1. What is the most significant change to your region/jurisdiction’s tax legislation or regulations in the past 12 months?
Concurrent with the release of the Canadian federal government’s 2024 budget, the government announced draft legislation that would provide the Canada Revenue Agency with significantly increased audit powers, including the power to require any question to be answered under oath, orally or in writing, and the power to issue a notice of non-compliance with respect to any audit query, which would, in addition to the imposition of penalties, suspend the otherwise applicable statute-barring limitation period until complied with or quashed by a court.
2. What has been the most significant impact of that change?
From a financial perspective, the most significant impact of these changes will be the suspension of limitation periods. However, the requirement to answer under oath during an audit introduces a level of risk and formality that will, perhaps unnecessarily, increase the resources needed for, and costs of, compliance.
3. How do you anticipate that change impacting your work and the market moving forwards?
These changes will require a greater allocation of resources to audit responses. Individuals may also be required to obtain separate legal representation with respect to their testimony under oath. These increased compliance burdens are consistent with those resulting from earlier amendments in the financial sector, which effectively delegate authority with respect to pre-approval applications for input tax credit methodologies.
4. How has this changed the way you offer tax advice?
The enhanced audit powers have increased the need for more timely and fulsome audit responses. While this is not problematic in theory, particularly in the financial services sector, audit queries can be extensive and of uncertain relevance, and duplicative when compared with the pre-approval process for input tax credit methodologies. The newly introduced draft legislation materially increases these concerns.
5. What potential other legislative/regulatory changes are on the horizon that you think will have a big impact on your region/jurisdiction?
Following in the footsteps of other jurisdictions, particularly in the European Union, we also expect tax authorities to move to electronic invoicing (e-invoicing). In the immediate future, the Canadian tax authorities appear to be considering more onerous recipient obligations to protect against carousel fraud.
6. What are the potential outcomes that might occur if those changes are implemented?
Greater obligations may be imposed on recipients of supplies in an attempt to verify that suppliers are legitimate, which, in turn, will result in greater compliance burdens. With enhanced recipient obligations, whether supported by legislation or merely by administrative fiat, there is a real risk of material exposure being borne by innocent recipients. These obligations may be mitigated by a thoughtful introduction of e-invoicing to the Canadian market.
7. Do you think that change will have a positive effect on both your practice and the wider regional/jurisdictional market?
The enhanced audit powers are expected to increase a taxpayer’s risks (through, in part, the extension of limitation periods) and compliance burden. More onerous obligations on recipients would have similar results. Other solutions, such as e-invoicing, may mitigate these effects.
8. Are there any regulatory/legislative changes you believe should be implemented in your region/jurisdiction?
For the financial services industry, particularly in the banking and insurance sectors, it would be helpful to amend the pre-approval process for an input tax credit methodology to provide for clearer and more efficient compliance and administration, and a more robust dispute resolution process. In addition, cross-border rules – which incorporate, by reference, non-tax legislation – could be clarified. For all sectors, legislation and regulations to support the shift to e-invoicing would be useful.
Conversely, in our view, retroactive legislative amendments should be made less frequently, as they interfere with the fundamental tax concepts of equity and certainty. For example, under the coming-into-force legislation in respect of recent retroactive tax legislation, foreign suppliers (or recipients of supplies therefrom) may have a greater burden than that imposed on domestic suppliers (or recipients of supplies therefrom).
9. How do you believe those changes would help improve the tax landscape in your market?
The benefits of e-invoicing are obvious; a more efficient and transparent compliance mechanism will benefit both tax authorities and taxpayers. If properly designed, this initiative may also materially reduce opportunities for carousel fraud.
Amendments to the pre-approval process in the financial sector would make possible more effective judicial oversight of the exercise of administrative discretion by tax authorities, consistent with the original, principled intent of Parliament and the rule of law more generally.
Clarification of cross-border rules would eliminate or at least mitigate the risk of non-creditable tax arising from commercial activities.
10. How are issues surrounding the taxation of the digital economy affecting your work?
There are precise, substantive impacts in terms of the digital services tax and the simplified goods and services tax system/specified Quebec sales tax system. There is also a more fundamental impact, in terms of the broad recharacterisation of supplies, a contentious issue at the best of times, and the disruption to supply chains.
11. How would you describe the tax authorities’ approach in your region/jurisdiction?
In cases involving significant amounts of tax, the tax authorities have adopted a more arbitrary approach, resulting in uncertainty for taxpayers in the ultimate resolution of tax disputes. In general, however, and especially at higher levels, the tax authorities are principled, competent, reasonable, and helpful in resolving unnecessary disputes, particularly when this approach is adopted by the taxpayer and its advisers.
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