DFK Tax Newsletter
Mandatory Disclosure Rules – Update on Reportable and Notifiable Transactions
On August 9th, 2022, the federal government released amended draft legislation for the mandatory disclosure rules that were originally released in draft on February 4th, 2022.
The February 4th, 2022, draft legislation made these rules effective for transactions that were entered into after 2021. This caused uncertainty for taxpayers and their advisors who were involved in transactions that were required to be reported, when the legislation was still in draft and there were many unanswered questions. The good news is that the August 9th proposal has pushed the effective date of the legislation to 2023. These new rules are now proposed to apply to transactions that are entered into after 2022.
The deadline to report these transactions is generally within 45 days of the taxpayer (person who is receiving the tax benefit) entering into the transaction. There are significant penalties for not reporting that will be applicable once the legislation has been passed. As a result, these rules should be reviewed in detail and procedures to identify potential reporting requirements should be implemented.
The revised draft legislation states that a transaction is a reportable transaction if it can reasonably be considered that one of the main purposes of entering into the transaction (or series of transactions) is to obtain a tax benefit and one of the following conditions exists:
- A promoter or advisor is entitled to a contingent fee based on the tax benefit obtained or number of taxpayers who participate in the transaction.
- A promoter or advisor obtains confidential protection relating to the tax treatment of the avoidance transaction.
- The taxpayer (or certain other persons) obtains contractual protection relating to the transaction (unless obtained in a normal arms-length commercial transaction).
The revised draft legislation narrows the scope of the confidential protection and contractual protection conditions. The confidential protection condition now must relate to the tax treatment of the avoidance transaction. The contractual protection now carves out normal commercial transactions provided it does not extend to the tax treatment of an avoidance transaction.
In the original legislation, if any person who is required to file a reportable transaction information return filed a “full and accurate” return, then everyone who was required to file a return was deemed to have filed a return. The revised draft legislation eliminates that deeming rule. It clarifies that there is no reporting requirement for a person who only provides clerical or secretarial services “with respect to the planning”. Everyone else involved in “creating, developing, planning, organizing or implementing the transaction”, including the taxpayer, advisors and promoters are required to disclose the reportable transaction and file an information return.
A notifiable transaction is any transaction that is designated by Canada Revenue Agency (CRA) with the agreement of the Department of Finance or a transaction that is substantially similar.
Finance provided the following samples of notifiable transactions when the draft legislation was released on February 4, 2022 (there has been no update since):
- Manipulating CCPC status to avoid anti-deferral rules applicable to investment income
- Straddle-loss creation transactions using a partnership
- Avoidance of deemed disposal of trust property
- Manipulation of bankrupt status to reduce a forgiven amount in respect of a commercial obligation
- Reliance on the purpose test in section 256.1 to avoid a deemed acquisition of control
- Back-to-back arrangements
Similar to the reportable transactions, the revised draft legislation clarifies that there is no reporting requirement for a person who only provides clerical or secretarial services “with respect to the planning”. The revised draft legislation also alleviates an employee’s or partner’s reporting requirement for a notifiable transaction if the employer or partnership has filed the required information return. Everyone else involved in “creating, developing, planning, organizing or implementing the notifiable transaction”, including the taxpayer, advisors and promoters are required to disclose the notifiable transaction on an information return.
In the February 4, 2022 release, Finance indicated the following information will be required to be disclosed on the information return:
- The expected, claimed or purported tax treatment and all potential benefits expected to result form the transaction
- Any related contractual protection
- Any related contingent fees
- A detailed description of the transaction sufficient to allow the CRA to understand the tax structure
- Any provisions relied upon for the tax treatment, including relevant tax rules, treaties or any other enactments used to compute or determine tax or other amount payable or refundable
- The identity of every person required to file an information return in respect of the transaction, to the best knowledge of the person filing the return
- Other information as required by the information return
Stay tuned to see if CRA will expand the list of notifiable transactions. Some have speculated that they could follow Quebec’s rules and add transactions that multiply the capital gains exemption to the list.