Budget 2021: New Draft Proposals on Notifiable Transactions
To improve Canada’s mandatory disclosure rules, Budget 2021 announced a public consultation process on the proposals, including a new notifiable transaction reporting requirement. With the concurrence of the Minister of Finance, the Minister of National Revenue now has the power to designate a transaction or series of transactions as subject to disclosure by taxpayers, advisers, promoters and certain other persons. The proposals generally apply to taxation years and transactions occurring in taxation years that begin after 2021. These proposed amendments are intended to provide information to the Canada Revenue Agency (CRA) and would not change the tax treatment of a transaction.
A taxpayer who enters into a notifiable transaction or a transaction substantially similar to a notifiable transaction would be required to report the transaction in the prescribed form to the CRA within 45 days of the earliest of the following dates:
- The day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction; and
- The day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) enters into the transaction.
For these purposes, any transaction or series of transactions which are expected to give rise to the same or similar tax consequences and which are either factually similar or based on the same tax strategy or on a similar tax strategy, is considered substantially similar. This should be interpreted broadly in favor of disclosure.
The taxpayer, another person who enters into such a transaction for the purpose of providing a tax benefit to the taxpayer, a promoter or adviser who proposes a scheme that would be a reportable transaction (if implemented), as well as a person who does not deal at arm’s length with the promoter or adviser and who is entitled to receive fees in respect of the transaction would all be required to report the transaction.
Six categories of transactions to be notified
Notifiable transactions would mainly fall into six categories:
- Manipulation of Canadian-controlled private corporation (CCPC) status to avoid anti-deferral rules applicable to investment income;
- Operations to create overlapping losses using a partnership;
- Avoidance of deemed disposition of trust property;
- Manipulation of bankrupt status to reduce an amount discounted with respect to a commercial;
- Requirement to rely on purpose tests in loss limitation rules (ITA Section 256.1) to avoid a deemed takeover; Where
- Leveraged arrangements designed to circumvent thin capitalization rules and Part XIII withholding tax.
These reportable transaction disclosure rules are in addition to the existing transaction rules determined by Revenu Québec (RQ) in 2021. Two of its transactions overlap, namely the avoidance of the deemed disposition of trust property and the exchange tax attributes, which means that it will be necessary to make two declarations for these same transactions (that is to say one to RQ and one to CRA).
It will be important to stay on top of these new rules, as failure to report a reportable transaction could result in a penalty of $500 per week for each failure to report a reportable transaction, up to the greater of $25,000 and 25% tax benefit; or for corporations with assets having a total book value of $50 million or more, $2,000 per week, up to the greater of $100,000 and 25% of the tax benefit. In addition, the proposals provide that the normal reassessment period would not begin in respect of the transaction until the taxpayer has complied with the reporting requirement. Therefore, if a taxpayer fails to comply with a mandatory reporting requirement for a taxation year in respect of a transaction, a reassessment for the year in respect of the transaction would not become statute-barred. .