Tax Avoidance Transactions: New Federal Reporting Requirements

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In an attempt to follow the lead of other jurisdictions, including the United Kingdom, United States and the Province of Quebec, Canada's Minister of Finance announced new reporting requirements for certain tax avoidance transactions, as part of the March 4, 2010 Federal Budget.

While the proposed new reporting requirements released on May 7, 2010 for consultation may not be as stringent as those in the aforementioned jurisdictions, they will allow the Canada Revenue Agency (CRA) to identify aggressive tax planning in a timely manner. It is proposed that these measures would apply to avoidance transactions entered into after 2010, as well as those that are part of a series of transactions completed after 2010.

Reportable Transactions

In the context of the proposed reporting requirements, a reportable transaction is a tax "avoidance transaction" (as defined for the purposes of the General Anti-Avoidance Rule (GAAR)) that features two of the following three "hallmarks" that commonly exist when taxpayers enter into aggressive tax planning arrangements:

1. the promoter or tax advisor is paid a fee contingent on successfully obtaining a tax benefit;
2. the promoter or tax advisor requires confidential protection with respect to the transaction(s); and/or
3. contractual protection was provided to the taxpayer (i.e. indemnity or compensation in case of failure of the transaction(s)).

Filing Requirements

The taxpayer seeking the tax benefit must report the transaction on or before the taxpayer's filing due date for the taxation year in which the tax benefit arose (though the actual prescribed reporting form has yet to be developed). To the extent that a taxpayer fails to report the transaction, the tax benefit arising from the transaction will not be available until it is reported. Promoters and/or tax advisors who are entitled to fees, as described in the "hallmarks," are also required to file an information return in prescribed form. Parties who fail to disclose the required information could share joint and several liability for penalties, subject to specific liability caps and a due diligence defence. The CRA is expected to provide more guidance in the future with respect to the information to be reported on the prescribed form.

Taxpayer Uncertainty

The Department of Finance has indicated that a disclosure of a "reportable transaction" will not in any way be considered an admission that GAAR applies to the transaction(s). However, this is a controversial position since a reportable transaction must first be an "avoidance transaction" and that term is not used in the Income Tax Act other than as a defining transaction subject to GAAR. This would suggest that there is a greater likelihood that the underlying transaction(s) could be challenged under the existing GAAR provisions of the Income Tax Act. Accordingly, there is uncertainty as to how CRA auditors will use the disclosed information and whether their audit focus and risk assessments will change as a result of the proposed reporting requirements. Hopefully, after the Department of Finance completes its public consultations, the proposed legislation will be modified to address many of the concerns now being raised by tax practitioners.

In the meantime, please contact your Collins Barrow tax advisor for additional information and updates relating to the proposed reporting requirements for tax avoidance transactions.

Ross Cammalleri, CA, is a Tax Partner and Stephen Panno, CA, is a Tax Specialist in the Vaughan office of Collins Barrow.

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