On July 6, 2023, the Canada Revenue Agency (CRA) posted on its website new administrative guidance (CRA Guidance) on the application and administration of the revised mandatory disclosure rules in the Income Tax Act (ITA) that were included in the Budget Implementation Act (Bill C-47) released on April 17, 2023. For our Bulletin discussing the revised mandatory disclosure rules, please see Blakes Bulletin: Mandatory Disclosure Update: Department of Finance Introduces Revised Rules in the House of Commons. Bill C-47 received Royal Assent on June 22, 2023.
The CRA Guidance was contemplated in the explanatory notes (Explanatory Notes) that were released with Bill C-47. It was developed with input from the Department of Finance and various stakeholder groups, and it is expected that the CRA may update the guidance as they continue to consider submissions received. The CRA is also expected to release updated versions of the mandatory reporting forms in the near term, but the forms have not been published as of the date of this bulletin.
The CRA Guidance generally repeats and elaborates on many of the points already set out in the Explanatory Notes, offering further examples and a greater level of detail. However, it does not directly address many of the concerns expressed during the consultation process.
The CRA Guidance provides some additional explanations and examples of how the CRA intends to interpret and administer the reportable transaction rules. In particular:
1. The CRA Guidance states that while the amended mandatory disclosure rules only apply to transactions entered into after June 22, 2023, reporting will be required in respect of reportable transactions where the taxpayer contracted to enter into the relevant transactions on or before June 22, 2023 but the transactions were entered into after June 22, 2023. The CRA also states that the amended rules will apply in respect of a series of transactions that “straddles” June 22, 2023 (i.e., where some transactions in the series were entered into on or before June 22, 2023, and other transactions in the series were entered into after that date). This timing may raise some interesting questions relating to the identification of a “transaction,” and when that transaction has been “entered into.” The CRA Guidance does confirm that the reporting deadline for such “straddle” cases will be 90 days after the date on which the transaction or the relevant step in the series after June 22, 2023 occurs. This is an important confirmation that the CRA does not interpret the coming into force and reporting deadline provisions in Bill C-47 as having a retroactive effect, at least in this instance. The guidance also indicates that recurring tax benefits resulting from a transaction would only need to be reported once, provided there are no new transactions that have not already been reported.
2. The CRA Guidance confirms that tax-motivated transactions such as estate freezes, debt restructuring, loss consolidation transactions, shareholder loan repayments, purification transactions, capital gains exemptions claims, divisive reorganizations and foreign exchange swaps will not be subject to reporting under the reportable transaction rules unless one of the three hallmarks is present. (See our bulletin on the mandatory disclosure rule for a description of the three hallmarks.) It is unclear whether this statement is intended to suggest that the CRA considers that standard features of such transactions that might give rise to technical concerns that one or more hallmarks are present do not, in the CRA’s view, result in an obligation to report the transaction. However, if the amendments to the general anti-avoidance rule (GAAR) announced in the 2023 federal budget are enacted as proposed, taxpayers may wish to consider voluntarily reporting certain tax-motivated transactions to avoid penalties and/or extended reassessment periods. (For a discussion of the proposed GAAR amendments, see our Blakes Bulletin: 2023 Federal Budget: Selected Tax Measures.)
3. The CRA Guidance includes an expanded list (as compared to the Explanatory Notes) of fees that would not generally be considered to trigger the contingent fee hallmark under the reportable transaction rules, including the following:
Fees charged by a financial institution for the establishment and ongoing administration of a financial account such as an RRSP or a segregated fund, including where the fee is determined in relation to the amount of the investment.
Lending fees in connection with a loan to a family trust to fund a subscription for shares as part of an estate freeze, and annual trustee and bank fees payable by the family trust.
Lending fees and interest in connection with a borrowing by a Canadian corporation in order to fund the repayment of a shareholder loan.
- Fees that are contingent on the number of tax returns or elections prepared by an advisor or promoter, or that are contingent on the number of taxpayers who participate in or are given access to tax advice in respect of certain tax-deferred transactions (such as tax-deferred share exchanges under section 85.1 of the ITA, section 85 rollovers or tax-deferred amalgamation or winding-up transactions), provided such fees are only contingent on the number of returns or participants and not on the actual amount (or availability generally) of the relevant tax benefit.
These examples suggest that the linkage between the fee and the tax benefit in question must be, in the CRA’s view, reasonably strong in order to trigger the contingent fee hallmark. The CRA Guidance also states that generally no reporting obligation would arise for a financial institution that collects a standard fee for the provision of an ordinary financial account that is broadly offered in a normal commercial or investment context in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly.
4. The CRA Guidance also expands upon the Explanatory Notes in respect of the contractual protection hallmark by including examples generally not caught by the rules, such as the following:
Standard representations, warranties and guarantees between vendors and purchasers in M&A transactions that are generally given to protect purchasers from pre-closing liabilities, including standard representations and warranty insurance.
Standard price adjustment clauses.
Standard commercial indemnities for RRSP trustees in the event that the RRSP becomes subject to tax.
It is notable that the CRA Guidance indicates that the final example above would not trigger the contractual protection hallmark on the basis that such an indemnity is a form of protection that applies in the normal commercial or investment context. This is a sensible result and is consistent with the Explanatory Notes, though is unclear whether this position is intended to leave open the possibility that other standard commercial protections also should not trigger reporting, even if not fitting squarely with the text of any specific carve-out.
5. The CRA Guidance further provides the following specific examples of protections that would generally be eligible for the M&A-specific carve-out from the definition of contractual protection:
Tax indemnities related to existing pre-closing tax issues or the amount of existing tax attributes (such as losses or deductible expenditure pools).
Specific contractual covenants and related indemnities in respect of acquisitions by public companies intended to give the buyer protection in respect of the availability of the paragraph 88(1)(d) basis “bump” (though it is unclear whether this example intentionally limits the exclusion from contractual protection to the public company purchaser context and, if so, why such limitation is appropriate from a policy perspective).
Tax insurance related to the purchase of taxable Canadian property or property that may be taxable Canadian property from a non-resident vendor.
The CRA Guidance repeats the warning in the Explanatory Notes that the M&A exception would not apply to other insurance or protection obtained to cover specific identified tax risks, such as issue-specific tax insurance obtained in connection with avoidance transactions.
The CRA Guidance also confirms, for greater certainty, that partners and employees of a partnership or employer that has a reporting obligation would not themselves be required to report where the partnership or employer has itself reported. This confirmation is helpful given that the amended reportable transaction rules do not include an express statutory provision to this effect, as appears in the new notifiable transaction rules.
The CRA Guidance does not provide any meaningful insights into the notifiable transaction rules, though it appears to confirm the intention that notifiable transactions will be designated by the Minister through the CRA website. The CRA has yet to release a list of transactions that it intends to designate. (It is unclear whether the example transactions contemplated in the backgrounder released in February 2022 are still under consideration, though it should be noted that one of those examples has since been addressed by the 2022 Budget.)
Uncertain Tax Positions
The CRA Guidance provides a number of clarifications and details regarding the reporting of “reportable uncertain tax treatments” (RUTTs) under the new rules.
The CRA Guidance confirms that under the RUTT rules, reporting is required only for uncertain positions relating to tax payable under the ITA. This includes not just Part I tax but all other taxes under the ITA, such as withholding tax payable under Part XIII of the ITA. However, the CRA Guidance helpfully confirms that reporting would not be required for uncertain tax positions in respect of GST/HST, provincial taxes, or any non-Canadian taxes, alleviating a concern that had been identified with the wording of the legislation.
The CRA guidance also confirms that RUTT reporting must be done on an entity-by-entity, non-consolidated basis, even if the “relevant financial statements” reflecting the RUTT are consolidated group statements. Related to this, under the legislation, a corporation is required to report uncertain tax treatments for a taxation year only where it satisfies certain criteria, including that it has at least C$50-million in assets at the end of the financial year that coincides with the taxation year. The CRA Guidance confirms that the C$50-million threshold would apply to each individual corporation.
The CRA Guidance also states that corporations required to report uncertain tax treatments are expected to report their proportionate share of RUTTs of any partnership in which they hold an interest.
Finally, the CRA Guidance emphasizes that reporting is required even where the CRA already has full awareness of a RUTT. In particular, the CRA Guidance provides that:
reporting is required in a particular year if that year’s relevant financial statements reflect any RUTT, including ones that relate to prior years’ income, even if such amounts have been reported previously; and
reporting is required for matters already disclosed to the CRA pursuant to the reportable transaction or notifiable transaction regimes, through a notice of objection or an advance income tax ruling, or because the matter is in court proceedings.
However, the CRA Guidance does provide that the disclosure requirement can be satisfied in part by attaching the previously filed document, somewhat streamlining the reporting.
Penalties and Due Diligence Defences
The CRA Guidance indicates that any penalties to be imposed under the mandatory disclosure rules will be subject to approval and oversight by CRA headquarters, and will require a mandatory referral to headquarters in order to be assessed. This is an appropriate and reasonable approach. Hopefully, it will promote consistent application of the potentially severe penalties under the disclosure rules.
The CRA Guidance indicates that the due diligence defence will generally be interpreted in a manner consistent with existing jurisprudence on the due diligence defence for directors’ liability under the ITA. The guidance identifies the following general principles arising from such jurisprudence:
The relevant test is whether the person with the obligation to report exercised the degree of care, diligence and skill that would have been exercised by a reasonably prudent person in comparable circumstances.
The reference to a reasonably prudent person indicates an objective test, informed by the factual aspects and circumstances of the person who was subject to the reporting requirement rather than subjective intent.
Ultimately, whether the due diligence standard has been satisfied in any particular case will be based on the particular facts and circumstances.
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