Understanding advanced tax rulings and interpretations.

Are you entering a business deal, but are unsure of any tax effects it may trigger? If you are, you should consider both the cost and benefit of requesting an income tax ruling and an interpretation. In this article, I will provide you with further information on this complex topic so you can make an informed decision. For a brief look at rulings and interpretations, please visit our resource: What is the difference between a GST/HST rulings and interpretations? 

Technical Interpretations

If you are unclear on the tax treatment of a business transaction and need clarification, you can request a technical interpretation from the Canada Revenue Agency (CRA) free. Based on the information you give them, the Income Tax Rulings Directorate of the CRA will issue their written opinion. The CRA should answer you within two weeks of receipt. The CRA will provide you with a contact name and reference number. Normally, they should process the interpretation within 90 business days from the date they received all your essential information.

You should note that technical interpretation letters are not binding. If you follow the CRA’s advice and they reassess you, the letter cannot be used as a binding document.

Advance Income Tax Rulings

Like the technical interpretation, an advance income tax ruling is a written statement issued by the directorate. It states how the CRA interprets your definite or proposed transaction based on the facts of the case. Unlike an interpretation, however, an advance ruling is a little more involved. Where a technical interpretation is not legally binding, an Advance Income Tax Ruling is. As long as you accurately stated the details in the request, the CRA cannot reassess you for the transaction(s) covered by the ruling letter. The CRA also gives priority to advance ruling requests, while they serve technical interpretations are on a first-come-first-serve basis.

You may now wonder why anyone would choose a technical interpretation. After all, having a legally binding document and the promise of priority sounds attractive. However, these extras do have a related cost. The fee is $100 for each of the first 10 hours or part of an hour and $155 for each subsequent hour or part of an hour spent on the ruling request. All amounts are subject to applicable taxes. An advance payment of $500 is also required, which represents 5 hours of work. If the time billed is less than 5 hours, the Directorate will refund the excess.

To be processed, requests must include all relevant documents and provide comprehensive information. This generally includes the name of all involved parties, the precise nature of the proposed agreement, the relationship between all parties, financial statements, and tax returns. For a more complete list of information, please visit the CRA at Information requirements for an advance income ruling request. If the CRA requires further information after the request is submitted, they will notify you. To speed up an already long process, however, it is best to provide all relevant information at the beginning.

It is important to remember the CRA is under no obligation to issue a ruling. If they are not going to be issuing, they will let you know why. Below, I have listed some common circumstances under which the CRA may refuse to rule. For a more in depth look at advanced income tax rulings, please visit the CRA: Income Tax Information Circular

• When the submitted agreement is similar to one that has been completed a previous taxation year. The CRA is currently reviewing or discussing the implications of the completed transaction, but have not been put before the courts.
• When the central issue involves a matter that is before the courts. If the court has already issued a judgment, an appeal to a higher court is being considered.
• When the business transaction is to be completed at an unspecified future time, or where a contemplated transaction is lacking sufficient evidence.
• When the request for a ruling contains alternative courses of action on the taxpayer’s part.
• When the major issue for starting the review is of an income or capital nature.
• When the matter involved is a request for the fair market value of property.
• When the question concerns tax-related calculations (e.g., the amount of refundable dividend tax on hand at a particular time).
• When a ruling would involve an interpretation of a provision in the Income Tax Act that the Government has not established, or would require a regulation and the particular regulation they have not circulated.
• When a ruling would require an opinion on generally accepted accounting principles or commercial practices.
• When a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the relevant facts cannot be established at the time of the request for the ruling. This could include issues involving residence, carrying on of a business and the existence of a partnership.
• When an issue would require an opinion or interpretation of a foreign law.
• When the taxpayer does not consent to the release of the ruling, in severed form, to the public.

Applying for a ruling can be a complex and expensive process. If the proposed transaction is large enough to warrant a large amount of consequences, applying can be a very good idea. Talk to your accountant about requesting a ruling or interpretation letter if you think you might benefit – he or she can help gather and present the facts for the request. If you’re not sure your business needs an accountant, please visit our resource to learn more: Accounting In Toronto – What Business Owners Need to Know.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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