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With the release of the Federal Budget on March 4, 2010, the Department of Finance announced a public consultation process related to a new proposed information reporting regime for tax avoidance transactions. The stated purpose of the proposed information reporting regime is to curb aggressive tax planning arrangements that are seen to undermine the tax base, and the fairness and integrity of the Canadian tax system. The regime is intended to assist the CRA in more quickly identifying arrangements that constitute aggressive tax planning but do not meet the definition of a “tax shelter” under the Act. The new reporting regime will operate alongside the existing reporting requirements for tax shelters. Charities and their advisors must be aware of these new reporting requirements, as certain types of gifting arrangements may fall within the ambit of the new rules.
The Proposed Regime
Under the proposed regime, “reportable transactions” must be reported to the CRA. Reportable transactions consist of “avoidance transactions”, as that term is defined in the Act, which bear two out of three hallmarks. Avoidance transactions are defined as transactions (or series of transactions) that confer a tax benefit and were entered into primarily for the purpose of obtaining the tax benefit. Such transactions will constitute reportable transactions if they bear any two of the following hallmarks:
- A “promoter” or “tax advisor” in respect of the transaction is entitled to fees that are to any extent (a) attributable to the amount of the tax benefit from the transaction; (b) contingent upon obtaining a tax benefit from the transaction; or (c) attributable to the number of taxpayers who participate in the transaction or who have been provided access to advice given by the promoter or advisor regarding the tax consequences from the transaction.
- A “promoter” or “tax advisor” in respect of the transaction requires “confidential protection” about the transaction.
- The taxpayer or a person who entered into the transaction for the benefit of the taxpayer obtains “contractual protection” in respect of the transaction (otherwise than as a result of a fee described in the first hallmark). “Contractual protection” refers to any insurance or indemnity protecting the taxpayers from possible adverse financial consequences as a result of participation in the transaction.
Further details regarding the proposed regime were provided in a Backgrounder on the Department of Finance’s website in May 2010. The Backgrounder sets out the types of persons who would be subject to the new regime, the manner in which reportable transactions would be required to be reported to CRA, the consequences for failing to report, and certain important definitions. The Backgrounder is available http://www.fin.gc.ca/n10/data/10-043_1-eng.asp.
According to the Backgrounder, any person seeking to obtain a benefit from a reportable transaction, or any person entering into a reportable transaction for the benefit of a taxpayer (e.g., a corporation that enters into a reportable transaction from which a tax benefit accrues to a current or future shareholder), would be subject to the reporting requirements. Notably, if one or more promoters or tax advisors are entitled to receive fees in respect of a reportable transaction, such a promoter or tax advisor would also be caught by the reporting requirements.
Reportable transactions entered into after 2010, or that are part of a series of transactions completed after 2010, are to be reported in an information return on a prescribed form and filed with CRA. The information return must be filed on or before the taxpayer’s filing-due date for the taxation year in which the tax benefit arose. Where there is no filing-due date, the information return would be required to be filed before June 30th of the calendar year following the calendar year in which the tax benefit arose. Failing to report could result in a denial of the tax benefit pending reporting to CRA and penalty (applicable to all persons required to file an information return, including promoters and tax advisors). There may also be joint and several liability for all persons who entered into the transaction for the benefit of the taxpayer.
On August 27, 2010, the Department of Finance released the consultation draft of the legislative proposals. On September 10, 2010, Explanatory Notes in respect of the legislative proposals were released, further elaborating on the new reporting regime. The Explanatory Notes are available at http://www.fin.gc.ca/drleg-apl/ita-lir10n-eng.pdf.
Response to the Proposed Regime
The new reporting regime has received some criticism from, among others, the Canadian Bar Association and the Canadian Institute of Chartered Accountants. In a joint submission to the Department of Finance in July 2010, these associations listed a number of concerns identified by members of the tax community, particularly relating to the scope of the new proposals and the conflicts created between the proposed regime and the professional responsibilities of advisors. The joint submission made several recommendations for improvement to the proposals. The CBA also made a separate submission in response to the draft legislation released in August. No response from the Department of Finance has been made as of the date of writing this article.
It remains to be seen whether any legislative changes will be made before CRA begins administering the new regime. It naturally also remains to be seen how the regime will be administered in practice, and what types of transactions will be caught. Charities and their advisors will need to take account of these requirements when entering into or advising on structured gifting arrangements as certain of these arrangements may be subject to the new reporting requirements, and both the advisor and potentially the charity may be required to report to CRA.