On October 15th, 2009, the Quebec Ministry of Finance released an Information Bulletin containing new rules aimed at fighting “aggressive tax planning” (“ATP”) schemes. These measures give additional tools to Revenue Quebec to identify and attack aggressive plans designed to avoid taxation in Quebec. Most of these new measures are applicable to transactions carried out after October 14th, 2009. A proposed bill is expected to be presented to the Quebec National Assembly in the spring.
Aggressive Tax Planning
According to the Quebec Ministry of Finance, an ATP scheme is “generally described as a tax avoidance transaction that complies with the letter of the law while abusing its spirit.”
Quebec’s Strategy for Fighting ATP Schemes
Four measures are proposed to be implemented by Quebec for combating ATP schemes. The first measure relates to the disclosure of potentially abusive transactions while the other three relate to the Quebec general anti avoidance rule (the “Quebec GAAR”).
- Mandatory Disclosure of Arrangements Resulting in a Tax Benefit
A taxpayer will now be required to disclose to the Quebec tax authorities any transaction for which the taxpayer retains the services of an adviser that results in a tax benefit of $25,000 or more or affects his income by at least $100,000 and if either:
• the taxpayer enters into a confidentiality agreement in relation to the transaction; or
• the remuneration of the adviser is conditional on or proportionate to the tax benefit. Substantial penalties (between $10,000 and $100,000) may arise in the event of a failure to disclose. This measure is aimed at targeting so called “pre-packaged” or “off the shelf” tax products and will force taxpayers to come forward rather than oblige Revenue Quebec to discover such potentially abusive plans by itself.
- Clarification of the Quebec GAAR
An avoidance transaction under the Quebec GAAR generally excludes any transaction that may reasonably be considered to have been undertaken for a bona fide purpose other than obtaining a tax benefit. The scope of the Quebec GAAR is extended by specifying that a tax benefit obtained under the laws of another Province or under a Federal law will not be considered a bona fide purpose. With this change, Quebec’s GAAR will be more in line with the GAAR of the other Provinces and will help the Quebec tax authorities in their fight against “inter provincial” tax schemes.
- Extension of the Reassessment Period Under the Quebec GAAR Revenue
Quebec will now have an additional three (3) years to reassess under the Quebec GAAR, unless the mandatory disclosure procedure mentioned above was complied with or unless a preventive disclosure is made.
- New Penalty Regime Where GAAR Applies
A taxpayer will now face a penalty equal to 25% of the additional tax resulting from the application of the Quebec GAAR to the avoidance transaction. In addition, a promoter of an avoidance transaction (basically a person who markets or promotes an avoidance transaction) will be subject to a penalty equal to 12.5% of the amount received by the promoter.
These last two measures are extreme and, in our view, distort the intended nature of the Quebec GAAR. A taxpayer entering into transactions that comply with the law but may appear abusive in the view of the Quebec tax authorities will now face substantial penalties and an extended period under which the taxpayer may be reassessed while a taxpayer engaging in transactions in contravention of specific provisions of the Taxation Act (Quebec), absent gross negligence, would not face similar consequences.