This presentation details the 10 Things You Need to Know About Resolving Tax Controversies, including: Planning and documenting the transaction, A new model for dealing with the Canada Revenue Agency, etc.

1. 10 Things You Need to Know About
Resolving Tax Controversies
Presented by: David Spiro, Donald Bowman, William Innes
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2. 10 Things You Need to Know About
Resolving Tax Controversies
1. Planning and documenting the transaction
2. A new model for dealing with the Canada Revenue Agency
3. Managing the audit process
4. Settling at the audit stage
5. Managing the objection process
6. Settling at the objection stage
7. Managing the litigation process in the Tax Court of Canada
8. Settling before trial
9. Federal Court of Appeal and Supreme Court of Canada
10. The high cost of tax litigation: is there a better way?
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3. 1. Planning and
documenting the
transaction
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4. Planning/documenting the transaction
• Categories of material
– Transaction documents
– Opinions
• Legal
• Accounting
– Planning documents
– Minutes of meetings
– Chatter
• Email
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5. Planning/documenting the transaction
• Central documentation coordinator
• Office records policy
– Retention/destruction of records policy
• Planning documents
• Minutes of meetings
• Other
• Policies on email use
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6. 2. A new model for
dealing with the
Canada Revenue
Agency
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7. A new model for dealing with the CRA
• A new risk‐based approach to audits, embraced by the OECD and several
other jurisdictions, is now being adopted by the Canada Revenue Agency
(“CRA”) for large taxpayers (over $250m in annual revenues)
• The grading system will be used based on, among other things, the
compliance history of the taxpayer and the extent to which the taxpayer
has adopted effective tax governance measures
• The objective is to facilitate an open, transparent and collaborative
relationship where the taxpayer’s proposed transactions are discussed in
advance and feedback is received in a timely way from CRA
• Benefits to the CRA are more efficient use of their resources and earlier
resolution of disputes so they can focus on higher‐risk taxpayers
• Benefits to low‐risk taxpayers are less frequent and more limited audits
(reduced compliance burden)
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8. A new model for dealing with the CRA
• Other benefits include a better understanding by CRA of the taxpayer’s
business (which is often missed in the course of the ordinary audit process)
as well as potential opportunities to influence tax policy through
meaningful engagement with government decision makers
• Early adopters include Vodafone in the U.K. and TD Bank Group in Canada
• Challenges ahead include:
– Significant culture shift required by large taxpayers
– Significant culture shift required by CRA large case auditors
– Additional resources and commitment are required by CRA:
• Timely responses needed to early disclosure of proposed transactions
• Lower‐risk taxpayers need to see that they are actually being treated differently
than higher‐risk taxpayers
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9. 3. Managing the audit
process
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10. Managing the audit process
• Variations from TSO to TSO
• Nature of issues
– Multiple
– Single issue
– Tax avoidance
• Access to materials
– General – very wide access
– Limitations
• Privileged materials
• Third party identification
• Segregation of privileged materials
– Client’s premises
– Lawyer’s premises
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11. 4. Settling at the audit
stage
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12. Settling at the audit stage
• Settlements at the audit stage
– Multiple issue cases
– Single issue cases
– Tax avoidance cases
• Local TSO settlement
• Head Office referrals
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13. 5. Managing the
objection process
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14. Managing the objection process
• Mandate of the Appeals Branch is to provide a “fair and
impartial” process to resolve disputes
• First step in that process is filing a Notice of Objection to a
reassessment, reassessment or loss determination on or
before the day that is 90 days after the sending of the notice of
assessment
• The Notice of Objection should set out all of the relevant facts
and the reasons for the objection.
• Stricter rules for “large corporations” (over $10m of taxable
capital employed in Canada) that file Notices of Objection
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15. Managing the objection process
• Notices of Objection filed by large corporations must:
– reasonably describe each issue to be decided;
– specify in respect of each issue, the relief sought, expressed as the amount of a
change in a balance or a balance of undeducted outlays, expenses or other
amounts of the corporation; and
– provide facts and reasons relied on by the corporation in respect of each issue
• Cover letter should offer the possibility of additional submissions on the
facts or on the law if they would assist the Appeals Officer in making his or
her determination
• Request the opportunity to meet with the Appeals Officer to address any
concerns he or she may have about the facts or the law
• Face to face contact always helps to facilitate the settlement process
(strategic choices on whether to bring the client, witnesses, etc.)
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16. Managing the objection process
• Notice of Objection should be consistent with the “theory of the case” that
was established earlier in the process (ideally at the planning stage)
• Note that what is in (or is not in) the Notice of Objection can be used
against the taxpayer later on
• Be aware of the time it takes for an Appeals Officer to be assigned to the
file
• Ask the Appeals Branch to send you copies of the auditor’s file (i.e. the
auditor’s T‐20 Report, position papers, working papers, memoranda to and
from Head Office, valuation reports or other reports, information received
from third parties, substantive email messages, notes, etc.) and consider
using Access to Information process to obtain additional records
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17. Managing the objection process
• Strategic considerations
– Should we give the Appeals Branch an opportunity to review the file,
or
– Should we file a Notice of Appeal with the Tax Court of Canada once 90
days have elapsed after service of the Notice of Objection?
• The answer will often depend on the nature of the dispute and
where you’ll achieve the best results – at the Appeals Branch
or in Court
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18. 6. Settling at the
objection stage
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19. Settling at the objection stage
• If a matter settles at the Appeals Branch, the decision is
frequently based on information “not available to the auditor”
(factual or legal) – an easy way of rationalizing the decision
• The easiest cases to settle are those that present factual issues
(e.g. a valuation issue)
• The most difficult cases to settle are those that present legal
issues of considerable significance, either individually or as
part of a larger group, to the CRA (the test and important case
list)
• Most cases fall somewhere in between those extremes ‐ that’s
where “the art of the deal” comes into play
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20. Settling at the objection stage
• In order to facilitate settlement, be imaginative in your
approach
• If you’re aiming for a 75/25, 66/33, or even a 50/50
settlement, consider whether that objective can be achieved
by agreeing to (a) increase or reduce the number of years over
which a deduction is taken or income is included or (b) adjust
amounts in tax pools, balances or other accounts in the
taxation year in question or in other open taxation years
• CRA says that all settlements must be “principled”, but at the
objection stage that requirement is not stringently followed
• Where there’s a will, there’s a way!
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21. 7. Managing the
litigation process
in the Tax Court of
Canada
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22. Managing the litigation process in the Tax
Court of Canada
• Should be a collaborative process between the client and tax litigation
counsel
• Assign a contact person/litigation manager early on (from the law group or
the tax group)
• Stay on top of cost estimates – departures from those estimates should be
justified and explained
• Agree on a strategic game plan for settlement and litigation and stick to it –
though each client has different expectations, open lines of communication
between the contact person/litigation manager and tax litigation counsel
are key
• Organization and preparation is critical – there will always be surprises in
the litigation process ‐ be prepared to deal with them together
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23. 8. Settling before trial
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24. Settling before trial
• Consummate importance of being able to settle tax cases
• Settling cases is the bedrock of a successful tax practice
• A good settlement is one in which neither party gets
everything it wants
• Never lose sight of the fact that no case is a certainty –
witnesses and judges are unpredictable
• If you haven’t settled at the audit stage or at the objection
stage, consider appealing to Tax Court 90 days after objection
if no reassessment or confirmation (prevents CRA from coming
up with additional “assumptions” at the appeals stage)
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25. Settling before trial
• File appeal and press for the Reply at the earliest opportunity
• As soon as you have the Reply, press for production of
documents and examinations for discovery without delay
• Avoid procedural wrangling – a waste of time and an obstacle
to settlement ‐ avoid chasing the will o’ the wisp
• Consider initiating settlement discussions immediately after
discovery (when Justice counsel should be most receptive)
• Meet with Justice counsel and offer a reasonable settlement
• Don’t make your offer your final offer ‐ leave room for
opposing counsel to come back to you with a counter‐offer
• Generally inadvisable to take client to settlement negotiations
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26. Settling before trial
• Some clients expect counsel to take aggressive or unreasonable positions –
counsel may impress the client by pounding the table and posturing, but it
doesn’t necessarily facilitate settlement
• If you make no progress with Justice counsel ask the Court for a settlement
conference
• Use care in drafting your settlement brief
• Settlement conferences are “without prejudice” (although each party
learns more about the other party’s case)
• Importance of the selection by the Chief Justice of the settlement
conference judge ‐ some judges are good at that, some are mediocre and
others simply don’t have the skill set required – Chief Justice is careful to
select only those who can do the job
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27. Settling before trial
• Importance of admitting weaknesses in your case
• Settlement conference judge should be able to say that if he or she were
hearing the case it would be decided in your favour
• Compromises – “principled settlements” – Cohen/Consoltex; Enterac;
Smerchanski; Galway (if deals cannot be made, or if they can be repudiated
at the whim of the Crown, the system breaks down)
• Importance of having your client (the decision maker) at the settlement
conference
• Importance of having the instructing CRA officer (the decision maker) at
the settlement conference
• Adopt a co‐operative and conciliatory approach, not a confrontational one
(which may be the approach taken by the Department of Justice or the
CRA)
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28. Settling before trial
• Settlement conference judge may suggest a potential path to settlement
and send the parties away to discuss it ‐ this can be the most valuable part
of the settlement conference
• Some cases are more easily settled than others
– multiple issues
– some years statute‐barred
– issue may arise in several taxation years – give up on one, keep the other
– valuation cases
– capital gain v. income ‐ Sharkey v. Wernher
• Don’t be intimidated by the ritual incantation of the mantra (or rubric) of
“principled settlement”
• Put your settlement offer in writing – if you do better than your offer at
trial you may be entitled to enhanced costs – Practice Note No. 18
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29. Settling before trial
• Note differences between Consent to Judgment and Minutes of Settlement
(and consider subsection 169(3) of the ITA)
• The “principle” is the bottom line ‐ if you want to saw the tax liability off,
find a figure and then work towards it
• No settlement falls through because no “principle” could be found:
compare U.S. practice, or practice under Ontario Corporations Tax Act;
s.169(3) ITA
• Requires imagination – that’s what lawyers are paid to do
• Transfer pricing – opportunities for settlement similar to valuation cases
• Competent Authority
• If you don’t settle at the settlement conference, don’t lose heart ‐ keep the
effort up until the eve of trial
• Many settlements are reached on courthouse steps
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30. Settling before trial
• Find out two weeks before trial who your judge is going to be – an
essential factor in whether you settle
• Consider rectification in appropriate cases
• GAAR – a whole new set of settlement skills is required
• Two approaches:
– GAAR doesn’t apply
• tax benefit
• avoidance transaction
• abuse
– GAAR applies, but there is a more reasonable way of re‐characterizing the
transaction and the tax result
• In approaching settlement, weigh the risks of litigation ‐ courts are
unpredictable – you will lose cases you thought you would win and you
will win cases you thought you would lose
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31. 9. Federal Court of
Appeal and Supreme
Court of Canada
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32. Federal Court of Appeal/Supreme Court
• Income tax appeals
• GST appeals
• Importance of Justice counsel
• Importance of role of litigation officer/appeals officer
• How many issues to appeal
• Appeals on questions of fact
• Appeals on question of law
• Predicting the orientation of the Court
– Patterns of tax cases
– Changes in the composition of the Court
• The importance of the Memorandum of Fact and Law
• The importance of oral advocacy
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33. 10. The high cost of tax
litigation: is
there a better
way?
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34. The high cost of tax litigation
• Preparation is key to reducing costs of litigation later on, going
back to the planning, documentation and implementation of
the transaction itself
• Maintaining the file for litigation purposes is essential if costly
re‐construction efforts (including having to call multiple
witnesses and performing extensive document searches in
multiple locations) are to be avoided later on
• Getting your witnesses and experts lined up early is key (for
settlement purposes as well)
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35. The high cost of tax litigation
• Ask counsel for cost estimates before commencing each stage
of the process
– Audit stage
– Objection stage
– Litigation stage
• Pleadings
• Discoveries
• Contemplated motions
• Settlement conference
• Statement of Agreed Facts
• Experts
• Preparing for and conducting the trial
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36. Questions?
David Spiro 416 863 4761 David.Spiro@fmc‐law.com
Donald Bowman 416 863 4620 Donald.Bowman@fmc‐law.com
William Innes 416 863 4350 William.Innes@fmc‐law.com

37. The preceding presentation contains examples of the kinds of
issues companies looking to resolve tax controversies could
face. If you are faced with one of these issues, please retain
professional assistance as each situation is unique.