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2 August, 2023

New tax avoidance reporting rules take effect

In 2021, the Federal Government announced that strengthening the Canada Revenue Agency’s (CRA) ability to curtail tax evasion, money laundering, and aggressive tax avoidance in both the domestic and international context was a top budget priority. To accomplish this, Parliament passed the Budget Implementation Act, 2023 (Bill C-47), with the Act receiving Royal Assent on June 22, 2023.

The Budget Implementation Act makes numerous changes to the Income Tax Act’s notifiable transaction reporting regime that lawyers and their clients must be aware of. Such changes include an expansion of the existing reportable transactions regime rules and definitions, as well as the creation of new penalties for non-reporting by advisors (including lawyers). This blog post will provide a high-level overview of the recent changes lawyers should note for their practice.

Expansion of the Existing Reportable Transactions Regime

The Budget Implementation Act expands the definition of what constitutes an “avoidance transaction”, as outlined at section 237.3(1) of the Income Tax Act, to include any transaction (or series of transactions) that could reasonably be considered to have a “main purpose” of obtaining a tax benefit.

Building on the expanded definition of avoidance transaction, the Budget Implementation Act also changes the reportable transaction regime, wherein advisors, lawyers, and their clients must report avoidance transactions to the CRA, or else face heavy penalties. Prior to the changes implemented in June 2023, the reportable transaction regime required that two of three “hallmarks” must be present for an avoidance transaction to be reported to the CRA. However, the Budget Implementation Act lowers the threshold for reporting, requiring that only one of the three hallmarks be present to mandate reporting a transaction to the CRA.

Generally, the hallmarks of a reportable transaction now include any of the following:

  1. A Contingency Fee Based Upon a Tax Benefit: contingency fees from an advisor or promoter based on the amount of a tax benefit that results (or would result) from an avoidance transaction.
  2. Confidential Protection: when an advisor, promoter or person who does not deal with an advisor or promoter at an arms’ length basis obtains confidential protection, and the prohibition on disclosure provided under the confidential protection provides confidentiality in respect of a tax treatment in relation to the avoidance transaction or series, this transaction must be reported to the CRA.
  3. Contractual Protection: When the person or their agent enters an avoidance transaction for the benefit of the person receiving the tax benefit has contractual protection in respect of the avoidance transaction, this transaction must be reported to the CRA.

The Budget Implementation Act states that the CRA must be notified of reportable transactions within 90 days from the day the person enters the reportable transaction, or, 90 days from when the person becomes contractually obligated to enter the reportable transaction, whichever is first.

As of July 20, 2023, the Minister of National Revenue and the Minster of Finance have not yet created a list of what they consider to be notifiable transactions, as per the amendments to the Income Tax Act via the Budget Implementation Act. However, there is a sample list of notifiable transactions on the Minister of Finance’s Website.

It is also important to note that once a list of notifiable transactions is created by the Ministers, “substantially similar” transactions to those on the list must be reported to the CRA as per the Budget Implementation Act. The definition of “substantially similar” notifiable transactions includes transactions wherein a person is expected to obtain the same or similar types of tax consequences (or benefit) through the transaction, and the transaction at issue has a similar set of facts or tax strategy to the listed notifiable transactions. Further, substantially similar transactions are to be interpreted broadly and advisors should err on the side of disclosure to the CRA, as per the changes made by the Budget Implementation Act.

Penalties for Non-Reporting by Advisors

Additionally, the Budget Implementation Act makes amendments to the Income Tax Act to include new penalties for non-reporting for advisors, including lawyers. As such, every individual person or corporation who fails to file an information return regarding a notifiable transaction within the 90-day period as outlined above may face extensive monetary penalties including the following:

If the non-reporter is an individual, they are liable for the fees charged in respect of the notifiable transaction, a fine of $10,000, and an ongoing penalty of $1,000 multiplied by the number of days during which the failure continues, up to a maximum of $100,000.

If the person is a corporation with a value of $50 million or more, it faces a penalty of $2,000 multiplied by the number of weeks during which the failure continues, to a maximum amount equal to the greater of $100,000 and a penalty of 25% of the amount of the tax benefit in respect of the notifiable transaction.

If the person is a corporation with a value of $50 million or less, it faces a penalty of $500 multiplied by the number of weeks during which the failure continues, to a maximum amount of $25,000 and a penalty of 25% of the amount of the tax benefit in respect of the notifiable transaction.

This blog post is meant as a brief overview of the new amendments to the Income Tax Act via the Budget Implementation Act, 2023. If you have further questions or think these new amendments for reporting may apply to you, reach out to a lawyer in Harrison Pensa’s Business Law Group.

Image credit: ©Deemerwha studio – stock.adobe.com

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