Tax law changes expand mandatory disclosure rules for business transactions

With recent tax law changes the federal government has broadly expanded the mandatory disclosure rules for business transactions.

Bill C-47 received Royal Assent on June 22. The amendments swell the number of reportable transactions under s. 237.3 of the Income Tax Act. The changes introduce a new category: notifiable transactions. According to the Department of Justice’s Charter statement on Bill C-47, notifiable transactions will include abusive transactions and those that “may be abusive” but on which Canada Revenue Agency needs more information to make a call. The legislation will also extend the normal reassessment period, boost and broaden fines for non-compliance with reporting rules, and will establish rules for reporting “uncertain tax positions.”

The amendments are going to add compliance burden and cost to “many ordinary taxpayers,” say Dentons Canada LLP tax lawyers Mark Jadd and Brian Kearl.

“Right now, it's very burdensome,” says Jadd, a senior partner in the firm’s Toronto office and chair of the national tax group. “It's going to be very expensive for clients, and very difficult for law firms and accounting firms when we're advising clients.”

Notifiable transactions are “basically the CRA’s greatest hits,” he says. They are six different specific types of transactions that the CRA wants to audit, which are not necessarily problematic but could be.

Reportable transactions are not specific types of transactions, but they have specific features. One feature is that someone is deriving a fee based on the amount of tax savings resulting from the deal or how many people are participating in the plan. Another feature is when a party has some type of indemnity insurance protection that promises compensation if no tax benefit results from the transaction. Either of these features – plus a few others – combined with the marks of an avoidance transaction, triggers an obligation to report.

The requirement that every adviser who worked on a notifiable transaction file a report can raise compliance difficulties, says Jadd. Notifiable transactions include an accountant to structure it and could include a banking lawyer who would assist with the loan, which can be required in some of these transactions. Because they’re involved in the implementation of the transaction, either of these advisers must file a report. But the client may not tell the banking lawyer, who is not an expert on tax planning, the purpose of the loan and the failure to file a report carries a maximum penalty of 110 percent of their fees plus $100,000.

“There’s egregious tax planning,” he says. “I don't think anybody is really in favour of egregious tax planning. But there's the everyday stuff, and the system that they've now implemented is so broad ranging, so open to interpretation as to what's caught and what's not caught, that it's sweeping up ordinary, everyday tax plans.”

The new rules have met criticism that they go further than what the Organisation for Economic Co-operation and Development (OECD) recommended, says Kearl, a Calgary-based partner in Dentons’ tax group. The OECD recommendations contemplated a de minimis test, which the rules do not have; that one person involved in the reportable transaction could report for everyone involved; and that only the tax lawyer would be considered an “adviser” for reporting purposes.

“Particularly with respect to the reportable transaction rules, they're so broad, the bar is so low, and they capture so many ordinary transactions, they’re just going to add an extra cost to people as they prepare their tax returns every year,” he says.