On June 22, 2023, Bill C-47, An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023, received royal assent. The bill introduces new rules that (i) significantly broaden the circumstances in which a taxpayer, and their advisors, must report certain transactions to the Canada Revenue Agency (the “CRA”) and (ii) significantly increase penalties on parties that fail to report such transactions. These rules are applicable to transactions entered into after June 22, 2023. This bulletin provides a brief summary of these new rules and the applicable penalties.[1]
Reportable Transactions
Bill C-47 amends the existing reportable transaction rules; significantly expanding their scope.
In general, under the amended rules, each of the following persons must file an information return in respect of a reportable transaction: (i) a person for whom a tax benefit results (or is expected to result) from the reportable transaction; (ii) a person who has entered into, for the benefit of a person described in (i), the reportable transaction; and (iii) an advisor or promoter in respect of the reportable transaction that is entitled to a “contingency fee” (see a description of a contingency fee below).[2] An advisor includes any person who has provided assistance or advice with respect to a transaction.[3] A promoter includes a person who is promoting or selling a plan, scheme, or arrangement in respect of a transaction.[4]
A “reportable transaction” is an avoidance transaction entered into by, or on behalf of, a person that has one of three hallmarks (see below; prior to the amendments a transaction would only constitute a reportable transaction if it satisfied two of three hallmarks). An avoidance transaction includes a transaction if it is reasonable to consider that one of the main purposes of the transaction, or a series of which the transaction is part, is to obtain a tax benefit; e.g. a reduction, avoidance or deferral of tax.[5] The three hallmarks are as follows:
- Contingency Fee – An advisor or promoter has an entitlement to a fee that is (i) based on the amount of the tax benefit that results from a transaction, (ii) contingent upon the obtaining of a tax benefit from the transaction (or refundable where the transaction fails to obtain a tax benefit), or (iii) attributable to the number of persons participating in the transaction or a similar transaction (or attributable to the number of persons provided access to advice in respect of the tax consequences of the transaction or a similar transaction).
The CRA has provided a list of fees that it typically would not consider to be ”contingency fees” for purposes of these rules. These fees include : (i) a fee charged by a financial institution in respect of certain investment products and financial accounts (e.g. a fee charged for the establishment and ongoing administration of a RRSP); (ii) a fee for claiming SR&ED tax credits; (iii) a fee for the preparation of an annual income tax return that results in a taxpayer obtaining a refund of tax or personal tax credits; (iv) a fee based on the number of preparations and filings of income tax elections in respect of a transaction or series; (v) a fee based solely on the value of a service provided in respect of a transaction or series (and determined without reference to the tax results of the transaction or series); and (vi) a contingent litigation fee in respect of an appeal of a completed transaction or series. [6] - Confidential Protection – An advisor or promoter obtains “confidential protection” (e.g. anything prohibiting the disclosure of the details or structure of a transaction) that provides for confidentiality in respect of the tax treatment of a transaction from: (i) in the case of an advisor, a person to whom the advisor has provided assistance or advice in respect of the transaction; and (ii) in the case of a promoter, from a person to whom an arrangement, plan, or scheme has been sold (among other persons). The CRA has clarified that a protection of trade secrets, unrelated to tax, would not result in a reporting requirement.
- Contractual Protection – The taxpayer, a person who entered into the transaction on behalf of the taxpayer, or an advisor or promoter obtained “contractual protection” in respect of the transaction. Contractual protection includes any form of insurance or other protection (e.g. an indemnity, compensation, or a guarantee) that (i) protects a person against the failure of the transaction to obtain a tax benefit or (ii) reimburses a person for any fees, expenses, taxes, interest, penalties, or similar amounts incurred in the course of a dispute relating to a tax benefit realized from the transaction. However, contractual protection does not include standard professional liability insurance or certain insurance/protection/indemnification integral to an agreement between arm’s length parties for the sale of a business.
The CRA has provided a list of items that it typically would not consider to be ”contractual protection” for purposes of these rules. These items include: (i) normal professional liability insurance of a tax practitioner; (ii) standard representations, warranties, and guarantees between a vendor and purchaser in the context of a merger and acquisition transaction; (iii) certain insurance integral to an agreement between arm’s length parties for the sale of a business (as noted above); (iv) standard price adjustment clauses; (v) an advance income tax ruling; (vi) a contingent litigation fee arrangement in respect of an appeal of a completed transaction or series; or (vii) an indemnity under a RRSP plan document (provided by a bank) pursuant to which a client must indmenify the trustee of the RRSP in the event that the RRSP becomes subject to tax. [7]
The CRA has clarified that a transaction will not constitute a reportable transaction to the extent that it does not have any of the three hallmarks outlined above; even if the transaction results in a tax benefit. This may include estate freezes, debt restructurings, loss consolidation arrangements, shareholder loan repayments, purification transactions, capital gain exemption claims, divisive reorganizations, and foreign exchange swaps. [8]
Notifiable Transactions
Bill C-47 introduced new rules for notifiable transactions. These rules are distinct, and apply separately from, the rules for reportable transactions outlined above.
Each of the following persons must file an information return in respect of a notifiable transaction: (i) a person for whom a tax benefit results (or is expected to result) from the notifiable transaction; (ii) a person who has entered into, for the benefit of a person described in (i), the notifiable transaction; and (iii) an advisor or promoter in respect of the notifiable transaction (regardless of whether they are entitled to a contingency fee).
A “notifiable transaction” includes (i) any transaction which the CRA designates as being a notifiable transaction and (ii) a transaction which is the same as, or substantially similar to, a transactions described in (i). In 2022, the CRA released a sample list of notifiable transactions. This list includes transactions relating to the manipulation of CCPC status, straddle loss transactions using partnerships, and transactions which provide for the avoidance of the 21-year deemed disposition rule for trusts (among others). However, it is unclear as to when the CRA will release an official list of notifiable transactions.
Penalties
If a taxpayer fails to file an information return in respect of a reportable transaction or notifiable transaction prior to or on the prescribed date (typically 90 days after the date on which the taxpayer entered the transaction; although, it may be earlier), the taxpayer will be liable for a penalty equal to: (i) if the taxpayer is a large corporation (i.e. a corporation with assets in excess of $50,000,000 based on their carrying value), $2,000 multiplied by the number of weeks during which the taxpayer fails to report the transaction, up to the greater of $100,000 and 25% of the amount of the tax benefit sought; and (ii) if the taxpayer is not a large corporation, $500 multiplied by the number of weeks during which the taxpayer fails to report transaction, up to the greater of $25,000 and 25% of the amount of the tax benefit sought.
If an advisor or promoter fails to file an information return in respect of a reportable transaction or notifiable transaction prior to or on the prescribed date (as discussed above), the advisor or promoter will be liable for a penalty equal to the total of: (i) the amount of the fees charged by the advisor or promoter in respect of the reportable transaction or notifiable transaction, as applicable; (ii) $10,000; and (iii) $1,000 multiplied by the number of days during which the advisor or promoter fails to report the transaction, up to $100,000.
The new rules provide for “due diligence” defences. In the case of a reportable transaction, if a person has exercised the degree of care, diligence and skill to prevent a failure to file a return in respect of a reportable transaction that a reasonably prudent person would have exercised in comparable circumstances, the person will not be liable for a penalty for failing to file such return. In the case of a notifiable transaction, if a taxpayer, who has entered a notifiable transaction (or realized a tax benefit from the notifiable transaction), has 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, the taxpayer will not have an obligation to file a return in respect of the transaction. This same defence does not extend to advisors or promoters in respect of notifiable transaction; however, the rules do provide for a separate (reasonable) “knowledge” exception for advisors and promoters in respect of a notifiable transaction.
Additional Comments
The new reportable and notifiable transactions rules impose significant responsibilities on taxpayers and their advisors. In particular, an advisor will need to complete proper diligence in respect of a transaction to determine whether: (i) the transaction constitutes a reportable transaction or notifiable transaction; and (ii) the new rules impose any reporting obligations on the advisor or any client to whom they are providing advice in respect of the transaction. An “advisor” may include both a tax professional and non-tax professional (i.e. a person not providing any form of tax advice in respect of the transaction).
While the rules are broad in scope, taxpayers (and their advisors) may be able to obtain some relief under the due diligence exceptions (as described above). In addition, the new rules acknowledge that a person will not have an obligation to disclose information under the new rules to the extent that (i) the person only provides clerical or secretarial services in respect of a transaction; or (ii) such information is subject to solicitor-client privilege. This latter exception is a particularly crucial exception for lawyers as the obligation to disclose information to the CRA may conflict with their professional obligations to a client. If you have any questions relating to the new reportable and notifiable transaction rules, please contact Ronald Nobrega at rnobrega@fasken.com or Devon LaBuik at dlabuik@fasken.com
[1] Bill C-47 also contained new rules in respect of uncertain tax treatments. However, discussion of these rules is beyond the scope of this bulletin.
[2] A contingency fee also includes a fee in respect of contractual protection.
[3] An advisor also includes any person who provides contractual protection in respect of a transaction or series.
[4] A taxpayer may also have an obligation to report a reportable transaction to the extent that the taxpayer has entered a series of transactions that includes the reportable transaction (and the taxpayer realizes a tax benefit from such series of transactions).
[5] The rules contain exceptions for transactions that involve the acquisition of a tax shelter or the issuance of a flow-through share for which an information return has already been filed with the CRA.
[6] See: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/mandatory-disclosure-rules-overview/guidance-document.html.
[7] Ibid.
[8] Ibid.
