New mandatory disclosure rules pose administrative challenge for some businesses
Draft legislation recently tabled by the Department of Finance could significantly complicate transaction reporting requirements for a selection of individuals and businesses across the country. Under newly proposed mandatory disclosure rules that were first introduced in the 2021 federal budget, certain taxpayers may need to report a comprehensive new set of reportable or notifiable transactions and “uncertain tax treatments” to the Canada Revenue Agency. Disclosure for reportable and notifiable transactions will have to be made within 45 days of the earlier of their implementation, or when a taxpayer has entered into an agreement to implement the transaction, whereas uncertain tax treatments will have to be disclosed with the tax filing of the reporting entity.
The CRA would have the authority to designate these notifiable transactions at its discretion. The Minister has confirmed that legislation would apply to relevant reportable and notifiable transactions once the legislation has received Royal Assent, however the legislation relating to uncertain tax treatments will be effective for all transactions occurring after 2022. Penalties will not apply until such time as the legislation receives Royal Assent.
How the new rules could impact your organization
The category of transaction that would fall under this new reporting regime would be so-called ‘avoidance transactions,’ or those that could potentially enable an individual or corporation to obtain a tax benefit (for the purposes of this legislation the definition of an avoidance transaction is broader than that found in the Income Tax Act’s General Anti-Avoidance Rule, or GARR). In essence, this would include any business structuring or tax-mitigation strategy that the CRA considers to be an abuse of the system.
Examples of a notifiable transaction could be those used to manipulate a company’s Canadian-controlled private corporation status (e.g., issuing majority voting shares of a corporation to a public corporation or non-resident individual at less than market value, or ‘continuing a corporation initially incorporated in Canada under the laws of a foreign jurisdiction’), transactions that could manipulate a corporation’s bankruptcy status or transactions designed to avoid the deemed disposal of trust property.
Please note that transactions are not limited to the above list. The legislation will impact transactions that are substantially similar, and that provide similar tax benefits, to any transaction that has been designated by the Minister. The Canada Revenue Agency will likely add more to the list as time goes on. Visit the CRA website for a complete list of designated notifiable transactions (LINK TO: https://www.canada.ca/en/department-finance/news/2022/02/income-tax-mandatory-disclosure-rules-consultationsample-notifiable-transactions.html).
The new mandatory disclosure rules are part of the government’s long-standing campaign to crack down on aggressive tax-planning. The draft legislation would lower the threshold to trigger the reporting requirement to one ‘hallmark’—from the current two to three—before clarifying information would need to be provided to CRA.
Reporting hallmarks are triggered in situations where:
- There are contingent fees
- Confidentiality protections exist in relation to an individual or organization’s tax planning strategies
- Contractual protections apply to non-arm’s-length commercial or investment transactions
In general, every party involved in the transaction will be required to file or disclose, with very few exceptions. They will be required to provide a range of details including:
- The potential tax benefits of the transaction
- Related contractual protections
- Related contingent fees
- A summary of the transaction and tax provisions used to determine tax owing
- Names of individuals required to file an information return as part of the transaction
- Any other information related to the transaction that the CRA requests
An uncertain tax treatment is initiated when a corporation—in its audited financial statements—indicates that it is unsure whether a tax treatment runs afoul of CRA rules. An information return must be filed in these circumstances, but only if the corporation:
- Is required to file a Canadian income tax return for the tax year in question
- Prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP) standards
- Has at least $50 million in assets at the end of its financial/tax year
Consequences of non-compliance
For individuals or organizations that fall under this reporting regime, failure to comply can be costly. Individuals that neglect to report a notable transaction could incur penalties of $500 per week per transaction, up to the greater of 25 per cent of the tax benefit, or $25,000. Corporations with $50 million or more in assets that fail to report a notable transaction could be fined $2,000 per week per transaction, up to $100,000 or 25 per cent of the tax benefit. Corporations that fail to flag uncertain tax treatments could be fined up to $2,000 per week for each failure, to a maximum of $100,000.
The new measures would also extend the re-assessment period for taxpayers with uncertain tax treatments and reportable transactions to the point that the taxpayer has complied with the mandatory disclosure rules. In other words, the CRA could extend their reassessment period indefinitely until these reporting requirements are satisfied.
Work with your Chartered Professional Accountant now to determine whether any transactions or tax treatments that could be implemented after 2022 will need to be reported. Once identified, take the time to address all compliance requirements and/or adjust your financial and tax strategies accordingly.
Armando Iannuzzi, Co-Managing Partner
Contact a member of our team to discuss the new mandatory disclosure rules and how they could impact your personal or corporate financial circumstances.