Legislation to implement significant enhancements to Canada’s mandatory disclosure rules received royal assent on June 22, 2023. Introduced in the 2021 federal budget and subject to extensive consultations, the new mandatory disclosure rules are intended to help provide the Canada Revenue Agency (CRA) with timely and sufficient access to information regarding aggressive tax planning arrangements to mitigate any potential risk to federal tax revenue. These rules are also aligned with measures recommended in the Base Erosion and Profit Shifting Project, Action 12: Final Report and rule changes implemented in other international jurisdictions with similar tax systems.
The enhanced mandatory disclosure rules include changes to the pre-existing reportable transaction requirements, new reporting obligations for notifiable transactions and uncertain tax treatments, and substantial penalties for non-compliance. The new rules are effective for reportable and notifiable transactions after June 22, 2023, as well as for tax years beginning after 2022 for reportable uncertain tax treatments.
Previously, a transaction was reportable if it constituted an “avoidance transaction” [within the meaning of the general anti-avoidance rule (GAAR) under subsection 245(2) of the Income Tax Act (ITA)] and it contained at least two of the following three “generic hallmarks”:
- A contingent fee arrangement for a promoter or tax advisor;
- Confidential protection for a promoter or tax advisor; and
- Contractual protection for a taxpayer.
Under the new mandatory disclosure rules, only one of the above hallmarks is required for an avoidance transaction to be reportable. In addition, a transaction is considered an avoidance transaction if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a “tax benefit” (as defined in the ITA)—a lower threshold for avoidance than the previously used “primary purpose” test applicable under GAAR. Further, a series of commercial steps could be construed as an avoidance transaction if any step in the series is motivated by a tax benefit.
A taxpayer entering into a reportable transaction (or another person entering into the transaction for the benefit of the taxpayer) is required to report the transaction to the CRA within 90 days from the earlier of the date the transaction is entered and the date the person becomes contractually obligated to enter the transaction. These reporting requirements extend to promoters and advisors (except to the extent solicitor-client privilege applies), as well as persons not dealing at arm’s length with them who are entitled to receive a fee in respect of the transaction.
The enhanced rules introduce reporting requirements for notifiable transactions. Similar in concept to “listed transactions” for income tax purposes in the United States, this new category encompasses transactions that the CRA has found to be abusive or identified as “transactions of interest” (i.e., where more information is required to make such a determination).
Notifiable transactions may be designated by the Minister of National Revenue. However, a transaction or series of transactions is also notifiable if it is the same as, or substantially similar to, a transaction or series that has been designated. Currently, the list of designated notifiable transactions includes those devised to:
- Manipulate Canadian-controlled private corporation status to avoid investment income anti-deferral rules;
- Create straddle losses using a partnership;
- Avoid the 21-year deemed disposition rule for trusts;
- Manipulate bankrupt status to reduce debt forgiveness;
- Avoid a deemed acquisition of control of a corporation in certain circumstances; and
- Avoid either thin capitalization rules or non-resident withholding tax through back-to-back lending arrangements.
On the same basis as reportable transactions, a taxpayer entering into a notifiable transaction (or another person entering into the transaction for the benefit of the taxpayer), as well as a promoter or advisor (except to the extent solicitor-client privilege applies), is required to report the transaction to the CRA within 90 days from the relevant contract date.
Uncertain Tax Treatments
Disclosure requirements for uncertain tax positions have also been established under new rules. For Canadian income tax purposes, a tax treatment is considered to be uncertain when there is doubt as to whether the filing position used (or planned to be used) will be accepted as in accordance with the legislation.
Corporations must report uncertain tax treatments only when all of the following conditions exist:
- 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 fiscal 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 listed on a stock exchange outside Canada; and
- There is an uncertain tax treatment related to the corporation’s Canadian income tax reflected in the audited financial statements.
Uncertain tax treatments must be reported on a prescribed information return that is due at the same time as the corporation’s Canadian income tax return (T2).
Substantial penalties have been put in place for non-disclosure or late filing of the prescribed information returns.
For corporations with assets of at least $50 million, a weekly penalty of $2,000 applies, up to a maximum of $100,000 (or 25% of the tax benefit sought, whichever is greater, for reportable and notifiable transactions) for each unreported item. Other taxpayers are subject to a weekly penalty of $500, up to the greater of $25,000 and 25% of the tax benefit sought, for each unreported reportable or notifiable transaction.
Advisors, promoters, and others not dealing at arm’s length and receiving fees in respect of reportable and notifiable transactions may be subject to a penalty of 100% of the fees charged, plus $10,000 and an additional amount of $1,000 per day to a maximum of $100,000.
Reassessment periods may be extended if disclosure has not been made in prescribed form.
The CRA has published an overview and specific guidance on the administration of the enhanced mandatory disclosure rules. However, the CRA has also advised that its approach in applying the new rules will evolve as it gains more experience with various tax planning schemes.
If you have any questions or concerns about the new mandatory disclosure rules and how they might impact your organization, please reach out to your Ryan representative, or contact Ryan TaxDirect® at 1.800.667.1600 or firstname.lastname@example.org.