Budget 2019: Tax Dispute Resolution and Controversy

The federal government tabled its 2019 budget on March 19, 2019. The budget included a number of initiatives relating to tax dispute resolution and controversy. We consider some of these and their impact on Canadian taxpayers here.

TAX COMPLIANCE IN THE REAL ESTATE SECTOR

Budget 2019 focused on Canada’s housing market. Consistent with this focus, the federal budget proposed the Canada Revenue Agency (CRA) receive an additional $50 million over 5 years to create four new dedicated real estate audit teams (with specific knowledge, training and expertise) in B.C. and Ontario. The mandate of these teams will be to ensure:

• Taxpayers report sales of their principal residences
• Capital gains on real estate transactions are identified
• Real estate “flipping” transactions are reported on income account
• Commissions are reported as taxable income
• GST / HST remittances on new residential properties are properly addressed

The government said it expects the new real estate audit teams will generate an additional $68 million of revenue over the next 5 years. As a result, taxpayers should expect to continue to see increased audit activity relating to real estate transactions, consistent with increased audit activity in this sector since 2015.

The CRA reported that between April 2015 and December 2018, audits of real estate files in B.C. and Ontario resulted in almost $858 million in audit assessments. The CRA indicated it made approximately $258 million of these audit assessments between March 2018 and December 2018 alone. These numbers do not appear to include related penalty assessments.

Budget 2019 acknowledged the data collected under B.C.’s Speculation and Vacancy Tax Act will also be shared with the CRA. Thus, taxpayers could also see an increase in queries around source of funds used to purchase and maintain properties, their worldwide income and their residency status resulting from the information provided in their declarations for the Speculation and Vacancy Tax.

SERVICE

Budget 2019 also earmarked funds and programs to help the CRA improve client services, adding $50 million over five years to the $206 million pledged in the 2018 budget.

• $34 million of the $50 million is to be spent over five years hiring additional staff to assist with processing T1 adjustment requests more quickly. Budget 2019 indicated this was a key concern highlighted by the Taxpayer’s Ombudsman in her 2018 report.
• The remaining $16 million is to be spent over five years making the dedicated support line for tax service providers, first introduced in Budget 2016 as a pilot program, permanent.

TAX COMPLIANCE

Budget 2019 proposed spending an additional $150.8 million over five years combating tax evasion and aggressive tax avoidance. The funds would be spent:

• Hiring additional auditors
• Conducting outreach
• Building technical expertise to target non-compliance associated with cryptocurrencies and the digital economy
• Creating a data-quality examination team to ensure proper withholding, remitting and reporting of income by non-residents
• Extending programs to combat offshore non-compliance

The federal government expects to reap $369 million over 5 years through this initiative.

Over their four budgets, the Liberal government proposed to spend $1.21-billion by 2024-2025 on tax compliance and to see increased revenues of $5.823 billion as a result. In considering the fiscal impact their programs, the CRA considers tax assessed, tax refunds reduced, interest and penalties and present value of federal tax assessable arising from compliance actions. However, the CRA does not account for the impact of reversals on appeals or collections issues. As a result, taxpayers may increasingly find themselves having to object to audit assessments to see a resolution of their tax dispute.

OTHER NOTABLE CHANGES

The federal budget also made several other notable proposals in the arena of tax dispute resolution and controversy:

• Investing $65.8 million over five years to improve the CRA’s information technology systems to “help the CRA stay ahead of non-compliance schemes driven by the use of new, advanced technologies.”
• Extending joint and several liability to holders of tax-free savings accounts (TFSA) for tax owing on income from carrying on a business in the TFSA.
• Making it possible for the CRA to send requirements for information electronically to banks and credit unions, with those bank and credit union’s consent.
• Confirming the government’s commitment to the Base Erosion and Profit Shifting Project intended to combat aggressive international tax avoidance.
• Proposing amendments to the definition of “transaction” for the purposes of applying the extended reassessment period applicable to reassessments made as a consequence of transactions between a taxpayer and a non-arm’s length non-resident.

All in all, each of the changes Budget 2019 proposed seem to confirm the environment in which tax dispute resolution and controversy arises. Operations of the CRA continue to be of focus and taxpayers will likely continue to see an increased use of audits and reviews, particularly around certain areas of focus like real estate and new areas such as cryptocurrency and the digital economy.

HOW MNP CAN HELP

For more information, contact Jacqueline Fehr, JD, LL.M., Partner, Tax Services, at 778.309.4740 or [email protected]