HOW CRA IDENTIFIES ISSUES THAT CONCERN THEM (AND THEN YOU)

You have a better probability of finding Sasquatch than a taxpayer eager to pay more tax (unless you're in Warren Buffett's locale). We hunt for effective tax strategies but our savings reduce what the government collects. Win/lose or lose/win.

Canada Revenue Agency (CRA) interprets the tax laws to identify potential under-payers. If you make the list, they’ll let you know. You can appeal their decisions and ultimately the courts decide who is right. CRA has a huge advantage since few are willing or able to go to court.

INSIDERS

How does CRA operate? Two insiders shared their insights at a CALU technical session last week:

• Susan Gulliver worked at CRA for 36 years — her last 23 in Aggressive Tax Planning. She spent 15 years on the GAAR (General Anti-Avoidance Rule) Committee. She's now a Senior Tax Advisor at PricewaterhouseCoopers.
• Dan Rivet has been at CRA for 17 years. He's on the GAAR Committee. He is the Manager of the GAAR, Inter-Provincial Tax Avoidance and Technical Support Section. How do you fit that on a business card without abbreviations?

I spoke to both briefly. In 2009, I met Donald Bowman, the former Chief Justice of the Tax Court of Canada. I need an autograph book!

Identifying Issues

How does CRA identify the issues which concern them? There are five key ways:

1. requests for rulings
2. conducting regular compliance audits and finding practices of widespread concern
3. attending conferences and seminars
4. reading published articles
5. participating internationally; e.g., in the OECD and the Joint International Tax Shelter Information Centre (JITSIC)

These sources are certainly reasonable. Let’s explore further.

Ruling Requests

If you ask for a ruling, you might change your mind and withdraw your request if you sense the decision might be unfavourable. While ignorance can be better than knowing for certain, CRA does not forget. Withdrawn requests go to the GAAR Committee for review. Lesson: If you'd rather not know, don't ask.

Ruling requests could be misused. Apple and Samsung are busy suing each other and already have 21 lawsuits pending around the world. Let’s turn to tax strategies. Suppose your company is a laggard losing sales to competitors or a leader staving off competition. Maybe you could get request a ruling anonymously (e.g., through a lawyer?) and withdraw your request to trigger a GAAR review. That’s nasty but might work, if structured properly.

Public Sources

CRA has been accused of not understanding industry practices, violating the 5th habit of the highly effective: seek first to understand and then to be understood.

Professionals require continuing education credits to maintain their designations (100 hours every two years for actuaries). Why not attend industry conferences and seminars? CRA staff are doing that and reading articles. While this may look like snooping, the purpose is to learn.

There are also internal courses. Some advanced courses are taught by outside instructors who don't have biases or conflicts of interest. That’s ideal. If you rely on financial advice from commissioned salespeople, be wary (e.g., read the wealthy reveal how their advisors fail them).

Outcome

We might not like what CRA does but now we have a better understanding of the inner workings. Before using a strategy that looks “too good to be true”, ask yourself how CRA may react (and these 13 questions). Happy tax planning!

Links

• How effective are tax auditors?
• Surviving an audit: two lies and three tips
• Warren Buffett’s very strange tax argument (Forbes, Aug 2011)
• Secret 7: The best tax-sheltering in Canada
• The four steps in wealth management
• Three steps to keeping financially solvent
• Mope, gloat or move: How tax compares by province
• How you comply with the taxman makes all the difference: The Related Party Initiative (Globe and Mail, May 2011)
• The tautology of Canada's GAAR: A tax haven for uncertainty
• Sharon Gulliver (PWC website)
• image courtesy of Kamil Dratwa (Poland)

Podcast 141 (5:23)

direct download | Internet Archive page | iTunes

PS Has your opinion of CRA changed over the years?

THE WEALTHY REVEAL HOW THEIR ADVISORS FAIL THEM

Wealthy clients keep getting interviewed about what they want from their advisors and aren't getting. The advisors keep getting reminded but do they change?

Survey Says

The ideal advisor ...

• discloses fees: 94%
• understands your life and financial goals: 94%
• engages in open and honest dialogue: 84%
• has professional designations: 77%

You probably agree. These findings are from a new informal survey of 40 wealthy investors. The results may also apply to other types of advisors.

The most interesting results are quotes from the participants. We’ll look at the main issues raised

Transactional

If your advisor is focused on making money today, you won't get much attention unless you're buying now. Your past purchases won’t entitle you to ongoing service or attention. That’s short-sighted but does happen.

Here are quotes from the survey

• "He doesn't take the time to explain things thoroughly" [expedient; may not know how]
• "He provides responses that I think are general to his client list" [cheaper than personalized attention; the responses might be prepared by the advisor’s firm, which makes them even more generic]
• "There's not enough contact." [cheaper to ignore those who aren't buying]
• "There's lack of communication." [cheaper, may lack communication skills. especially when writing]
• "I'm just a number [to my advisor]" [and that’s not Number One]
• "She acts like she has no time for me" [why are you paying her?]
• "She doesn't get back to me when I have a question" [why are you paying her?]

If you get more service at Starbucks, you’ve got a problem with your advisor. You are paying your advisor directly or through hidden fees. You deserve to get what you’re paying to get.

SalesY

Advisors can be salesy because they are typically paid based on what they sell

• "I get too many emails" [This comment may mean too many messages of the wrong type. If your advisor uses social media, you decide what you want to receive and how often.]
• "There's a conflict of interest between how they are paid versus my best interest (life stage, fit, superiority of product, personalized to my needs, etc)" [why do you tolerate this?]

Be alert for hints of conflict of interest. More revenue for your advisor means less benefits for you. Advisors are not fiduciaries required to put you first.

Service

• "I'm not able to reach him in difficult times" [why do you tolerate this?]
• "He may retire before I am finished with his services" [You’re paying but your advisor decides how long to keep you? That’s backwards.]

If your advisor shows no concern for your future well-being are they treating you well today? Like everyone else, advisors do retire, get sick, die and get disabled. A well-run practice will have plans in place for these contingencies.

Learning

More quotes

• "He doesn't learn from mistakes"
• "He justifies his actions as "unforeseen events""

You’ll easily find advisors who are slow to learn and quick to shift blame for bad news. By staying and paying, you are condoning their actions. Maybe you’re not learning. There may be a gap in your expectations and what your advisor can realistically deliver. That’s a communication problem.

Communication

"He does not always speak in layman's terms."

You'd expect communication to be a core skill, especially when Canadians suffer from innumeracy (financial illiteracy). Skills vary. Some advisors seem brilliant ... but are difficult to understand. Some are clear but … have nothing to say. Practice helps both extremes.

Advisors can hone their communication skills from listening to writing to speaking at Toastmasters. That's an ideal environment to get feedback on the clarity of their messages.

Communicating clearly takes more skill. The first step is having a detailed understanding and the next is to simplify. Do you recall The Seven Habits of Highly Effective People by Stephen Covey? That's the second half of 5th habit: seek first to understand then to be understood.

Understanding

You'd hope that advisors understand you. That's the first half of 5th habit: seek first to understand then to be understood.

If you aren’t confident that your advisor understands you, how can they truly help you. There are oodles of advisors but only one you. They need you more than you need them.

We've discussed advisors before. The simple answer is that the ideal advisor has three elements: chemistry, credentials and generosity. What do you think?

Links

• The ideal advisor (The Forum, Oct 2011)
• RIP: What happens if your advisor dies?
• Is your advisor sleeping on the job?
• Why after-sales service suffers
• Three reasons the rich get richer
• The ABCs of 1-2-3: The key to financial literacy/numeracy
• Why I finally joined Toastmasters
• Does your advisor have these three elements?
• The foolproof measure of trust
• Image courtesy of Tim Grable (US)

Podcast 140 (6:25)

direct download | Internet Archive page | iTunes

PS Advisors would serve you better if they read the Seven Habits and applied them.