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 originally proposed in the 2021 federal budget. The upgraded mandatory disclosure rules will require taxpayers and advisors to disclose “reportable transactions” and “notifiable transactions” to the CRA. Penalties for non-compliance can be significant. Taxpayers and advisors should prepare to comply with these rules.
Reportable Transactions
The new legislation expands the reportable transaction rules and applies an extended definition of the term “avoidance transaction” to assess whether disclosure of a reportable transaction is required. An avoidance transaction is more broadly defined and includes 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” is present:
- Contingent Fee – fee is based on amount of tax benefit, contingent on obtaining a tax benefit or number of people participating in the transaction (excludes contingent fees related to SR&ED claims)
- 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.
- Contractual protection – includes insurance for failure to achieve a tax benefit or reimbursement of expense arising from a tax benefit dispute (excludes standard professional liability insurance and indemnity clauses in arm’s length purchases and sales).
Who is required to disclose?
Subsection 237.3(2) outlines the persons required to disclose a reportable transaction:
- 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 contingent fee or in respect of contractual protection.
- Every person not dealing at arm’s length with an advisor or promoter who is entitled to a contingent hallmark fee.
“Advisor” is broadly defined in subsection 237.3(1) and 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, these may include lawyers and accountants. However, the legislation 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.
Disclosure Due Date
An information return must be filed 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.
Note that subsection 237.3(3) clarifies only one information return is required in respect of a series of transactions. Filing by a person that reports each transaction in the series is deemed to satisfy the filing obligation under 237.3(2).
Taxpayer Penalties
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 defense against penalties. Subsection 237.3(11) provides 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.
Notifiable Transactions
Bill C-47 also introduced a requirement to disclose tax avoidance transactions and other transactions identified as transactions of interest by the CRA. The Minister has the authority to designate transactions and 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 transaction or designated series of transactions. “Substantially similar” is fairly broad and ensures the obligation to disclose isn’t avoided by making small variations in the facts, tax consequences or strategy.
On April 4, 2022, the CRA released a Backgrounder with examples of some transactions that may require disclosure as 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?
Subsection 237.4(4) outlines who must file and the rules are similar to reportable transactions in subsection 237.3(2) discussed above. However, the notifiable transaction rules have a broader reach and application. Unlike reportable transactions, notifiable transactions do not require the advisor 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 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
The due date for the information return is the same as reportable transactions and must be filed within 90 days.
Penalties – Taxpayers and Advisors
The penalties for failure to disclose are the same as for reportable transactions.
Resources
Budget Implementation Act, 2023, No. 1
Backgrounder – Income Tax Mandatory Disclosure Rules Consultation: Sample Notifiable Transactions
The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.
