July 24, 2023
Canada's new mandatory disclosure rules now in effect
New rules to enhance Canada's mandatory disclosure requirements included in Bill C-47, Budget Implementation Act, 2023, No. 1, were enacted on 22 June 2023.1 The new rules, which include an expansion of the existing reportable transaction rules and new reporting requirements for notifiable transactions and reportable uncertain tax treatments, are intended to provide the Canada Revenue Agency (CRA) with earlier access to relevant information for certain transactions and tax planning arrangements.
The new mandatory disclosure rules for reportable transactions and notifiable transactions, including the imposition of penalties, apply for transactions entered into after 22 June 2023. In the case of reportable uncertain tax treatments, the new mandatory disclosure rules apply for tax years beginning after 2022, although penalties will not apply to tax years that begin before 22 June 2023.
This Tax Alert briefly summarizes the new mandatory disclosure measures included in Bill C-47 and provides an overview of the guidance the CRA has released to date regarding application of the new rules.
The 2021 federal budget outlined broad proposals to enable the CRA to have better visibility of transactions or tax-reduction planning that it would consider aggressive in nature. These proposals are based on the principles set out in the Organisation for Economic Co-operation and Development (OECD) project to identify base erosion and profit shifting (BEPS), Action 12: Final Report.
The proposals focused on:
Following the release of draft legislative proposals and a consultation period that ended in September 2021, the Department of Finance released amended draft legislative proposals on 4 February 2022.
To elicit further feedback provided by stakeholders, the Department of Finance released for public comment revised draft legislative proposals on 9 August 2022 and indicated that the application date for the measures would be deferred by one year.
On 20 April 2023, legislative proposals, as modified since their last release on 9 August 2022, were included in Bill C-47.
Bill C-47 amends the existing rules for reportable transactions to make the rules more effective and consistent with international leading practices.
First, the definition of "avoidance transaction" for purposes of these rules is amended so that a transaction is considered an avoidance transaction if it can reasonably be concluded that one of the main purposes of entering into the transaction (or series that includes the transaction) was to obtain a tax benefit. Under the previous rules, the term "avoidance transaction" had the same meaning as defined under the general anti-avoidance rule (GAAR) in section 245 of the Act. As such, the amendment results in a lower threshold for an avoidance transaction under the reportable transaction rules than under the current GAAR regime, which uses a primary-purpose test.2
Second, under the new rules, only one of the three generic hallmarks for reportable transactions — contingent fee arrangement, confidential protection and contractual protection — needs to be met for a transaction to be reportable; the previous rules required that two conditions be met.
Third, the deadlines for filing an information return disclosing the reportable transaction to the CRA are accelerated and more complex. More specifically, Bill C-47 requires a taxpayer who enters into a reportable transaction, or another person who enters into a reportable transaction to obtain a tax benefit for the taxpayer, to report the transaction within 90 days of the earlier of:
Reporting within the same time limits is also required by a promoter or advisor of an arrangement (or other person who does not deal at arm's length with a promoter or advisor and who receives a fee with respect to the arrangement) that would be a reportable transaction if it were implemented. An exception to this rule is provided for advisors to the extent of solicitor-client (i.e., attorney-client) privilege.
Lastly, Bill C-47 includes various modifications to the amended reportable transaction rules since their last release on 9 August 2022. Most notably, clarifying amendments have been provided on the contractual protection hallmark to exclude, among other items, certain commercially standard value-protection provisions (e.g., indemnities for standard representations and warranties), and the definition of "reportable transaction" is modified to specifically exclude from the contingent fee arrangement hallmark fees received for the preparation of scientific research and experimental development (SR&ED) claims. These hallmarks are discussed in greater detail in the following section.
Guidance from the CRA
The following information outlined on the CRA's guidance webpage is of particular interest in applying the new rules with respect to reportable transactions:
Notifiable transactions are a new category of transactions introduced in new section 237.4 of the Act. These rules are intended to provide the CRA with pertinent information relating to tax avoidance transactions and other transactions of interest on a timely basis.
Bill C-47 provides the Minister of National Revenue (with the concurrence of the Minister of Finance) the authority to designate "notifiable transactions," which will include types of transactions that the CRA has found to be abusive, as well as transactions of interest (i.e., where more information is required to determine if a transaction is abusive).
Broadly speaking, taxpayers who enter into a notifiable transaction (or other persons who enter into notifiable transactions for the benefit of a taxpayer), as well as promoters or advisors of an arrangement (or other non-arm's-length persons who receive a fee with respect to the arrangement) that would be a notifiable transaction if implemented, will be required to report the transaction (or series of transactions) within the same time limits listed above for reportable transactions. An exception is provided for advisors to the extent of solicitor-client privilege.
A transaction will be a notifiable transaction if it is the same as, or substantially similar to, a transaction designated by the Minister, or a transaction in a series of transactions that is the same as, or substantially similar to, a designated series of transactions. For these purposes, any transaction or series of transactions that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or a similar tax strategy will be considered substantially similar. Furthermore, the legislation specifies that the phrase "substantially similar" is to be interpreted broadly in favor of disclosure.
The CRA's upcoming list of designated transactions or designated series of transactions will be made available through its website. In the meantime, see the samples of notifiable transactions that were provided for consultation on 4 February 2022, in a Department of Finance backgrounder.
Bill C-47 also includes reporting exceptions and clarifications, including a "reasonable expectation to know" rule, which generally provides that only advisors/promoters who know, or are reasonably expected to know, of their reporting obligations are required to file the required information with respect to a notifiable transaction. A due diligence defense for taxpayers is also available — i.e., there is an exemption from disclosure if the person has exercised the degree of care, diligence and skill in determining whether the transaction is a notifiable transaction that a reasonably prudent person would have exercised in comparable circumstances.
Employees and partners are deemed to have met their reporting requirements with respect to notifiable transactions when the employer or partnership has filed the required information return.
Guidance from the CRA
The CRA's overview webpage provides a summary of when you must disclose a notifiable transaction, as well as how to make the disclosure (i.e., through upcoming new Form RC312, Reportable Transaction and Notifiable Transaction Information Return) and by when, and the related penalties for nondisclosure or late filing.
It is also noted that the list of designated notifiable transactions will be linked to the webpage once designated.
Reportable uncertain tax treatments
New rules requiring larger corporations to report to the CRA all "reportable uncertain tax treatments" are introduced in new section 237.5 of the Act.
More specifically, Bill C-47 introduces a requirement for specified corporate taxpayers to report to the CRA particular uncertain tax treatments under the Act.
In general terms, 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 (in the relevant financial statements) about whether the tax treatment will be accepted as being in accordance with tax law.
Under the new rules, a corporation will generally be required to report an uncertain tax treatment if:
Prescribed information in respect of uncertain tax treatments (e.g., the amount of taxes at issue) will be required to be reported at the time a corporation's Canadian income tax return is due.
Guidance from the CRA
The overview webpage provides a summary of when you must disclose a reportable uncertain tax treatment, as well as how to make the disclosure (i.e., through new Form RC313, Reportable Uncertain Tax Treatments) and by when, and the related penalties for nondisclosure or late filing.
The following information outlined on the CRA's guidance webpage is of particular interest in applying the new rules:
Bill C-47 provides that if a taxpayer has a mandatory disclosure requirement in respect of a transaction relevant to the taxpayer's income tax return for a taxation year, the taxpayer's normal reassessment period will not commence for the transaction until the taxpayer has complied with the reporting requirement. If a Form RC312, Reportable Transaction and Notifiable Transaction Information Return, or Form RC313, Reportable Uncertain Tax Treatments, is not filed, an assessment or reassessment for the respective transaction(s) can be made any time up to four years after filing, or three years after filing for Canadian-controlled private corporations and individuals.
The links to Revised Form RC312 and Form RC313 have yet to be provided on the mandatory disclosure overview webpage.
As such, the tax year will not become statute-barred until all the requirements under the mandatory disclosure rules are satisfied.
Bill C-47 introduces various penalties for noncompliance with the mandatory disclosure requirements, and these penalties may be significant.
For reportable or notifiable transactions, a penalty of CA$500 per week, up to a maximum of the greater of CA$25,000 and 25% of the tax benefit, will apply for the failure to report a transaction by a taxpayer who enters into the transaction or who receives a tax benefit as a result of the transaction.
For corporations that have assets with a total carrying value of CA$50m or more, this penalty is increased to CA$2,000 per week, up to a maximum of the greater of CA$100,000 and 25% of the tax benefit.
For promoters or advisors of reportable or notifiable transactions (or other persons who do not deal at arm's length with promoters or advisors and who receive a fee in respect of the transaction), the penalty for each failure to report a transaction will be equal to the total of CA$10,000, 100% of the fees charged by the promoter or advisor (or other person), and CA$1,000 per day for each day the failure continues, up to a maximum of CA$100,000.
For corporations required to report uncertain tax treatments, the penalty for each failure to report a particular treatment will be CA$2,000 per week, up to a maximum of CA$100,000.
The penalties in relation to reportable transactions and reportable uncertain tax treatments are subject to a due diligence defense similar to that discussed above with respect to notifiable transaction reporting.
The new mandatory disclosure rules are complex and, although guidance is provided in the Department of Finance explanatory notes and on the CRA's webpages, there may be ambiguity in applying the rules in certain circumstances. In addition, complying with the 90-day reporting deadlines for reportable transactions and notifiable transactions may be challenging for taxpayers, promoters and advisors, especially if multiple disclosures are required and several parties are involved in the transaction or series of transactions.
While the CRA specifically notes on its webpage that its approach to the application of the mandatory disclosure rules will evolve over time based on its experience with specific factual situations, until further guidance is available, taxpayers, promoters and advisors should proceed with caution in assessing their reporting obligations to mitigate the risk for penalties and interest.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada)
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor
1 For more information on Bill C-47, see EY Global Tax Alert Canada enacts 2023 Budget implementation bill no.1, dated 28 June 2023.
2 As announced in the 2023 federal budget, the government intends to make various changes to the GAAR regime, including lowering the avoidance transaction standard. To learn more, see EY Global Tax Alert Canada Federal budget 2023/24: A made-in-Canada plan, dated 4 April 2023.