It is imperative to be in contact with CRA collections to ensure that you can get yourself on a payment plan so that your business is not interrupted by their legal action.

The CRA appeals section will also likely reopen in full force. They have been operating at an extremely reduced capacity, but that should change come September. They will also be under pressure to resolve their files quickly knowing that the audit section will be making tough decisions that taxpayers will likely not agree with. So there will be a large amount of objections coming following the resumption of CRA audit activities.

 

The Tax Court of Canada Post-Pandemic

The Tax Court of Canada has announced that they are scheduling in person hearings in September of 2021. So absent another deadly wave of the pandemic, the Tax Court of Canada should be back to normal operations soon. If you have an ongoing Tax Court of Canada appeal, and were waiting for the resumption to seek assistance, now is the time.

 

The Voluntary Disclosure Program Post-Pandemic

The Voluntary Disclosure Program has been experiencing delays even before the pandemic started. Their normal processing times have slowed from one year to more than two years. We are hopeful that they will return to their normal operations and will review and make decisions quicker than the current two year timeline. However, it will likely take additional CRA resources in order to achieve something like this.

The positive of the lengthy delay is that taxpayers have more time to pay their estimated amounts owing. The negative is that the taxpayer is essentially in limbo for years. Their financial lives are on the line, and they have no idea what the result will be.

 

COVID-19 Benefits Post-Pandemic

A major area that the CRA will focus on post-pandemic is auditing COVID-19 benefit programs. The CRA has created groups and task forces specifically to review the pandemic benefits claimed by individuals and corporations, and verify whether they were entitled to those benefits. We can already see this happening with CERB and CRB.

 

If your audit was put on hold, or you have CRA issues that need assistance once they get back to business, call us today! Rosen Kirshen Tax Law is here to assist everyone who has a CRA problem.

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.