Targeting the Wealthy - Good Tax Policy or Good Politics?

Transcription

1 Targeting the Wealthy - Sarah Chiu, Felesky Flynn LLP, Calgary 67 th Annual Tax Conference 67e Conférence fiscale annuelle 2015 Targeting the Wealthy Wealthy taxpayers should pay their fair share of taxes! What is a fair share? Will this improve equality? 2

2 Outline A. Evaluating Canada s Rules 1. Defining What is a Fair Share 2. Defining Who is Wealthy 3. Global Developments 4. Evolving Views on Tax Planning 5. Evaluating Canada s Response B. Practical Tips for Wealthy Taxpayers 3 Evaluating Canada s Rules - Defining What is a Fair Share 4

3 Defining What is a Fair Share Views on Taxation and Equality Taxes improve equality and raise revenue Tax based on ability to pay (1966 Carter Commission) Government transfers can be inefficient (2012 IMF) Balance: income equality vs. economic growth (1966 Carter Commission; 2012 IMF) Inequality: capital accumulation > economic growth (2014 Piketty) 5 Defining What is a Fair Share Equality in Canada Inter-generational equality relatively high (2012 Veall) Top 1% income concentration (2015 IMF) UK (2011) 25% of total income US (2011) 33% of total income Canada (2013) 10.3% of total income 6

4 Defining What is a Fair Share Equality in Canada Current Share of Wealthy Taxpayers Top 10% of Income Earners Year Income Share / Tax Share (%) Top 1% of Income Earners Year Income Share / Tax Share (%) Source: CANSIM Defining What is a Fair Share Equality in Canada Current Share of Wealthy Taxpayers Top 0.1% of Income Earners Year Income Share / Tax Share (%) Top 0.01% of Income Earners Year Income Share / Tax Share (%) Source: CANSIM

5 Defining What is a Fair Share Raising Revenue Elasticity of income Top 1% elasticity = 0.6 to 0.7 (2010 Finance) High rates harmful to economic growth (2013 IMF) High rates could lead to a brain drain and a capital drain (2009 OECD) 9 Defining What is a Fair Share Raising Revenue Revenue maximizing Maximum Revenue top marginal rates 50% (2014 Milligan; Equal Revenue 1966 Carter Commission) > 50% (2015 Osberg) Laffer curve illustration 0 Tax Rate (%) 100 Laffer Curve Illustration* Tax Revenue ($) *shape of curve uncertain 10

6 Evaluating Canada s Rules - Defining Who is Wealthy 11 Defining Who is Wealthy 12

7 Defining Who is Wealthy High Income Earners Top 1% of income earners in Canada Top 1% of Income Earners (Threshold Values) Historic Values $69,500 $103,900 $146,200 $222, Values* $158,000 $167,600 $193,400 $226,800 Source: CANSIM. *Converted to 2015 values with the Bank of Canada inflation calculator. 13 Defining Who is Wealthy High Income Earners Income Thresholds Top Marginal Rate Thresholds Federal (1990s) Top 5% Top 2.5% Top 1% Federal (Current) Federal (2001 to 2008) Federal (Proposed) Alberta ($300,000) Quebec ($138,586) Ontario ($220,000) 14

8 Defining Who is Wealthy High Wealth Holders wealthy > US $1M ultra-wealthy US$3M to US$30M OECD 2009 Report (in investable wealth / assets) > $50M controlled (alone or as a group) CRA Related Party Initiative Audit 15 Evaluating Canada s Rules - Global Developments 16

9 Global Developments OECD 2009 Report Best practices for tax administrators 17 Global Developments International Information Exchange Updated information exchange article in OECD Model Tax Convention on Income and Capital July 2014 Convention on Mutual Administrative Assistance in Tax Matters Jan 2014 Decline of Banking Secrecy G20 commitment April

10 Evaluating Canada s Rules - Evolving Views on Tax Planning 19 Evolving Views on Tax Planning Traditional view: A taxpayer is entitled to order his affairs to attract less tax (Duke of Westminster 1936 HL) Current view: More restrictive for wealthy taxpayers Media and public opinion Government of Canada view (Department of Finance, CRA) 20

11 Evolving Views on Tax Planning Tax Planning (intent to avoid owing tax) Aggressive Tax Planning (undefined) Tax Evasion (intent to avoid paying taxes owing) ACCEPTABLE Tax Planning Subject to the GAAR UNACCEPTABLE 21 Evaluating Canada s Rules - Legislative Rules 22

12 Legislative Rules Disclosure Rules recent examples Foreign property reporting (s ) Aggressive tax planning ( ATP ) reporting (s ) Electronic fund transfer reporting (Part XV.1) Tax information exchange agreements ( TIEA ) 23 Legislative Rules Evaluating the Disclosure Rules Purposes: Diminish interest in mass marketed ATP schemes Assist CRA in identifying ATP schemes and requesting legislative changes 24

13 Legislative Rules Evaluating the Disclosure Rules Cost vs. benefit of increased disclosure Cost to taxpayers and third parties to comply Cost to CRA to analyze information Offshore risk lower in Canada (OECD 2009) Estimated 2% wealth offshore (vs. 10% to 30%) 25 Legislative Rules Substantive Rules recent examples Top marginal tax rates and brackets Offshore trust rules, offshore investment rules Immigration trusts Advisor penalties 26

14 Legislative Rules Top Marginal Tax Rates / Brackets Liberal government election campaign Proposed top marginal rate of 33% Top income threshold > $200,000 6 provinces top marginal rate > 50% Including Ontario and Quebec Top 1% income in 2013 $230, Legislative Rules Offshore Rules Offshore Trust Rules (s. 94, 94.2) Offshore Investment Rules (s. 94.1) 28

15 Legislative Rules Immigration Trust Rules Eliminated February 2014 Former exclusion from Canadian taxation for up to 60 months Estimated Canadian tax revenue of $110 million for 2014 to 2019 (2014 Budget) 29 Legislative Rules Advisor Penalties (s ) Penalty requirements: Making or participating in making a false statement that could be used by a taxpayer Advisor knew (or reasonably expected to know) that statement was false Guidon v. Canada, 2015 SCC 41 From 2009 to 2013 (2014 AG Report): $63.3 million in penalties $440,000 median penalty 30

16 Legislative Rules Evaluating the Substantive Rules Purposes: raise revenue, target tax plans, deter ATP OECD recommended best practices (OECD 2009) Frequent amendments adversely impact taxpayer trust in the tax system and compliance (OECD 2009) Overbroad rules risk unintended and/or undesirable real economic change 31 Evaluating Canada s Rules - Administrative Programs and Initiatives 32

17 Administrative Programs and Initiatives Examples of Programs and Initiatives Related Party Audit Initiative Voluntary Disclosure Program Offshore Tax Informant Program 33 Administrative Programs and Initiatives Evaluating Programs and Initiatives Related Party Initiative Between 2006 and 2012 over 340 audits undertaken and $195 million in taxes identified (2013 CTF Conference Report) How much proven and collected? CRA ATP audit vs. large business audit 34

18 Administrative Programs and Initiatives Evaluating Programs and Initiatives Voluntary Disclosure Program Between 2006 and 2014 approximately $2 billion in unreported income disclosed (2013/2014 CRA Report to Parliament) CRA appeals branch vs. investigation division 35 Administrative Programs and Initiatives Evaluating Programs and Initiatives Offshore Tax Informant Program International non-compliance with tax > $100,000 Reward: from 5% to 15% of federal tax collected 208 written submissions, 100 cases being reviewed (2015 National Post) 36

19 Practical Tools for the Wealthy Taxpayer 37 Outline B. Practical Tools for the Wealthy Taxpayer 1. Asserting Privilege 2. Challenging Disclosure or Use of Documents 3. Seeking Rectification or Rescission 4. Potential Remedies for Negligence of CRA auditors 5. Planning for the Future 38

20 Asserting Privilege Categories of Privilege 1. Solicitor-client privilege (Descôteaux 1982 SCC) 2. Litigation privilege (Blank 2006 SCC) 3. Common interest privilege (Imperial 2013 TCC) Exception to waiver of privilege 39 Asserting Privilege Other Exceptions to Waiver Third party messenger between solicitor and client (Susan Hosiery 1969 Ex. Ct.) Third party performs function essential to solicitor-client relationship (e.g., experts) (Chrusz ONCA 1999) Limited Waiver of Privilege May be possible if disclosure is required (e.g., auditors or regulators) (Interprovincial Pipe 1996 FC) 40

21 Asserting Privilege Disclosing Privileged Documents to Third Parties Waiver exception or limited scope waiver Expressly and carefully document which applies Limited waiver to specific privileged document Must not be misleading (MIL 2006 TCC) Prevent inadvertent disclosure Assert privilege as soon as possible if inadvertently disclosed ( TCC) 41 Disclosure and Use of Documents Disclosure rules for domestic purposes very broad Sections and M.N.R. v. KPMG LLP, Federal Court File T Canada s obligations under TIEAs and tax treaties Article 26 of OECD Model Tax Convention Reliance on illegally obtained documents Brings the administration of justice into disrepute? Seek an injunction? 42

22 Rectification and Rescission Rectification Requires: (Juliar 2000 ONCA, Graymar 2014 ABQB) 1. Prior agreement 2. Common intention (to avoid tax) 3. Final document does not reflect intention 4. Common or mutual mistake 5. Equitable requirements: no other adequate remedy, clean hands, no adverse impact on third parties (CRA windfall excluded) Remedy: document corrected 43 Rectification and Rescission Rescission (Stone s 2009 ABQB) Common law rescission Fundamental mistake Remedy: contract void ab initio Equitable rescission Honest, inadvertent mistake Unfair, unjust or unconscionable Remedy: mistake corrected 44

23 Negligence of CRA Auditors Historical view: no duty of care to taxpayers Leroux v. Canada Revenue Agency, 2014 BCSC Auditor had a duty to take reasonable care in assessing taxes, auditing the taxpayer and imposing penalties Failed to prove negligence caused losses Successful cases likely rare 45 Planning for the Future Undertake a Cost-Benefit Analysis Costs Proper implementation and maintenance Clear documentation (including intention) Transfer pricing and valuation reports Obtain other supporting evidence Advisors or employees to manage compliance, deal with CRA queries and defend the planning Benefits Creditor proofing, charitable giving, Tax, estate and family planning, others 46

24 Planning for the Future Consider Reputational Risk for Wealthy Families Agree to and align tax planning strategies based on agreed levels of risk tolerance Consider who will be responsible for implementation and document management Consider other relevant jurisdictions (e.g., where other family members live) Ensure full understanding of options and risks 47 Thank You 48