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. Please see our previous e-blast Mandatory Disclosure Rules for a discussion on the enhanced disclosure rules.
On July 6, 2023, the CRA published administrated guidance regarding their approach to the application of the mandatory disclosure rules. Given penalties for non-compliance are significant for both taxpayers and advisors, the CRA guidance is welcoming. We have summarized some key areas in this article. The CRA also released updated form RC312 for reporting reportable and notifiable transactions on July 24, 2023.
Reportable Transactions
For a transaction to be a reportable transaction, it must have at least one of the three legislated hallmarks (i.e. contingent fee, confidential protection and contractual protection) 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.
Contractual & Straddle Transactions
The amended reportable transaction rules apply for transactions entered into after June 22, 2023. However, the CRA has stated the rules are applicable to transactions that are contractually entered into before June 22, 2023, even if they are implemented after royal assent. The CRA example states if a person contracted to enter a reportable transaction on June 1, 2023, but did not enter the transaction until June 30, 2023, the reporting obligation will apply, and the 90-day reporting period begins on June 30,2023.
Furthermore, series of transactions that “straddle” royal assent date will also be subject to disclosure. For example, if some transactions in the series were entered into before June 22, 2023, and some post, the reporting obligation is triggered with the first transaction post royal assent.
No Hallmarks Exists
The CRA confirm in their guidance that disclosure under the reportable transaction regime is not required where none of the legislated hallmarks exist even if it is reasonably concluded that one of the main purposes of entering the transaction is to obtain a tax benefit. For instance, transactions such as estate freezes, debt restructuring, loss consolidation arrangements, shareholder loan repayments, purification transactions, claiming of the capital gain exemption, divisive reorganizations and foreign exchange swaps are examples provided in the guidance of transactions where disclosure is likely not required unless one of the three legislated hallmarks exists. Despite this, the CRA states that the proposed GAAR rules in budget 2023 will not apply if a reportable transaction is disclosed either voluntarily or if required by legislation.
Contingent fee arrangements
The guidance also contains a list of contingent fee activities that would generally not meet a legislative hallmark and likely not require disclosure:
- Fees for claiming scientific research and experimental development (SR&ED) tax credits.
- A fee for the preparation of an annual income tax return even if a tax refund or benefit credits are obtained.
- Contingent fees based on the number of tax returns or elections for a transaction or series of transactions (i.e., preparation of multiple T2057 election forms where the fees are only contingent on the number of returns/elections prepared and not based on obtaining a tax benefit from the capital gain deferral).
- Contingent fees based on the number of taxpayers that participate in or have been provided advice on the tax consequences of the transaction provided it is not based on obtaining a tax benefit (i.e.., section 85.1 and 85 rollovers in the context of a share for share exchange, windups, and amalgamations)
- Value billing by legal and accounting professionals where the fee is based on criteria other than the value of the tax benefit such as time spent by the professional, experience of the professional, degree of risk and responsibility, value of work to the client.
- Contingent litigation fee for an appeal of a tax assessment by a lawyer in respect of a tax benefit from a completed transaction or series of transactions. However, if the litigation arrangement is put in place prior to the completion of the transaction or series, a reporting obligation would arise for the litigator.
- Various fees earned by financial institutions. Please refer to the guidance for specific examples for financial institutions.
Confidential and Contractual Protection
The CRA has provided the following comments regarding the confidential and contractual protection hallmarks:
- Normal professional liability for a tax practitioner would not trigger a reporting requirement.
- Standard representations, warranties and guarantees between a vendor and purchaser including representations and warranties insurance obtained to protect a purchaser from pre-sale liabilities (including tax liabilities) would not give rise to a reporting obligation.
- A reporting obligation will not arise in respect of pre-tax liability indemnities, price adjustment clauses and contractual insurance protection between arm’s length parties for the sale of a business and the insurance is not obtained for the purposes of obtaining a tax benefit. Some examples include:
- Indemnities for pre-closing tax issues or existence of tax attributes (tax pools, CCA)
- Contractual protection obtained in respect of the calculation of safe income on hand would generally not be considered to trigger the contractual protection hallmark where the pre-closing planning involves the payment of inter-corporate dividends to extract safe income.
- Tax insurance obtained by a purchaser for non-resident withholding tax where there is no certificate of compliance on a sale by a non-resident of Canada.
Filing Requirements
The CRA confirms in the guidance that partners or employees of a partnership or employer are generally not required to make a disclosure provided the partnership or employer makes a disclosure. Also, a reporting obligation does not apply to a person solely because they provided clerical services or secretarial services with respect to the planning.
In situations where a favour advanced income tax ruling is issued and a reporting obligation exists, the reporting person should attach a copy of the ruling to the prescribed disclosure form.
Due Diligence Defense
There is a due diligence defense against penalties which 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. The CRA states in their guidance that the rules parallel the existing rules for due diligence defence for directors’ liability. Whether a person has exercised the degree of care, diligence and skill required to prevent the failure to file will be based on the facts and circumstances of each case.
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. A list has yet to be released by the Minister outlining which transactions are notifiable. However, some examples were provided in a Backgrounder issued by the CRA on April 4, 2022. We will update you as the CRA provides additional information.
With respect to the due diligence defense against penalties for unreported notifiable transactions, the CRA confirms that a person would generally meet their due diligence obligations by relying on advice received from their advisors. For instance, if a person is informed by their advisors that a filing obligation does not exist and they relied on that advice to not disclose a notifiable transaction, they would likely meet the due diligence defense.
Resources
Mandatory disclosure rules – Guidance
Income Tax Mandatory Disclosure Rules Consultation: Sample Notifiable Transactions
Mandatory Disclosure Rules – Publication
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.
