Canada changes tax report rules

Canada changes tax report rules

Budget 2021 recognized that the lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main challenges faced by tax authorities worldwide.

Early access to this information allows tax authorities to respond quickly to tax risks through informed risk assessments, audits and changes to legislation.

To this effect, the Income Tax Act contains rules requiring that certain transactions be reported to the Canada Revenue Agency (CRA).

However, the CRA’s experience with these rules since their introduction indicates that they are not sufficiently robust to address these concerns.

To address these concerns, Budget 2021 announced a public consultation process on proposals to enhance Canada’s mandatory disclosure rules, including:

  • changes to existing reportable transaction rules;
  • a new requirement to report notifiable transactions;
  • a new requirement to report uncertain tax treatments; and
  • related penalties and an extension of the normal assessment period in certain circumstances, in the case of a failure to report.

The proposals apply to taxation years, and transactions occurring in taxation years, that begin after 2021.

(For purposes of this Backgrounder, a reference to a transaction includes a series of transactions that includes the transaction.) The proposals would not apply retroactively.

Stakeholders are invited to provide comments on the proposals set out below, as well as on draft legislative proposals and sample notifiable transactions released with this Backgrounder.

Comments should be directed to the Department of Finance by April 5, 2022. Please send your comments to Consultation-Legislation@fin.gc.ca.

Reportable Transactions

Canada’s existing mandatory disclosure rules in respect of reportable transactions apply when two of three generic hallmarks – contingent fee arrangements, and confidential or contractual protections – are present.

Under the proposals, only one generic hallmark would need to be present in order for a transaction to be reportable.

Further, a transaction would be reportable if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.

This provides a lower threshold for a reportable transaction than an avoidance transaction under the reportable transaction rules than under the General Anti-avoidance Rule, which uses a primary purpose test.

A taxpayer who enters into a reportable transaction, or another person who enters into the reportable transaction for the benefit of the taxpayer, would be required to report the transaction to the CRA within 45 days of the earlier of:

  • the day the taxpayer (or the person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction; and
  • the day the taxpayer (or the person who entered into the transaction for the benefit of the taxpayer) enters into the transaction.

The reporting obligations would continue to extend to a promoter or advisor, as well as persons who do not deal at arm’s length with the promoter or advisor and who are entitled to receive a fee with respect to the transaction, subject to the above-noted time limits.

These proposals would provide an exception to the reporting obligations for reportable transactions to the extent that solicitor-client privilege applies.

Notifiable Transactions

The proposals include new reporting obligations to provide the CRA with pertinent information relating to tax avoidance transactions and other transactions of interest on a timely basis.

Under the proposed approach, the Minister of National Revenue would have the authority to designate, with the concurrence of the Minister of Finance, a transaction as a notifiable transaction.

Notifiable transactions would include both transactions that the CRA has found to be abusive, and transactions identified as transactions of interest (i.e., where more information is required to determine if a transaction is abusive).

A taxpayer who enters into a notifiable transaction, or a transaction that is substantially similar to a notifiable transaction – or another person who enters into such a transaction in order to procure a tax benefit for the taxpayer – would be required to report the transaction in prescribed form to the CRA within 45 days of the earlier of:

  • the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction; and
  • the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) enters into the transaction.

A promoter or advisor who offers a scheme that, if implemented, would be a notifiable transaction, or a transaction that is substantially similar to a notifiable transaction – as well as a person who does not deal at arm’s length with the promoter or advisor and who is entitled to receive a fee in respect of the transaction – would be required to report within the same time limits. In addition, it is proposed that an exception to the reporting requirement be available for advisors to the extent that solicitor-client privilege applies.

These proposed amendments are intended to provide information to the CRA and would not change the tax treatment of a transaction.

It is expected that every information return required to be filed in respect of a notifiable transaction must:

  • describe the expected, claimed or purported tax treatment and all potential benefits expected to result from the transaction;
  • describe any contractual protection with respect to the transaction;
  • describe any contingent fees with respect to the transaction;
  • identify and describe the transaction in sufficient detail for the Minister to be able to understand the tax structure of the transaction;
  • identify the provisions – relied upon for the tax treatment – of any one or more of
    • the Act,
    • the Regulations,
    • the Income Tax Application Rules,
    • a tax treaty, or
    • any other enactment that is relevant in computing tax or any other amount payable or refundable to a person under the Act or in determining any amount that is relevant for the purposes of that computation;
  • identify, to the best knowledge of the person who is filing the return, every person required under subsection 237.4(4) of the Act to file an information return in respect of the transaction; and
  • provide such other information as is required by the information return.

Reportable Uncertain Tax Treatments

An uncertain tax treatment is a tax treatment used, or planned to be used, in an entity’s income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law.

These proposals would require specified corporate taxpayers to report particular uncertain tax treatments to the CRA. A reporting corporation would generally be required to report an uncertain tax treatment in respect of a taxation year where the following conditions are met:

  • The corporation is required to file a Canadian return of income for the taxation year. That is, the corporation is a resident of Canada or is a non-resident corporation with a taxable presence in Canada.
  • The corporation has at least $50 million in assets at the end of the financial year that coincides with the taxation year (or the last financial year that ends before the end of the taxation year). This threshold would apply to each individual corporation.
  • The corporation, or a consolidated group of which the corporation is a member, has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies (e.g., U.S. GAAP).
  • Uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected in those audited financial statements (e.g., the entity concluded it is not probable that the taxation authority will accept an uncertain tax treatment and thus, as described by the International Financial Reporting Standards Interpretations Committee, it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment).

Under these proposals, uncertain tax treatments would be required to be reported at the same time that the reporting corporation’s Canadian income tax return is due.

It is expected that the following information would be included in the prescribed information with respect to each reportable uncertain tax treatment:

  • the taxation year to which the reportable uncertain tax treatment relates;
  • a description of the relevant facts;
  • with respect to the transaction to which the reportable uncertain tax treatment relates, a description of
    • the provisions relied upon for determining the tax payable under the Act, or the refund of tax or other amount under the Act, of any one or more of
      • the Act,
      • the Regulations,
      • the Income Tax Application Rules,
      • a tax treaty, or
      • any other enactment that is relevant in computing tax or any other amount payable or refundable to a person under the Act or in determining any amount that is relevant for the purposes of that computation,
    • the differences between the tax payable under the Act, or the refund of tax or other amount under the Act, determined in accordance with
      • the relevant financial statements of the corporation for the taxation year, and
      • the tax treatment of the corporation, and
    • whether those differences
      • represent a permanent or temporary difference,
      • involve a determination of the value of any property, and
      • involve a computation of basis; and
  • such other information required by the Minister of National Revenue.

Reassessment Period

Where a taxpayer has a mandatory disclosure reporting requirement in respect of a transaction relevant to the taxpayer’s income tax return for a taxation year, the proposals provide that the normal reassessment period would not commence in respect of the transaction until the taxpayer has complied with the reporting requirement. As a result, if a taxpayer does not comply with a mandatory disclosure reporting requirement for a taxation year in respect of a transaction, a reassessment of the year in respect of the transaction would not become statute-barred.

Taxpayer Penalty

With respect to persons who enter into reportable or notifiable transactions, or for whom a tax benefit results from a reportable or notifiable transaction, these proposals include a penalty of

  • $500 per week for each failure to report a reportable transaction or a notifiable transaction, up to the greater of $25,000 and 25 per cent of the tax benefit; or
  • for corporations that have assets that have a total carrying value of $50 million or more, $2,000 per week, up to the greater of $100,000 and 25 per cent of the tax benefit.

Promoter Penalty

With respect to advisors and promoters of reportable or notifiable transactions, as well as with respect to persons who do not deal at arm’s length with them and who are entitled to a fee with respect to the transactions, a penalty would be imposed for each failure to report equal to the total of:

  • 100 per cent of the fees charged by that person to a person for whom a tax benefit results;
  • $10,000; and
  • $1,000 for each day during which the failure to report continues, up to a maximum of $100,000.

In order to avoid imposing two sets of penalties upon a person who both 1) enters into a reportable or notifiable transaction for the benefit of another person, and 2) is a person who does not deal at arm’s length with an advisor or promoter in respect of the reportable or notifiable transaction and is entitled to a fee, the proposals provide that such a person would be subject only to the greater of these two penalties.

Uncertain Tax Treatment Penalty

For corporations subject to the requirement to report uncertain tax treatments, the proposals include a penalty for failure to report each particular uncertain tax treatment equal to $2,000 per week, up to a maximum of $100,000.

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