Canada’s newly expanded mandatory disclosure rules (the “MDR”) are approaching their third anniversary. The enhanced MDR cover three types of reporting requirements:

  • reportable transactions capture avoidance transactions that meet one of three specific hallmarks;
  • notifiable transactions are specific types of transactions that are designated by the Minister of National Revenue along with any transaction that is the same as or substantially similar to a designated transaction; and
  • reportable uncertain tax treatments are uncertainties reflected in a corporation’s audited financial statements.

Of the three types of reporting covered by the MDR, reportable transactions have created the most anxiety for taxpayers and their advisors owing to potentially significant penalties and difficulties in determining whether a given transaction is in scope. However, as we explain below, a more nuanced understanding of their impact and scope is developing.

The following discussion first sets out what we view as a practical perspective to the MDR and then provides detail on the scope and exceptions from the reportable transaction regime.

A practical perspective to the MDR

Will the reportable transaction rules result in more CRA audits?

In Canada, audits are commonplace, with or without the MDR.

Although not demonstrable by empirical data, it is a commonly held belief that the CRA is a more aggressive auditor than the IRS. What this means is that, with or without the MDR, in contrast to the USA, audits are far more routine in Canada. This is especially true in the case of high value transactions.

As support for this theory, it is noteworthy to compare the relative size of the CRA and the IRS. The Canada Revenue Agency’s 2024-25 Departmental Results Report indicates that the number of CRA employees managing core responsibilities and internal services for 2024-2025 was 53,585 actual, full-time equivalent staff1. As of June 2025, the IRS is reported to have less than 76,000 employees2, yet the IRS is responsible for almost 10 times as many taxpayers.3

Do the reportable transaction rules apply to sales tax?

A significant carve out from the reportable transaction reporting requirement is the Canadian federal and provincial sales tax regimes. The reportable transaction rules are set out in section 237.3 of the Income Tax Act. Currently, there are no parallel provisions in the Excise Tax Act, or in provincial tax legislation (with the exception of Québec).

Is reporting required for M&A transactions?

The Income Tax Act provides that generally the reportable transactions regime does not apply in an M&A context. Generally under the reportable transaction rules, the reporting requirement can apply to a transaction (or series of transactions) covered by contractual protection.

Contractual protection is one of three hallmarks identifying reportable transactions. It is defined as:

  • any form of insurance or other protection (including an indemnity, compensation, or guarantee)
  • that protects a person (either immediately or in the future, either absolutely or contingently)
  • against a failure of a transaction (or series of transactions)
  • to achieve any tax benefit from the transaction (or series of transactions) or
  • that pays for or reimburses any amount incurred by a person in the course of a dispute in respect of a tax benefit from the transaction (or series of transactions).

It leads to reporting where the contractual protection is obtained by the person who entered into a relevant avoidance transaction or series, any person entering into the transaction or series for the benefit of that particular person, and persons dealing at non-arm’s length with both persons.

However, there is a statutory exception for contractual protection that is integral to an agreement between persons acting at arm’s length for the sale or transfer of all or part of a business (either directly or through the sale or transfer of one or more corporations, partnerships, or trusts) where it is reasonable to consider that the insurance or protection is intended to ensure the integrity of the purchase price and is obtained primarily for purposes other than to achieve a tax benefit.

CRA guidance has indicated that this exception covers a wide range of specific types of protection, including but not limited to

  • indemnities related to existing pre-closing tax issues and for damages arising from pre-closing transactions; and
  • indemnities for any taxes related to prior years, and tax insurance regarding the purchase of taxable Canadian property from a non-resident of Canada, for which applicable notification forms are completed and sent to the CRA.

How will artificial intelligence impact the MDR?

With CRA’s adoption of AI-driven tools, the difference between assessment and audit is shrinking. As AI capabilities develop, the CRA will be less dependent on taxpayer-provided information.

Indeed, predictive modelling may render traditional audit processes obsolete. The CRA has begun implementing artificial intelligence into its data analytics allowing it to identify anomalies or patterns in tax returns. As reported in the Government of Canada AI Register, currently, the CRA is using AI to scan its records to detect suspicious and potentially fraudulent transactions.4

In addition, CRA employees are using AI for the analysis of patterns, cluster analysis, prescriptive, predictive models for a variety of programs and evidence-based decisions. 5

The reportable transaction regime – scope and exceptions

What is a reportable transaction?

For a transaction to be a reportable transaction:

  • it must be an “avoidance transaction”; and
  • one of three hallmarks must be met.

In addition, if a reportable transaction is part of a series of transactions, each transaction in the series is itself a reportable transaction.

What is an avoidance transaction?

An avoidance transaction is a transaction for which it may reasonably be concluded that one of the main purposes for entering into the transaction was to obtain a tax benefit.

The definition of a “tax benefit” is broad and includes a reduction, avoidance or deferral of tax or other amounts payable, or an increase in a refund under the Income Tax Act.

As a result, it is not difficult for the tax avoidance threshold to be crossed. However, that is not the end of the analysis as to the applicability of the reportable transaction reporting requirements.

What are the hallmarks?

There are three hallmarks.

Contingent fee arrangements

This hallmark exists where an advisor or promoter (or a person that does not deal at arm’s length with an advisor or promoter) is entitled to a fee that is:

  • based on the amount of tax benefit;
  • contingent on obtaining a tax benefit; or
  • based on the number of participants in the same or similar transactions.

Contingent fee arrangements will generally not include fees for claiming SR&ED credits or clean economy investment credits, standard fees charged by financial institutions, and value billing by professionals.

Confidential protection

This hallmark exists where:

  • an advisor or promoter (or any person who does not deal at arm’s length with the advisor or promoter) obtains “confidential protection”; and
  • the prohibition on disclosure provided by the confidential protection provides confidentiality in respect of a tax treatment in relation to an avoidance transaction or series.

Confidential protection means anything that prohibits the disclosure to any person or to the Minister of the details or structure of the transaction (or series of transactions) under which a tax benefit results.

As the Technical Notes explain, this hallmark will arise in respect of an avoidance transaction (or series of transactions) if either:

  • an advisor obtains or obtained confidential protection from a person to whom the advisor has provided any assistance or advice with respect to such transaction (or series of transactions) pursuant to an engagement of the advisor by that person to that effect, or
  • a promoter obtains or obtained confidential protection from a person to whom an arrangement has been promoted or sold or statement or representation has been made, or from whom consideration has been received, in certain circumstances. Significantly, confidential protection does not include standard confidentiality agreements that do not specifically require confidentiality of tax advice and does not arise by virtue of an obligation of an advisor or promoter (in distinction from protection obtained by the advisor or promoter).
Contractual protection

As discussed above, this hallmark exists where a taxpayer or certain other persons require contractual protection in respect of an avoidance transaction or series of transactions. Contractual protection, while broadly drafted, has been narrowed by CRA guidance and, among other things, should not include standard representations and warranties in arm’s length M&A transactions.

What are the exceptions?

The Income Tax Act sets out multiple exceptions from the reporting requirements:

  • Confidential protection – Confidential protection is defined as not including the disclaiming or restricting of an advisor’s liability where it does not prohibit the disclosure of the details or structure of the transaction or series.
  • M&A Exception – Contractual protection is expressly defined as not including standard professional liability insurance or protection that is integral to an agreement between person’s acting at arm’s length for the sale or transfer of all or part of a business (either an asset sale or a share sale) where it is reasonable to conclude that the insurance or protection is intended to ensure that the purchase price takes into account any liabilities of the business immediately prior to the sale or transfer and is obtained primarily for purposes other than to achieve a tax benefit.
  • Tax shelter – The acquisition of a tax shelter is not a reportable transaction where the appropriate tax-shelter information return has been filed.
  • Flow-through shares – The issuance of a flow-through share is not a reportable transaction where the appropriate flow-through share information return has been filed.
  • Solicitor Client privilege – The reportable transactions regime does not require the disclosure of information if it is reasonable to believe that the information is subject to solicitor client privilege.
  • Clerical or secretarial services – The filing requirements for reportable transactions do not apply to persons who only provide clerical or secretarial services in respect of a reportable transaction.

CRA guidance

CRA guidance adds to the statutory exceptions and provides an extensive list of transactions that will generally not give rise to reporting requirements. Highlights from this list include:

  • Not a contingent fee – CRA guidance provides detail on certain fees that would not qualify as a contingent fee hallmark, including:
    • standard fees collected by financial institutions;
    • fees to assist in claiming tax credits such as SR&ED tax credits or clean economy investment tax credits;
    • referral fees in respect of life insurance policies in the context of an estate freeze;
    • fees based on the number of returns or forms filed;
    • fees based on the value of the services provided in respect of a transaction; and
    • contingent litigation fees in relation to an appeal of a tax assessment.
  • Not confidential protection – CRA guidance provides that confidential protection does not include:
    • protection of trade secrets that do not relate to tax;
    • standard confidentiality agreements that do not require tax advice to be confidential, such as a letter of intent including a confidentiality requirement;
    • standard commercial confidentiality provisions in standard client agreements that do not contemplate a specific identified tax benefit or treatment; and
    • confidential protection in respect of claims for one or more clean economy investment tax credits.
  • Not contractual protection – CRA guidance sets out multiple examples of contractual arrangements which would not qualify as contractual protection, including:
    • insurance arising in a M&A context;
    • contractual protection in respect of claims for one or more clean economy investment tax credits;
    • a limitation of liability clause in a professional engagement letter;
    • normal professional liability insurance of a tax practitioner;
    • standard representations, warranties and guaranties between a vendor and a purchaser;
    • traditional representations and warranties insurance policies to protect a purchaser from pre-sale liabilities including tax liabilities;
    • tax return insurance that does not contemplate any particular transaction or series of transactions;
    • reinsurance, where the original insurance is not reportable;
    • contractual protection in a normal commercial or investment context where parties operate on arm’s length terms, acting prudently, knowledgeably and willingly, including tax indemnities in standard provisions such as gross-up clauses in loan agreements or International Swaps and Derivatives Association (ISDA) agreements;
    • standard indemnity clause protecting a trustee in its capacity as trustee; and
    • standard price adjustment clauses that are not tax-driven.

In addition, CRA guidance provides that the M&A exception would include:

  • indemnities related to existing pre-closing tax issues or the amount of existing tax attributes (for example, tax pools and capital cost allowance);
  • indemnities in respect of any failure to comply with tax representations and warranties;
  • indemnities for any taxes related to prior years;
  • indemnities for any damages arising from pre-closing transactions;
  • contractual covenants obtained by a purchaser from the target corporation and the target corporation’s significant shareholders that work to ensure that the target or the significant shareholders do not take steps that could cause the bump denial rules to apply, in either a public or private corporation context;
  • indemnities provided to a purchaser for any additional taxes arising if the bump in paragraph 88(1)(d) becomes unavailable
  • tax insurance regarding the purchase of taxable Canadian property from a non-resident of Canada, for which applicable notification forms are completed and sent to the CRA (here the guidance expressly states that tax insurance may allow the parties to complete the transaction and go their separate ways without concern for any tax liabilities prior to the sale);
  • contractual protection for pre-sale transactions involving the payment of intercorporate dividends to a holding company to extract safe income, expressly including contractual protection obtained in respect of the calculation of safe income on hand;
  • indemnities or covenants to a purchaser or target in respect of Part III tax liabilities and other adverse tax consequences arising from dividends paid as part of a pre-closing reorganization; and
  • indemnities provided to vendors for any adverse tax consequences resulting from the failure of a transaction to achieve a tax benefit pursuant to the provisions of the “Immediate Intergenerational Business Transfer” rules.

Who needs to report?

The reporting requirement applies to three categories of persons:

  • the specific person for whom the relevant tax benefit results (or is expected to result) from the reportable transaction (or from any other reportable transaction within the series that includes the reportable transaction, or from a series of transactions that includes the reportable transaction);
  • persons that have entered into an avoidance transaction for the benefit of the specific person described above; and
  • advisors and promoters, in some circumstances. Generally, advisors and promoters are only required to report if they receive contingent fees or receive a fee in exchange for contractual protection.

What form is required?

The prescribed form is the RC312. It requires a complete disclosure of the relevant transaction, including the provision of sufficient detail for the Minister of National Revenue to be able to understand the tax structure of all of the transactions, the expected, claimed, or purported tax treatment of all potential benefits, and any additional anticipated steps.

What is the deadline?

For persons other than advisors and promoters, the deadline for reporting is generally 90 days after the earlier of:

  • the day on which the person becomes contractually obligated to enter into the transaction and
  • the day on which the transaction is entered.

What are the penalties?

For corporations that have assets valued at $50 million6 or more, the penalty is calculated as $2,000 per week, up to a maximum amount equal to the greater of $100,000 and 25% of the amount of the relevant tax benefit.

For non-corporate reporters, the penalty is calculated as $500 per week for each failure to report, up to a maximum amount equal to the greater of $25,000 and 25% of the relevant tax benefit.

For advisors and promoters, the penalty is the total of

  1. the amount of fees charged,
  2. $10,000 and
  3. $1,000 for each day up to a maximum of $100,000.

Consult with Miller Thomson’s Tax lawyers who can help interpret the relevant Income Tax Act provisions and provide guidance on your reporting obligations.

  1. Canada Revenue Agency’s 2024–25 Departmental results report ↩︎
  2. The IRS is Downsizing: Key Divisions Most Affected in 2025 ↩︎
  3. Canada’s population clock (real-time model); U.S. and World Population Clock ↩︎
  4. Canada Revenue Agency’s 2025–26 Departmental Plan ↩︎
  5. Government of Canada AI Register (Minimum Viable Product) – GC AI Register (MVP) 9 ↩︎
  6. Dollar references are to CAD. ↩︎