Reorganization gives the CRA new clout
Canada’s income trusts wrestle with executive retention issues
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Brochure on charities and guide for donors
New edition of How to Reduce the Tax You Pay

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Reorganization gives the CRA new clout

In the not-so-distant past, Revenue Canada struggled with limited powers, difficulty in pursuing issues, an inexperienced staff and an absence of documentation rules. As well, it drew critical comments from the Auditor General for its arbitrary application of penalties, weak enforcement activity, insufficient technical support or guidance, and unstructured case management. In response, Revenue Canada, now the Canada Revenue Agency (CRA), has evolved into a tougher, wiser, larger organization, kitted out for greater audit coverage, staffed by bigger field advisory teams, and equipped with ever-growing resources.

At the CRA you are no longer a client – you're a taxpayer!
In fact, the CRA’s new approach is aptly reflected in a single, telling word change: those who pay taxes are no longer called “clients,” as they were from the mid-1980s until very recently. Now they are called “taxpayers,” a harder-hitting, more direct word that tells us a lot about the agency’s new perspective.

One of the most significant recent developments at the CRA is its new reorganization, which embodies its changing attitude towards Canadian-based multinationals — who have also seen their status change from client to taxpayer.

Reorganization
The CRA completed a year-long review and realignment process to create five new branches designed to make tax administration more effective.

• Taxpayer Services and Debt Management Branch — comprises the Taxpayer Services (formerly Client Services) Directorate and the former Revenue Collections Branch
• Assessment and Benefit Services Branch — the former Assessment and Client Services Branch without the Client Services Directorate
• Corporate Strategies and Business Development Branch and Legislative Policy & Regulatory Affairs Branch — both formerly part of the Policy and Planning Branch
• Appeals Branch — assumes the responsibility for developing a more comprehensive process for resolving taxpayer service complaints
• Compliance Programs Branch — assumes the CRA-wide responsibility for compliance policy, strategy and research, and for international matters

To many this will look as though the CRA is simply moving deck chairs. But the re-alignment, coupled with some new directives, is resulting in a new, more adversarial relationship between the CRA and taxpayers. The most dramatic example is within the Compliance Programs Branch, where there has been a number of organizational changes, with the creation of seven new directorates and divisions that are the focal points for the CRA’s Compliance Priorities such as GST/HST Fraud, Small and Medium Enterprises Audits, and International and Aggressive Tax Planning.

The four directorates within the Compliance Programs Branch that could have the greatest effect on your business are:

1. International and Large Business Directorate
The International and Large Business Directorate is a combination of elements of the former International Tax & Audit Directorate and the Tax Avoidance & Special Audits Division. It will be responsible for international tax issues, including transfer pricing and competent authority services, and the CRA’s Tax Avoidance/Aggressive Tax Planning program. This new directorate will centralize the CRA’s international auditing and transfer pricing competencies and authority to improve the CRA’s ability to coordinate the tax avoidance aspects of international audits.

2. Audit Professional Services Directorate
This directorate will be the focal point for the provision of technical and professional services and support to the regions for Compliance Programs Branch programs. It will provide expertise to ensure that tax legislation is applied consistently and in accordance with CRA positions and government regulations. This directorate will be the focal point for stakeholders to discuss industry-wide audit issues.

3. Small and Medium Enterprise Directorate
Small and Medium Enterprises Directorate (SME) will focus on programs and strategies for individuals (both residents and non-residents), small and medium businesses, charities, public sector bodies, tax incentives and the film industry.

The SME Directorate will be the focal point for the Underground Economy and the GST/HST Compliance Priorities, and provincial income allocation issues.

4. Enforcement and Disclosures Directorate
The Enforcement and Disclosures Directorate is a re-branding of the former Investigations Directorate to better reflect its current programs and responsibilities, which include the Criminal Investigations, Special Enforcement and the Leads and Assistance Programs. These are programs that deal with the most serious cases of non-compliance and with workload generated through the Leads and Assistance Program. It will include the Voluntary Disclosure Program, which moves over from Appeals.

What does this all mean?
The CRA initiated this reorganisation so as to be better equipped to achieve its goals as efficiently as possible. For taxpayers, it means: start planning. The CRA can now audit everyone, regardless of company size or revenues, regardless of the complexity of the issues at hand, and regardless of a company’s prior audit history or possible controversies. Audits are periodically carried out for many different reasons. In order to support and defend its positions when the CRA reviews its operations, a company must methodically preserve all its accounting documentation, either on paper or electronically. See the article "Dealing with a tax audit by the Canada Revenue Agency," which appeared in the 2006 Winter issue of Executive TaxBreaks.

Gary Zed, Ottawa

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Canada’s income trusts wrestle with executive retention issues

When considering the primary concerns of executives across the country, there is little doubt that retention and recruitment top the list. This is particularly true in the oil and gas sector, where labour shortages have sparked a veritable war for talent in recent years. So, this past Halloween, when Canadian Finance Minister Jim Flaherty announced a proposed tax on income trusts, the stakes in this particular war went up another notch.

Outlined in two short pages, the announcement itself was fairly simple although the consequences will be significant for publicly traded income trusts (other than real estate investment trusts that meet certain strict conditions).

Despite its apparent simplicity, the response to this proposal was swift. According to CBC News, oil and gas trusts lost more than $17 billion in market value in the days following the proposed tax announcement. As of the end of November, the market had rebounded somewhat, although losses still tallied over $10 billion.

Needless to say, this decline in value has resulted in significant losses for unitholders. At the same time, it has also had a chilling effect on the compensation packages of many income trusts, leading to a significant drop in some incentive and deferred benefit programs.

This decline in target compensation remains a difficult issue to tackle for many income trusts. Given the losses suffered by unitholders, income trusts must worry about the message they are giving if they aim to shore up their executive compensation programs. At the same time, income trusts eager to weather this storm – and avoid ongoing losses in value – must prevent an outflow of skilled talent.

More than one response
As executives of income trusts ponder the future, one thing is clear: they must determine how to balance the interests of unitholders and employees over both the short and long terms.

For many income trusts, this may suggest the wisdom of adopting more than one approach in response to their retention issues. For instance, those trusts facing immediate retention issues may want to put deferred cash bonuses in place to motivate their employees to achieve specific results designed to drive business value, regardless of their ultimate business structure.

At the same time, it makes sense for affected trusts to review their existing plans to determine how much flexibility they have to make compensation changes in the short term. While simple plan amendments may be possible in some instances, some trusts may need unitholder approval to amend their plans – something that may not be forthcoming in the current environment.

Either way, once appropriate interim measures are in place, executives can begin to turn their minds to longer-term strategies. In some instances, this may include conversion to a corporation. In other instances, it won’t. Regardless of the ultimate structure, organizations must ensure their compensation strategies align with their overall corporate strategies. At the same time, they must take into account a host of ancillary issues that may affect their future operations.

For instance, trusts with operations outside of Canada will have to consider the implications of foreign tax issues. Leading up to 2011, executives will also have to review the effect of securities laws and benefits standards throughout each of the jurisdictions where they operate. They will have to determine which amendments will invoke their change in control provisions, how to respond to cash flow issues, and the effects of the proposed changes in accounting rules which have created a standard definition of “distributable income.”

Yet, despite the complexity of these potential changes, the news is not all bad. For organizations with complex plans, the timing is actually ripe to develop a considered strategy to address their compensation issues going forward.

Striking while the iron is hot
While not all income trusts will be equally affected by the proposed tax amendments, employees at trusts across the country are becoming increasingly concerned about their future prospects. To respond to these concerns, income trust executives must be prepared to communicate the details of their compensation programs to their staff and explain the impact the tax changes may – or may not – have on their compensation structures.

Executives interested in gaining this understanding will need to consider both their retention strategies and their ongoing recruitment strategies in light of the proposed accounting and tax changes. While equity-based compensation may remain a key component of an overall compensation package, income trusts may want to develop alternative short-term programs that address their potential skills shortage without putting their business operations at risk.

Ultimately, regardless of their business structure, organizations determined to execute on their business plans must retain key employees. By taking a holistic approach to their retention issues, understanding the tax implications of their compensation structures, and working with specialists experienced in compensation and business consulting, income trust executives will be better placed to position their organizations for long-term success.

Anne Montgomery, Toronto
Susan Madu, Calgary

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Prescribed federal interest rates for Q1 2007. The prescribed interest rates that apply to any amounts owed to the CRA and to any amounts the CRA owes to individuals and corporations for the first quarter of 2007 are unchanged from the previous quarter. These rates, which will be in effect from January 1, 2007, to March 31, 2007, are: 9% on overdue taxes, Canada Pension Plan contributions and Employment Insurance Premiums; 7% on overpayments; and 5% on taxable benefits to employees and shareholders from interest-free and low-interest loans.

Donations used as tax shelters can be risky. The CRA is warning taxpayers about the risks associated with certain gifting and donation arrangements used as tax shelters, such gift trust arrangements, leveraged cash donations, and buy-low, donate-high arrangements. The CRA continually audits many of these kinds of gifting arrangements. Generally, the CRA reduces the amount of the gift to no more than the cash paid by the taxpayer or reduces it to less than that; in some cases, it reduces the amount to zero when the donation is not a true gift. It is important to remember that a tax shelter identification number does not guarantee that the tax advantages will be admissible.

A new tax credit for businesses. A new tax credit proposed in the May 2, 2006, federal budget benefits businesses that hire certain apprentices. The Apprenticeship Job Creation Tax Credit is equal to 10% of the eligible salaries and wages payable to eligible apprentices in respect of employment after May 1, 2006. The maximum credit is $2,000 per year for each eligible apprentice.

Quebec’s income tax system indexed for 2007. The Minister of Finance for Quebec, Michel Audet, has announced that the personal income tax system will be indexed at a rate of 2.03% for the 2007 taxation year. The indexation will apply as of January 1, 2007, to the tax table and most tax credits.

Quebec increases tax deduction for accessibility. As a result of a new measure proposed in the March 23, 2006, provincial budget, a taxpayer in Quebec can deduct as current expenses in calculating the income from a business or property, the amount paid after that date for renovations or alterations made to a building to enable disabled persons to gain access to the building or be mobile within it. The taxpayer must provide Revenu Québec with an eligibility certificate issued by the Régie du bâtiment du Québec regarding the renovations or alterations.

Improvements to the tax credit for home support services for seniors. As of January 1, 2007, the Quebec tax credit for home-support services for seniors will increase from 23% to 25% and the annual ceiling for eligible expenses will rise from $12,000 to $15,000. This tax credit enables persons aged 70 years or older to receive home-support services at a reduced cost while remaining in their own community. Seniors must themselves pay the expenses for home-support services in order to claim the related tax credit. Seniors may claim the credit when they file their income tax returns, or they may apply for advance payments of the credit at any time throughout the year.

Quebec allows retirement income splitting. The Quebec Minister of Finance, Michel Audet, has announced that the Quebec tax system, like the federal system, will allow the option to split certain retirement income as of January 1, 2007. On October 31, 2006, the federal government announced that, as of January 1, 2007, it would allow couples the option to allocate to one spouse up to 50% of income eligible for the federal tax credit for pension income.

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Brochure on charities and guide for donors

If you’re an officer, trustee or director of a charity or non-profit organization, Deloitte’s new brochure, Taxation of Charities, will be of interest. The brochure is accompanied by a guide for donors, Tax and your charitable donations. Both publications are available on our web site in PDF format, or you can obtain printed copies from your Deloitte representative.

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New edition of How to Reduce the Tax You Pay

Do you want to avoid costly errors and reduce or defer your tax burden for 2006 and 2007? Get a copy of the 19th edition of the book, How to Reduce the Tax You Pay, edited by tax professionals at Deloitte. The book, published by Key Porter Books, will be on sale in 2007 for $19.95.

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