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Guide to Canada’s mandatory disclosure rules

Feb 1, 2024 9 MIN READ
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Skyscraper
Authors
Matias Milet

Partner, Tax, Toronto

Jack Silverson

Partner, Tax, Toronto

Patrick Marley

Partner, Tax, Toronto

Introduction

Canada’s mandatory disclosure rules were significantly expanded in 2023. Three separate regimes comprise the rules: reportable transactions, notifiable transactions and reportable uncertain tax treatments (RUTT). Read below for a brief overview of each, as well as related procedural and penalty rules. For full details of each regime, please see our full overview [PDF], which includes flowcharts and accompanying explanations that outline the steps in determining whether reporting is required under each of the mandatory disclosure rules.

Reportable transactions

What is a reportable transaction?

A transaction is a “reportable transaction” if it both

  1. is an “avoidance transaction” (meaning one of the main purposes of entering into the transaction, or of a series of transactions of which the transaction is a part, is to obtain a tax benefit)
  2. bears one or more of three hallmarks

Hallmarks are generic features that the government believes often accompany aggressive tax planning. There are three such hallmarks. 

  1. Contingent fee — A promoter or tax advisor is entitled to contingent fees in respect of the transaction or series of transactions based on the tax benefits obtained under the transaction or the number of taxpayers who participate in or receive advice about the transaction or series. Click here for more details about the contingent fee hallmark  ←
    • Certain fees that might otherwise satisfy this hallmark are excluded by the legislation or the CRA guidance document on the mandatory disclosure rules (the CRA Guidance):
      1. preparing scientific research and experimental development (SR&ED) claims
      2. “value billing” and tax litigation contingent fees by advisors
      3. standard fees by financial institutions (a) for establishing and administering financial accounts and instruments, where a discount is provided to a client based on the number of their financial accounts or (b) structured as a per-transaction charge for each trade in the context of a year-end tax-loss selling program
  2. Confidential protection — This hallmark will be met if there is a prohibition against the “tax treatment” of the avoidance transaction or series, and the person(s) protected by such prohibition is an advisor or promoter.
  3. Contractual protection — The taxpayer or certain other persons obtain “contractual protection” in respect of the transaction, meaning insurance, an indemnity or other protection against a failure to achieve the intended tax benefit or against having to bear the cost of certain amounts incurred in the course of a dispute in respect of a tax benefit from the transaction or series. Click here for more details about the contractual protection hallmark  ←
    • Certain forms of contractual protection that might otherwise satisfy this hallmark are excluded by the legislation or the CRA Guidance, including
      1. legal protection that is (a) integral to a contract for the sale or transfer of a business between persons acting at arm’s length, (b) intended to ensure that the purchase price accounts for pre-closing liabilities of the purchased business and (c) obtained primarily for purposes other than achieving achieve a tax benefit.
        1. This exclusion is intended to apply to standard representations, warranties and guarantees between arm’s length vendors and purchasers, as well as customary representation and warranty insurance, obtained in the ordinary commercial context of mergers and acquisitions.
        2. It is not intended to apply to other forms of insurance or protections acquired to cover identified tax risks, such as tax liability insurance policies in relation to avoidance transactions.
        3. The CRA Guidance provides further details regarding the application of this exclusion to specific types of protection, including in connection with pre-closing reorganizations.
      2. other circumstances set out in the Guidance, including
        1. standard commercial indemnity provisions in standard client agreements or documents that do not target any specific identified tax benefit or tax treatment
        2. protection provided in a normal commercial or investment context in which arm’s length parties act prudently, knowledgeably and willingly where the protection does not extend to a tax treatment in respect of an avoidance transaction

Reporting obligations

If a transaction is a reportable transaction, it must be reported to the CRA, along with any other transactions in the same series of transactions, within 90 days of the earlier of

  1. the day the person enters into the transaction
  2. the day the person becomes contractually obligated to enter into the transaction

Reportable transactions must be reported by all of the following:

  1. a person receiving (or expecting to receive) a tax benefit from the reportable transaction
  2. a person entering into the reportable transaction for the benefit of someone receiving a tax benefit
  3. advisors and promoters, as defined, who receive certain types of fees in connection with reportable transactions
  4. a person who does not deal at arm’s length with a promoter or advisor and who is entitled to receive certain types of fees in connection with reportable transactions

Persons that provide only clerical or secretarial services with respect to a reportable transaction do not have a reporting obligation.

The legislation specifically provides that information need not be disclosed (whether by a lawyer or non-lawyer) where it is reasonable to believe that it is subject to solicitor-client privilege.

The reportable transaction rules apply to transactions entered into after June 22, 2023. The CRA Guidance states that the amended rules can apply to transactions that were agreed to before this date but only entered into afterwards, as well as to series of transactions that “straddle” this date (triggered by the first reportable transaction that occurs after royal assent).


Notifiable transactions

What is a notifiable transaction?

Transactions that appear on a list published by CRA, along with any other transactions that are “substantially similar” to those listed, are “notifiable transactions” and must be disclosed by taxpayers, advisers, promoters and certain other persons. The intention is that the list will contain transactions that the CRA found to be abusive and transactions the CRA wants to better understand to determine whether they are abusive. The listed transactions are found on the CRA’s Notifiable transactions designated by the Minister of National Revenue web page.

There are currently five designated transactions and series of transactions:

  1. straddle loss creation transactions using a partnership
  2. avoidance of deemed disposition of trust property
  3. manipulation of bankrupt status to reduce a forgiven amount in respect of a commercial obligation
  4. reliance on purpose tests in section 256.1 to avoid a deemed acquisition of control
  5. back-to-back arrangements relating to the thin capitalization and withholding tax rules

This list may be modified from time to time.

For a more detailed description of each notifiable transaction, please see our full overview [PDF].

A transaction is “substantially similar” to a listed transaction if it (i) is expected to produce the same or similar tax consequences as a listed transaction and (ii) is either factually similar to or based on the same or a similar tax strategy as a listed transaction.

Reporting obligations

Similar to reportable transactions, notifiable transactions must be disclosed to CRA within 90 days of the earlier of (i) 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 (ii) the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) enters into the transaction.

Notifiable transactions must be disclosed by all of the following:

  1. a person receiving (or expecting to receive) a tax benefit from the notifiable transaction
  2. a person entering into a notifiable transaction for the benefit of someone receiving a tax benefit
  3. advisors and promoters, as defined, in respect of the notifiable transaction
  4. a person who does not deal at arm’s length with a promoter or advisor and who is entitled to receive a fee in respect of the notifiable transaction

A due diligence defense is available to persons in the first two categories (generally, participants in the transaction) if they 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. This standard generally requires the person to have taken active steps to ensure compliance (for example, by asking their advisors about reporting requirements that may result from a transaction).

If an advisor or promoter, or a party not dealing at arm’s length with them, does not know and should not reasonably be expected to know that the transaction was a notifiable transaction, they are not required to disclose the transaction.

Persons that provide only clerical or secretarial services with respect to a notifiable transaction do not have a disclosure obligation.

Where an employer or a partnership files a required information return with respect to a notifiable transaction, each employee of the employer or partner of the partnership, as the case may be, is deemed to have made that filing.

Similar to the reportable transaction rules, the legislation specifically provides that information need not be disclosed (whether by a lawyer or non-lawyer) where it is reasonable to believe that it is subject to solicitor-client privilege.

No disclosure of a notifiable transaction is required before the date that the transaction (or, if applicable, a substantially similar transaction) is designated by the Minister (November 1, 2023 for the current five transactions and series). The Guidance states that where a series of transactions includes transactions occurring both before and on or after the effective date of when a notifiable transaction was designated, the reporting requirement is triggered with the first transaction in the series entered into after the designation date.


Reportable uncertain tax treatments

Corporate taxpayers must disclose their “reportable uncertain tax treatments” to the CRA, if

  • they have (or are a member of a consolidated group that has) audited financial statements prepared in accordance with International Financial Reporting Standards (IFRS) or, for corporations listed on a non-Canadian stock exchange, country-specific generally accepted accounting principles (GAAP) (e.g., U.S. GAAP)
  • the carrying value of the corporation’s assets is at least $50 million at the end of the taxation year
  • the corporation is required to file a Canadian income tax return for the year (i.e., it is a Canadian resident or a non-resident with taxable income earned in Canada)

A “reportable uncertain tax treatment” is a treatment in respect of a transaction, or series of transactions, that the corporation uses or plans to use in an income tax return or information return, in respect of which uncertainty is reflected in the audited financial statements of the corporation (or its consolidated group) for the year. Corporations are already required under IFRS and certain local country GAAP to identify uncertain tax treatments for financial statement purposes. In addition, the uncertainty in question must relate to Canadian federal income tax.

The reporting of uncertain tax positions is due at the same time as the corporation’s Canadian income tax return.


Extension of reassessment period and penalties

The normal reassessment period (which generally determines how long a particular taxation year of a taxpayer may be subject to reassessment by the CRA) does not commence in respect of a particular reportable transaction, notifiable transaction or RUTT until the taxpayer has disclosed it.

Taxpayers who enter into reportable or notifiable transactions and fail to report or disclose as required may be subject to penalties of up to the greater of

  1. $25,000 ($100,000 for corporations with assets of total carrying value of $50 million or more)
  2. 25% of the tax benefit

Promoters or advisors who fail to disclose reportable or notifiable transactions may be subject to penalties equal to the total of

  1. 100% of the fees charged to a person for whom a tax benefit results
  2. $10,000
  3. $1,000 for each day during which the failure to report continues, up to a maximum of $100,000

Failure to report a RUTT can result in a taxpayer penalty of $2,000 per week, up to a maximum of $100,000.

The RUTT rules apply to taxation years that begin after 2022, except that the penalty provision only applies to taxation years that begin after the amending bill received royal assent on June 22, 2023.

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Mandatory disclosure rules

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