July 28, 2023
New Canadian Mandatory Disclosure Rules
On June 22, 2023, Bill C-47 Budget Implementation Act, 2023, No. 1 received royal assent. Bill C-47 includes legislation to implement the new mandatory disclosure rules initially proposed in the 2021 federal budget.
The revised mandatory disclosure rules will require taxpayers and advisors to disclose additional information to the Canada Revenue Agency (the “CRA”) under the following regimes
- “Reportable Transactions”, triggered by certain hallmarks of aggressive tax planning;
- “Notifiable Transactions”, triggered by transactions specifically designated by the CRA; and
- “Uncertain Tax Treatments”, triggered by certain financial statement reporting obligations and other conditions.
The reportable and notifiable transaction regimes require information reporting by taxpayers and any relevant advisors or promoters within 90 days of the effective date of the relevant transactions.
The uncertain tax treatments regime reporting deadline is the same as for the corporate tax return (i.e., six months after year-end).
Taxpayers and advisors should prepare to comply with these rules which we discuss in greater detail below.
The new legislation expands the reportable transaction regime and applies an extended definition of the term “avoidance transaction”. An avoidance transaction is now broadly defined to include a transaction where it may be reasonable to consider that one of the main purposes of the transaction (or a series of transactions) is to obtain a tax benefit, and any one of the following “hallmarks” of aggressive tax planning is present:
- Contingent Fee – fee is based on the amount of tax benefit, contingent on obtaining a tax benefit or number of people participating in the transaction.
- Confidential Protection – applies where an advisor obtains anything that would prohibit the disclosure of the avoidance transaction’s relevant details to any person or the CRA. Protection of trade secrets that do not relate to tax does not give rise to a reporting requirement.
- Contractual Protection – includes insurance for failure to achieve a tax benefit or reimbursement of expense arising from a tax benefit dispute.
Few relieving measures with respect to reportable transactions clarified by CRA:
- Fees for preparing Scientific Research and Experimental Development (SRED) claims will not result in the fee hallmark being met, even if the fee is contingent on the success of the SRED claim.
- Tax advisory fees that are not based specifically on time spent will not result in the fee hallmark being met as long the fees are not based on:
- the value of tax benefits resulting from the transaction or series of transactions, or
- the number of persons who entered the transaction or a series of transactions or who have been provided access to the advice or opinion.
- Standard representations and warranties protection in the context of an arm’s length sale of business, will not result in the “contractual protection” hallmark being met.
Who Is Required to Disclose?
The Income Tax Act (Canada)[i] outlines the persons required to disclose a reportable transaction as:
- Every person who receives a tax benefit or is expected to receive a tax benefit based on person’s tax treatment of the reportable transaction or any series of transactions.
- Every person who has entered into an avoidance transaction that is a reportable transaction for the benefit of another person who receives a tax benefit.
- Every advisor or promoter who is entitled to a fee that would meet either the contingent fee or contractual protection hallmark.
- Every person not dealing at arm’s length with an advisor or promoter who is entitled to a contingent hallmark fee.
An “Advisor”[ii] includes each person who, directly or indirectly, provides contractual protection in respect of the transaction or provides assistance or advice with respect to creating, developing, planning, organizing or implementing the transaction or series, to another person (including any person who enters into the transaction for the benefit of another person).
Generally, the definition of advisor includes lawyers and accountants but is broad enough to extend to other professional service providers as well. However, the legislation for the mandatory disclosure rules does clarify that a reporting obligation does not apply to a person solely because they provided clerical services or secretarial services with respect to the planning.
Reportable Transactions Disclosure Due Date
An information return must be filed in form RC312 with CRA within 90 days of the earlier of:
- The day the person becomes contractually obligated to enter the transaction; and
- The day the person enters the transaction.
Every person who fails to file an information return in respect of a reportable transaction is liable to a penalty.
Corporations with carrying value of assets greater than $50M for its last taxation year that ends prior to the filing due date, the penalty is $2,000 per week the return is late to a maximum of the greater of:
- $100,000 and
- 25% of the amount of the tax benefit
In all other cases, $500 per week the return is late to a maximum of the greater of:
- $25,000 and
- 25% of the amount of the tax benefit
Advisor and Promoter Penalties
Penalties for failure to file an information return also extend to advisors and promoters. The penalty is the total of:
- Fees charged in respect of the reportable transaction, plus
- $10,000, plus
- $1,000 per day that the person fails to report the reportable transaction up to a maximum of $100,000
There is a due diligence defence against penalties.
The mandatory disclosure rules provides [iii] that penalties will not apply if the person has exercised the degree of care, diligence, and skill to prevent the failure to file that a reasonably prudent person would have exercised in comparable circumstances.
The new legislation[iv] also introduced a requirement to disclose tax avoidance transactions and transactions identified as transactions of interest by the CRA. The Minister has the authority to designate transactions (or a series of transactions) as “notifiable transactions” which need to be disclosed. These include transactions or series of transactions that are the same, or “substantially similar” to designated transactions. “Substantially similar” has been defined broadly and is to be interpreted in favour of disclosure.
On April 4, 2022, the CRA released a Backgrounder[v] with examples of notifiable transactions which includes the following:
- Manipulating CCPC status to avoid anti-deferral rules applicable to investment income
- Straddle loss creation transactions using a partnership
- Avoidance of deemed disposal of trust property
- Manipulation of bankrupt status to reduce a forgiven amount in respect of a commercial obligation
- Reliance on purpose tests in section 256.1 to avoid a deemed acquisition of control
- Back-to-back arrangements
Who Is Required to Disclose?
The Income Tax Act (Canada)[vi] outlines who must file and the notifiable transactions rules are similar to reportable transactions discussed above. However, the notifiable transaction rules have a broader reach and application. Unlike reportable transactions, notifiable transactions do not require the advisor to earn a fee which raises questions and uncertainty as to who must disclose.
Similar to reportable transactions, a reporting obligation does not apply to a person solely because they provided clerical services or secretarial services with respect to the planning. Furthermore, information protected by solicitor-client privilege is also not subject to these mandatory disclosure rules.
The legislation also contains an additional relieving provision which alleviates reporting obligations for employees and partners provided the employer or partnership files a disclosure. As a result of the relieving provision, employees and partners are deemed to have filed. However, this provision only applies if the employer or partnership files. As a result, there is still potential exposure for these individuals.
Disclosure Due Date and Prescribed Form
The due date for the information return is the same as reportable transactions and must be filed within 90 days by way of submission of Form RC312 to CRA.
Penalties – Taxpayers and Advisors
The penalties for failure to disclose are the same as for reportable transactions.
Reportable Uncertain Tax Treatment
The new mandatory disclosure rules legislation also introduces a requirement to disclose “uncertain tax treatments”. The uncertain tax treatment regime will require a corporate taxpayer that meets all the following conditions to annually report particular uncertain tax treatments:
- The corporation is required to file a Canadian income tax return, and has at least $50 million in assets at the end of the relevant taxation year;
- The corporation, or a group of which the corporation is a member, has audited financial statements prepared in accordance with International Financial Reporting Standards or other country‑specific generally accepted accounting principles relevant for corporations that are listed on a stock exchange outside Canada; and
- There is an uncertain tax treatment related to the corporation’s Canadian income tax that is reflected in the audited financial statements of the corporation or of a group of which it is a member.
An uncertain tax treatment is generally understood to mean a tax position for which a “more likely than not” threshold of comfort has not been attained.
Disclosure Date and Form
Reporting of reportable uncertain tax treatments for a taxation year would be made in Form RC3133 which is due at the same time as the reporting corporation’s Canadian income tax return.
Penalties for late‑filing an uncertain tax treatments information return are $2,000 per week per unreported item, up to a maximum of $100,000 per item.
Extension of Assessment Limitation Period
Failure to report under the Reportable Transaction, Notifiable Transaction and Uncertain Tax Treatment Regimes extends the reassessment period for any transaction, until three or four years after all of the applicable reporting requirements for the respective regimes have been met.
For reportable and notifiable transactions a non-filing by an advisor or promotor in respect of a reportable or notifiable transaction could impact the taxpayer’s tax position.
Still Have Questions About the CRA Mandatory Disclosure Rules?
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NOTE: Tax laws are complex and are subject to frequent change. The contents of this article are not intended to represent legal or tax advice. Please consult your tax adviser before employing any strategies discussed within this article.
[i] Subsection 237.3(2)
[ii] As defined in subsection 237.3(1)
[iii] Subsection 237.3(11)
[iv] Bill C-47
[v] Department of Finance, “Income Tax Mandatory Disclosure Rules Consultation: Sample Notifiable Transactions” (February 4, 2022) at www.canada.ca/en/department-finance.html.
[vi] Subsection 237.4(4)