In brief
Canada’s Federal Budget 2021 (“Budget 2021“) proposes to expand the disclosure rules for certain transactions, which is in line with the measures recommended in the OECD’s Base Erosion and Profit Shifting Project, Action 12: Final Report (BEPS Action 12 Report).
The proposed expansion of mandatory disclosure rules contemplates: (i) changes to the Income Tax Act’s (ITA) existing reportable transaction rules; (ii) a new requirement to report notifiable transactions; (iii) a new requirement for specified corporations to report uncertain tax treatments; and (iv) an extension of the reassessment period in respect of transactions that are subject to the new disclosure rules and addition of penalties for failure to comply.
Budget 2021 indicates that the amendments would apply to taxation years beginning after 2021 (for measures applied to taxation years) and transactions entered into on or after 1 January 2022 (for measures applied to transactions). However, the related penalties would not apply to transactions that occur before the date on which the enacting legislation receives Royal Assent.
Reportable transactions
Budget 2021 proposes to amend the existing reportable transaction rules under the ITA.
Currently, in order for a transaction to be reportable under these rules, the transaction must be an “avoidance transaction” (as defined by the general anti-avoidance rule) and bear at least two of the three generic hallmarks. In general, these three hallmarks are the following:
- A promoter or tax adviser in respect of the transaction is entitled to contingent fees based on the tax benefits obtained from the transaction or number of taxpayers that participate in the transaction.
- A promoter or tax adviser requires “confidential protection” with respect to the transaction.
- The taxpayer (or the person who entered into the transaction for the taxpayer’s benefit) obtains “contractual protection” in respect of the transaction, including insurance, indemnity or a guarantee against a failure to achieve the intended tax benefit.
A reportable transaction must be reported to the Canada Revenue Agency (CRA) on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction.
Budget 2021 proposes to amend these rules as follows:
- Only one generic hallmark needs be present in order for a transaction to be reportable.
- Expanding the definition of “avoidance transaction” to include a transaction where it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.
- A reportable transaction has to be reported to the CRA within 45 days of the earlier of the day that a taxpayer (or another person who entered into the transaction for the taxpayer’s benefit) (i) becomes contractually obligated to enter into the transaction or (ii) enters into the transaction.
- Reporting of a scheme that, if implemented, would be a reportable transaction be required by a promoter or adviser within the same time limits (with an exception to the extent that solicitor-client privilege applies).
The proposed penalty for a taxpayer’s failure to report is up to the greater of CAD 25,000 (or CAD 100,000 for a corporation with assets of total carrying value of CAD 50 million or more) and 25% of the tax benefit. The proposed penalty for a promoter’s or adviser’s failure to report is equal to the total of: (a) 100% of the fees charged to a person for whom a tax benefit results; (b) CAD 10,000; and (c) CAD 1,000 for each day during which the failure to report continues, up to a maximum of CAD 100,000.
Notifiable transactions
Budget 2021 proposes to introduce a new category of specific hallmarks known as “notifiable transactions.” The minister of national revenue, with the concurrence of the minister of finance, would have the authority to designate 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. The description of a notifiable transaction would set out the fact patterns or outcomes that constitute that transaction in sufficient detail and examples of notifiable transactions would be expected to be issued.
Similar to the reportable transaction measures, a taxpayer (or another person entering into the transaction for the taxpayer’s benefit) entering into a notifiable transaction (or a transaction or series of transactions that is substantially similar to a notifiable transaction) would be required to report the transaction to the CRA within 45 days of the earlier of the day the taxpayer or the other person (i) becomes contractually obligated to enter into the transaction or (ii) enters into the transaction.
A promoter or adviser of a scheme that, if implemented, would be a notifiable transaction (or a transaction or series of transactions that is substantially similar to a notifiable transaction) would also be required to report within the same time limits (with an exception to the extent that solicitor-client privilege applies).
The proposed penalty for a taxpayer’s failure to report is up to the greater of CAD 25,000 (or CAD 100,000 for a corporation with assets of total carrying value of CAD 50 million or more) and 25% of the tax benefit. The proposed penalty for a promoter’s or adviser’s failure to report is equal to the total of: (a) 100% of the fees charged to a person for whom a tax benefit results; (b) CAD 10,000; and (c) CAD 1,000 for each day during which the failure to report continues, up to a maximum of CAD 100,000.
Reporting uncertain tax treatments
Budget 2021 proposes a new requirement for specified corporations to report particular uncertain tax treatments to the CRA if the following conditions are met:
The corporation is required to file a Canadian income tax return.
The corporation has at least CAD 50 million in assets at the end of the year (based on carrying value).
The corporation, or a related corporation, has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies.
Uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected in those audited financial statements (i.e., it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment).
For each reportable uncertain tax treatment, the corporation would be required to provide prescribed information, such as the quantum of taxes at issue, a concise description of the relevant facts, the tax treatment taken (including the relevant ITA sections) and whether the uncertainty relates to a permanent or temporary difference in tax. The reporting of uncertain transactions is proposed to be due at the same time as the corporation’s Canadian income tax return is due.
The proposed penalty for failure to report each particular uncertain tax treatment is CAD 2,000 per week, up to a maximum of CAD 100,000.
Reassessment period
In support of the new mandatory disclosure rules, Budget 2021 proposes that the normal reassessment period would not commence in respect of the transaction until the taxpayer has complied with the relevant reporting requirement. In other words, if a taxpayer does not comply with a mandatory disclosure reporting requirement in respect of a transaction, a reassessment in respect of the transaction would not become statute-barred.
