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In Budget 2010, the Government announced that it would consult on a proposal under which certain tax avoidance transactions would be required to be reported to the Canada Revenue Agency. Today’s release provides details of the proposals for public consultation, and is seeking views of stakeholders.

These proposals seek to address concerns about the impact of aggressive tax avoidance transactions on the fairness of the income tax system. Canada is not the only jurisdiction that has acted to address the impact of aggressive tax planning. Notably, the United Kingdom, the United States and the province of Québec have introduced reporting regimes that identify aggressive tax planning by reference to “hallmarks” of such tax planning, to assist their respective tax administrations in identifying potentially abusive transactions and their participants. In general terms, the particular hallmarks reflect certain circumstances that commonly exist in the context of tax avoidance transactions. The presence of these hallmarks often indicates a greater likelihood that the underlying transactions are ones that could be challenged under the existing provisions of the tax law.

Budget 2010 therefore proposed consultations on a reporting regime for Canada. These proposals, as modified to take into account the public consultations, would apply to avoidance transactions entered into after 2010, as well as avoidance transactions that are part of a series of transactions commenced before 2011 and completed after 2010.

description of the proposals

Terms used in this description are defined below. Generally, under these proposals:

  • A transaction entered into by a taxpayer that is an avoidance transaction – as currently defined under the Income Tax Act – and which bears at least two of three hallmarks (described below) would be a “reportable transaction” in respect of which the taxpayer would be required to report prescribed information to the Canada Revenue Agency. Tax advisors and promoters may also be subject to the reporting requirements.
  • Persons subject to the reporting requirements may be liable to a penalty for failure to disclose a reportable transaction.
  • Upon discovery of a reportable transaction that has not been reported when required, the Canada Revenue Agency would be empowered to deny the tax benefit resulting from the transaction. If the taxpayer still wants to claim the tax benefit, the taxpayer would be required to file with the Canada Revenue Agency the information that should have been reported as well as to pay a late-filing penalty.

Reportable transaction

Under these proposals, a reportable transaction would be a transaction entered into by or for the benefit of a taxpayer that is classified within the existing definition of an “avoidance transaction” and that bears at least two of the following three hallmarks:

  1. A promoter or tax advisor in respect of the transaction is entitled to fees that are to any extent
    • attributable to the amount of the tax benefit from the transaction; 
    • contingent upon the obtaining of a tax benefit from the transaction; or
    • attributable to the number of taxpayers who participate in the transaction or who have been provided access to advice given by the promoter or advisor regarding the tax consequences from the transaction.
  2. A promoter or tax advisor in respect of the transaction requires “confidential protection” with respect to the transaction.
  3. The taxpayer or the person who entered into the transaction for the benefit of the taxpayer obtains “contractual protection” in respect of the transaction (otherwise than as a result of a fee described in the first hallmark).

A reportable transaction would include all the transactions in a series of transactions if at least one of the transactions in that series is an avoidance transaction. Reporting would be required for the taxation year in which a tax benefit arises.

If a reportable transaction is also a tax shelter or a flow-through share arrangement, only the reporting requirement for tax shelters or flow-through shares would apply.

persons subject to the reporting requirements

Under these proposals, an information return would be required to be filed with the Canada Revenue Agency by a person who seeks to obtain a tax benefit from a reportable transaction. This reporting requirement would also apply to any person who enters into such a transaction for the benefit of a taxpayer, such as where the result of a series of transactions undertaken by a corporation is that a tax benefit will accrue to a current or future shareholder of the corporation.

If one or more promoters or tax advisors are entitled to fees as described in the hallmarks with respect to that transaction, each such promoter or tax advisor would also have to file an information return with the Canada Revenue Agency.

If more than one person is required to file an information return in respect of a reportable transaction, the filing of a complete disclosure by one of the parties will satisfy the obligation of each party.

Form and content of information return

The information return with respect to a reportable transaction would be required to be filed in prescribed form on or before the taxpayer’s filing-due date for the taxation year in which the tax benefit arose. Where the taxpayer who sought to obtain the tax benefit does not have a filing-due date, the prescribed form would be required to be filed before June 30 of the calendar year following the calendar year in which the tax benefit arose.

The Canada Revenue Agency will publish guidance in respect of the manner in which a transaction is to be reported and the information that will be required to be reported.

Disclosure of a reportable transaction would have no bearing on whether the benefit is allowed under the law; rather it would simply assist the Canada Revenue Agency in identifying the transaction and the taxpayer who seeks to obtain a tax benefit from the transaction. In this regard, disclosure of a reportable transaction would not be considered in any way as an admission that the General Anti-Avoidance Rule (GAAR) applies to the transaction, or that the transaction is an avoidance transaction for the purpose of the GAAR. Furthermore, the fact that reporting of a particular transaction may not be required under these proposed rules should not be taken to suggest that the GAAR does not apply to the transaction.

Consequences for failure to report

Suspension of the tax benefit

Any tax benefit sought to be obtained by a taxpayer from a reportable transaction would not be available until the transaction is reported and, if applicable, the penalty for failure to disclose the transaction is paid.

Penalty for failure to report

If an information return in respect of a reportable transaction is not filed as and when required, each person who is required to file would be liable to pay a penalty, notwithstanding any agreement between the parties as to who is to file the return. In such circumstances, the penalty payable by any taxpayer who sought to obtain a tax benefit from the reportable transaction would be the total of all amounts each of which is a fee in respect of the transaction, described in a hallmark, to which a promoter or tax advisor is or would be entitled to receive. All other persons who entered into the transaction for the benefit of the taxpayer would be jointly and severally liable with the taxpayer to pay that penalty. Each promoter or tax advisor in respect of the reportable transaction would be jointly and severally liable with the taxpayer, and with all the other persons that entered into the transaction for the benefit of the taxpayer, to pay the portion of the penalty that would be equal to all the fees to which that promoter or tax advisor is or would be entitled to receive and that are included in computing that penalty.

Due diligence

Any person required to file an information return in respect of a reportable transaction would not be liable for a penalty for a failure to file that return as and when required if the person has exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances.

Definitions

The following are general descriptions of definitions that would apply for the purpose of these proposals.

Avoidance Transaction

The existing definition of an “avoidance transaction” for the purposes of the General Anti-Avoidance Rule (GAAR) in the Income Tax Act would apply. Therefore, an avoidance transaction would mean any transaction

  • that, but for the GAAR, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
  • that is part of a series of transactions that, but for the GAAR, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

Confidential Protection

A “confidential protection” with respect to a transaction would mean any limitation on disclosure to any other person, including the Canada Revenue Agency, that is placed by a promoter or tax advisor on the taxpayer, or on a person who entered into the transaction for the benefit of the taxpayer, in respect of the details or structure of the avoidance transaction that give rise to any tax benefit. This would not extend to a requirement that the advisor’s professional liability exists only towards the taxpayer in the capacity of client and according to which a third party may not, for its own purposes, rely on the opinion given by the advisor to the client. 

Contractual protection

A “contractual protection” with respect to a transaction would mean any form of insurance (other than standard professional liability insurance), indemnity or compensation that

  • protects against a failure of the transaction to result in any portion of the tax benefit being sought from the transaction; 
  • pays for or reimburses any expenses to be incurred in respect of a tax benefit arising from a transaction; or
  • is intended to guarantee a return of, or in respect of, the cost of any property acquired by the taxpayer in the course of the transaction.

Fee

A “fee” would mean any consideration that is, or could be, received or receivable by a promoter or tax advisor in respect of a transaction for

  • advice with respect to that transaction;
  • implementing the transaction;
  • preparing the documents supporting the transaction, including tax returns or any information returns to be filed under the Income Tax Act; or
  • a contractual protection.

Fee attributable to a tax benefit

A fee would be attributable to a tax benefit if the fee is based, in whole or in part, on the amount of a tax benefit sought to be obtained from a transaction by a taxpayer.

Fee that is to any extent contingent upon the obtaining of a tax benefit

A fee of a promoter or tax advisor that is to any extent contingent upon the obtaining of a tax benefit would include a fee that is refundable based upon the obtaining of the tax benefit, in whole or in part, in any manner whatever.

Person

A “person” would include a partnership.

Promoter

A “promoter” would be a person who

  • engages in an activity that is the promoting or selling (whether as principal or agent and whether directly or indirectly) of an arrangement, plan or scheme (an “arrangement”) where it can reasonably be considered that the arrangement includes or relates to an avoidance transaction; or
  • accepts (whether as principal or agent and whether directly or indirectly) consideration in respect of the promotion or sale of an arrangement where it can reasonably be considered that the arrangement includes or relates to an avoidance transaction.

More than one person may be a promoter in respect of the same avoidance transaction.

Tax Advisor

A “tax advisor” would mean a person who, directly or indirectly, provides

  • any aid, assistance or advice with respect to organizing or implementing an avoidance transaction entered into by or for the benefit of a taxpayer; or
  • any contractual protection in respect of an avoidance transaction. 

A person who provides such aid, assistance or advice to another tax advisor or promoter in respect of an avoidance transaction would also be considered a tax advisor in respect of the transaction.

More than one person may be a tax advisor in respect of the same avoidance transaction.

Tax Benefit

The existing definition of “tax benefit” for the purposes of the General Anti-Avoidance Rule in the Income Tax Act would apply for the purpose of these proposals.

Application date

These proposals, as modified to take into account the public consultations, would apply to avoidance transactions entered into after 2010, as well as avoidance transactions that are part of a series of transactions that commenced before 2011 and was completed after 2010.