Proposals on reporting of tax avoidance transactions released
Canadian Tax Alert, May 18, 2010
On May 7, 2010, the Minister of Finance released for public consultation proposals in respect of a reporting regime for certain tax avoidance transactions. The regime is proposed to be applicable to avoidance transactions, as defined, entered into after 2010, as well as those that are part of a series of transactions commenced before 2011 and completed after 2010.
Proposed reporting requirement
Under the proposals, an avoidance transaction that bears at least two of the three following hallmarks would be required to be reported by a taxpayer to the Canada Revenue Agency (CRA):
- the promoter or tax advisor is entitled to fees that are to any extent attributable to the amount of, or contingent on the obtaining of, a tax benefit, or fees that are 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;
- the promoter or tax advisor requires confidential protection with respect to the transaction;
- the taxpayer obtains contractual protection in respect of the transaction.
An avoidance transaction is quite broadly defined in the Income Tax Act. It includes any transaction (or series of transactions) that would result in a tax benefit (e.g., a reduction, avoidance or deferral of tax payable) unless undertaken for bona fide purposes other than to obtain the tax benefit.
The prescribed information return for reporting an avoidance transaction would be required to be filed on or before the taxpayer’s filing due date for the taxation year in which the tax benefit arises. Promoters and tax advisors are also required to file the prescribed information return. However, a complete disclosure by one of the parties will satisfy the obligations of each party.
Penalty for failure to report
Subject to a due diligence defence, a taxpayer would be liable for a penalty for failure to disclose a reportable transaction. The amount of the penalty is proposed to be the total of all fees which a promoter or tax advisor would be entitled to receive in respect of the transaction. A promoter or tax advisor would be proportionately jointly and severally liable with the taxpayer for the penalty.
Any tax benefit would be suspended until compliance with the reporting requirement, including payment of any penalty.
Proposed reporting requirement: A reasonable approach?
While many of the details are yet to be determined and greater study of the proposed regime and its implications is required, the proposals appear to be appropriately aimed at those transactions that the CRA considers to be the most offensive. We commend the Department of Finance for taking what seems to be an approach that balances the need for information by the CRA and the need for clarity and certainty in understanding by the taxpayer in complying with the reporting requirements. In the interest of efficiency, we would favour the provincial tax authorities, including Quebec, adopting the federal legislation rather than burdening taxpayers with separate and quite different filing requirements with the same objective.
However, before any conclusion can be reached on the reasonableness and the efficacy of the proposed regime, clarification and consideration of a number of issues would be required, including, for example:
- How broadly should confidential protection be interpreted?
- How broadly should the “to any extent” language be interpreted for purposes of the fee hallmark?
- What constitutes a series of transactions for these purposes?
- How broadly would contractual protection be interpreted?
- How would a due diligence defence be established?
- Might it be problematic to require that the taxpayers, promoters and advisors be jointly and severally liable for payment of the penalty?
In response to the invitation for comments on the new reporting requirement, Deloitte will be preparing a submission to the Department of Finance, in which we will raise these questions as well as others and make recommendations. If you have any comments or concerns about these proposals, please feel free to contact your Deloitte advisor.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.