David Rotfleisch on How Businesses & Individuals Can Resolve Cross-Border Tax Problems Using the Mutual Agreement Procedure (MAP) – Insights from a Canadian Tax Lawyer

Introduction: The Mutual Agreement Procedure (MAP) is a Tool for Resolving Cross-Border Tax Disputes

Cross-border tax issues are increasingly common for Canadian taxpayers, both individuals and corporations, as immigrants now make up about one-quarter of Canada’s population. One of the most frequent challenges is double taxation, which occurs when the same transaction or property is taxed more than once during the same period.

Double taxation often arises when a bilateral treaty between Canada and another country permits both jurisdictions to tax a specific type of transaction. A less common scenario occurs when Canada and another country characterize a transaction differently, and the applicable treaty does not provide clear guidance on its tax treatment.

To mitigate double taxation, most bilateral tax treaties include provisions for resolving such conflicts through the Mutual Agreement Procedure (MAP). The MAP, also referred to as the MAP Program, is a service provided by tax authorities such as the Canada Revenue Agency (CRA).

In Canada, the MAP serves as a dispute resolution mechanism that enables CRA officials to negotiate directly with foreign tax authorities to address cases of double taxation or taxation that conflicts with a bilateral tax treaty. Typically, taxpayers initiate the MAP by submitting a request in their country of tax residence.

This article offers an overview of the Mutual Agreement Procedure for Canadian taxpayers facing double taxation concerns. The following sections outline the basis for invoking the MAP and the options for challenging decisions made under the program.

How to Invoke the Mutual Agreement Procedure (MAP)

To invoke the Mutual Agreement Procedure (MAP) in Canada, a taxpayer must first be a Canadian tax resident. The process begins with a formal written request submitted to the CRA’s Competent Authority Services Division, International and Large Business Directorate. The request should:

• Identify the foreign country involved;
  Outline the facts of the case;
• Explain how the taxation in question conflicts with the provisions of the relevant bilateral tax treaty;
• Include supporting documentation such as tax assessments, correspondence, and a detailed analysis of the treaty article(s) at issue.

Most tax treaties set a time limit for filing, so the request must be submitted within the deadline specified in the applicable treaty.

A well-prepared, complete, and reasoned request is critical. The CRA uses this information to decide whether to accept the case and initiate discussions with the foreign tax authority. While the taxpayer does not participate directly in negotiations between Canada and the treaty partner, the CRA may request additional details or clarifications.

Once accepted, the CRA contacts its foreign counterpart to resolve the issue under the bilateral treaty framework. The CRA aims to complete MAP cases within 24 months of receiving a complete request, though this timeline is not guaranteed. Complex cases, or those involving multiple tax authorities, often take longer.

If an agreement is reached, the CRA or the foreign tax authority will issue an offer outlining the terms of relief, typically through adjustments to the taxpayer’s assessments in one or both jurisdictions. However, if negotiations fail, the MAP may end without relief. Because of the complexity and stakes involved, taxpayers are strongly advised to work with an experienced Canadian tax lawyer to ensure a strong application and maintain effective communication with the CRA throughout the process.

How to Appeal a CRA Decision After Invoking The Mutual Agreement Procedure (MAP)

Appealing a CRA decision after using the Mutual Agreement Procedure (MAP) is difficult because taxpayers are excluded from the negotiations and communications between the CRA and the foreign tax authority. They also cannot negotiate directly with either party to alter or revise an offer, whether that offer comes from the CRA or from the foreign authority.

When a Canadian taxpayer wishes to dispute a CRA decision after MAP, the process usually shifts to Canada’s domestic legal system, most often through an appeal to the Tax Court of Canada or an application to the Federal Court of Canada.

To formally challenge the decision after the MAP invocation, the taxpayer must file an application for judicial review. If the taxpayer rejects an offer from the CRA or the foreign tax authority, the options for resolution become limited to domestic dispute mechanisms.

The available domestic routes vary depending on the stage and nature of the dispute. These may involve further internal review, judicial review before the Federal Court, filing an objection with the CRA Appeals Division, or pursuing an appeal before the Tax Court of Canada. However, once all domestic remedies are exhausted, the taxpayer may find that no further recourse is available.

CGI Holding LLC v. Canada (National Revenue): When Competent Authorities Fail to Agree

In rare situations, the competent authorities of two countries may be unable to reach an agreement, leaving a case of double taxation unresolved. The case of CGI Holding LLC v Canada (National Revenue), 2016 FC 1086, illustrates such an outcome.

CGI Holding LLC (CGI), a Delaware-based limited liability company, received $142 million in Canadian dollars in dividends in 2007 from a related Canadian corporation. The Canada Revenue Agency (CRA) withheld 25% under subsection 212(2) of the Income Tax Act, amounting to more than $35 million Canadian dollars.

Following the 2010 decision in TD Securities (USA) LLC v The Queen, the CRA revised its approach and allowed a reduced 5% withholding tax on certain dividends paid to U.S. companies. CGI subsequently sought a refund of over $28 million based on this revised position, but the CRA denied the claim on the basis that it was statute-barred.

The CRA then considered the matter under the Mutual Agreement Procedure (MAP) with the Internal Revenue Service (IRS). However, the two authorities failed to reach a resolution, and CGI’s request was closed without relief.

The Federal Court confirmed that it had jurisdiction to review the CRA’s conduct in the MAP process, even though a foreign tax authority was involved. Nonetheless, the court found that the CRA’s decision to deny relief was reasonable and that there had been no breach of procedural fairness.

This case highlights that if a taxpayer believes that the CRA acted unfairly during the Mutual Agreement Procedure (MAP) or that the resulting decision was unreasonable, they have the right to seek judicial review of the CRA’s conduct and decision. While the Federal Court can review how the CRA handled the matter, it typically does not replace the CRA’s decision with its own, even if it finds issues with the process or outcome.

However, if the Federal Court determines that the CRA breached procedural fairness or acted unreasonably, it may quash the decision and return the matter to the CRA for reconsideration. In that case, the CRA may be required to reopen discussions with the foreign tax authority under the MAP or to revise its position and offer to the taxpayer.

Pro Tax Tips – When to Invoke the Mutual Agreement Procedure

The Mutual Agreement Procedure (MAP) is a dispute resolution process available under most bilateral tax treaties to address cross-border tax issues. It is often relied upon when domestic tax laws cannot provide adequate relief, such as in cases of double taxation.

For instance, an individual who ceases to be a Canadian tax resident may face tax on the deemed disposition of foreign real estate, only to be taxed again by the foreign country when the property is eventually sold. If the applicable treaty does not clearly resolve the conflict, the MAP may be necessary to eliminate or mitigate the double taxation.

If you believe you may need to invoke the MAP because of double taxation, it is important to consult with a knowledgeable Canadian tax lawyer. Our expert Canadian tax lawyers can assess your situation, identify potential issues, and guide you through the MAP application process to improve your chances of securing relief.

Frequently Asked Questions (FAQs)

How Does the Mutual Agreement Procedure Work?

The Mutual Agreement Procedure (MAP) begins with a taxpayer submitting a written request to the appropriate competent taxing authority. In Canada, this request must be filed with the Director of the Competent Authority Services Division (CASD), International and Large Business Directorate. The application should be supported with documentation such as tax assessments, proof of payments, and any relevant decisions issued by the CRA or a foreign tax authority.

After a request is submitted, the CRA aims to review and conclude the case under the MAP within 24 months from the date it receives a complete application. That said, this timeframe is only a target and not a guarantee. In situations involving complex tax matters or negotiations among multiple competent authorities, the process may extend well beyond 24 months.

After discussions between the tax authorities conclude, the CRA or the foreign authority will present an offer to settle the dispute. Taxpayers are given a specific timeframe to review and decide whether to accept it. If they agree, the resolution is implemented accordingly. If they decline, they must instead pursue available domestic remedies to address the unresolved issues.

Can I Reject or Negotiate a MAP Offer from the CRA?

Canadian taxpayers have the right to reject an offer made under the Mutual Agreement Procedure. However, they cannot negotiate the terms of that offer, whether it is issued by the CRA or a foreign tax authority. This is because the negotiations occur strictly between the competent taxing authorities, generally without taxpayer involvement, meaning the taxpayer’s own position is not necessarily considered during the MAP process.

That said, taxpayers who decline a MAP offer are free to pursue domestic remedies instead. For instance, if a Canadian taxpayer disagrees with the outcome of the MAP, they may refuse the offer and file an objection to the CRA’s decision. Should that objection be denied, further recourse is available by appealing to the Tax Court of Canada or applying for judicial review with the Federal Court of Canada, depending on the nature of the tax dispute.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.

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