Tax planning can be very complicated with an Income Tax Act (“Act”) consisting of over 1.1 million words. This is a far cry from the original 4,000 words of the Act’s predecessor, Income War Tax Act, which was originally enacted as a temporary measure in 1917.
The more than 3,000 pages contained in the Act is the legislation that governs our Canadian income tax system that is supplemented by precedent setting court decisions of our judiciary system, as well as commentary from both the Canada Revenue Agency and Canada’s tax professionals. This voluminous amount of material that makes up our income tax system can be overwhelming to any tax professional trying to assist their client with the development and execution of a tax strategy or an estate plan.
Uncertainties in the income tax system
The responsibility of a tax professional becomes further exacerbated when additional elements of uncertainty are introduced to our income tax system by the government. The fast-paced pronouncements of new tax legislation in 2020 to implement the various Covid-19 pandemic related federal assistance programs is a perfect example of adding an additional level of uncertainty and responsibility to our already complex income tax system.
It is now August 2021, approximately eighteen months since the pandemic took its hold on Canada and for the weary tax professional, the additional uncertainty created by these federal assistance programs appears to be coming to an end. Now enter stage left with bill C-208 and Finance’s soon to be legislative response to bill C-208, and a federal election.
As a tax professional for over 20 years, I have become accustomed that there will always be uncertainty in our income tax system. To avoid mid-day cold sweats or spring out of bed moments, I have implemented policies and procedures in my practice over the years to assist in mitigating the risk that is associated with this uncertainty. These policies and procedures are supported by the four pillars of a high-quality tax practice:
- Education, and
- Office systems.
It is extremely important to know your client’s objectives and make sure you properly communicate your understanding of those objectives. Any risk or uncertainty with the tax plan’s outcome should also be communicated with the client. A detailed engagement letter is very useful for communicating this information with the client.
Problems don’t typically arise within your brain’s short-term memory system, which is why documentation is so critical. Each engagement should have sufficient documentation to allow a tax professional to reconstruct any decision that was made throughout the engagement. This documentation could include the client’s objectives, tax research, informal and formal communications with the client, discussions with tax specialists, approval processes, risk memos, signed engagement letters, and checklists.
Knowledge and experience in a subject matter is one of the fundamental keys to a high-quality tax practice. Baseball coined the phrase “in the wheelhouse” in the 1950’s referring to the strike zone where a batter is most likely to hit a home run. For a tax practice, this wheelhouse is where education, experience and capacity all come together. Practicing within your wheelhouse significantly reduces the risk of making careless mistakes.
This last pillar often gets forgotten, but it is equally important. Office systems ensure proper review and approval procedures are in place, checklists are completed and timely communications with clients happen. Office systems ensure client documents are not lost, complete and accurate information is gathered, and potential changes in legislation is investigated. And of course, office systems track due dates.
If this pandemic has taught us anything, it is how important these four pillars are when administering a high-quality tax practice in uncertain times. As the fall and winter of 2021 rolls around with more uncertainty on the horizon, we have to wonder how will CRA administer the tax plans using the legislative amendments of Bill C-208 and what will Finance’s legislative response look like? What new tax proposals will be introduced by each respective party in the 2021 Federal election, and which of those proposals will be enacted? And what if we have a fourth wave. Will there be further extensions of the CEWS, CERS, CRHP, or will there be entirely new programs. Developing a tax practice on the foundations of these four pillars will ensure that your practice remains a high-quality tax practice in uncertain times.
 IncomeWarTax.1917.pdf (wartimecanada.ca)
 Why does Canada’s tax system have to be so complicated? (cpacanada.ca)
 The recent GAAR decision by the FCA in The Queen v. Deans Knight Income Corporation (2021 FCA 160) may open the GAAR door a little wider allowing CRA to look beyond the textual wording of Bill C-208 to try and ascertain parliamentary intention.