Quell Uncertainty with an Advance Ruling

Advance income tax rulings can be a useful tool in business and personal wealth planning because they provide certainty and confidence.

Running a business is complex enough; add in taxation and the complexity goes up a few notches. Each year, as governments close every conceivable loophole by imposing nebulous rules that require judicial determination, it gets even more complicated.

The General Anti-Avoidance Rules, found at section 245 of the Income Tax Act, are an excellent example. So, too, are the proposed “reportable transactions provisions” which will be subsection 237(3) of the Act in the near future. (For more on this, see Knowledge Bureau Reports, Dec. 5  and Dec. 12.)

The Canada Revenue Agency (CRA), however, offers to mitigate this madness by allowing taxpayers to apply for advance income tax rulings. Here is how you can take advantage of this service.

A taxpayer will propose to the Income Tax Rulings Directorate at the CRA a plan or business strategy. The CRA will respond, explaining how it would apply specific provisions of the Act given its interpretation of the taxpayer’s plan. The CRA undertakes to deliver its binding determinations within 90 days of receipt of the taxpayer’s request.

Advance rulings, therefore, can quell the uncertainty inherent in complex transactions and are consistent with the rationale of the indefinable rules. The Technical Notes (June 30, 1988) explain the rationale for section 245 of the Act as: “The new rule seeks to distinguish between legitimate tax planning and abusive tax avoidance and to establish a reasonable balance between the protecting of the tax base and the need for certainty for taxpayers in planning their affairs.”

The CRA doesn’t provide these services for free, however. The fee is $100 plus GST/HST for each of the first 10 hours or part of an hour, and $155 plus GST/HST for each subsequent hour or part of an hour spent on the ruling request.

Taxpayers requesting an advance ruling are required to remit $500 in advance. If the time billed is less than five hours, the Directorate will refund the excess portion of the advance payment.

There is no legal requirement for the CRA to issue a ruling once requested, although not issuing a declaration is unusual. Generally, the CRA will only refuse to do so if the taxpayer making the request is entangled in a legal dispute with the CRA over a similar matter for which the application was made.

For more information, see the CRA Information Circular.

Greer Jacks is updating jurisprudence in EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.