On June 22, 2023, Bill C-47 - An Act to implement certain provisions of the budget tabled in Parliament on March 28, 2023 received royal assent, implementing the new mandatory disclosure rules. The rules require taxpayers, promoters and advisors to report certain types of transactions or series of transactions to the Canada Revenue Agency (CRA). A transaction (or series of transactions) will have to be reported to the CRA if one of the main purposes of the transaction (or series) is to obtain a tax benefit and the transaction (or series) has one of the following three hallmarks:
- Contingency fees – the advisor or promoter is entitled to a fee contingent on the tax benefit realized from the transaction(s).
- Confidential protection – the advisor or promoter receives "confidential protection" from a person who received advice with respect to the transaction(s). The prohibition of disclosure must include the tax treatment related to the transaction(s). Confidential protection includes a confidentiality or non-disclosure agreement.
- Contractual protection – persons associated with the transaction(s) receive contractual protection generally in the form of an indemnity, insurance policy or other form of reimbursement that provides financial assistance where the transaction's tax purpose fails. An example would be where a promoter promises to cover the costs of litigating a challenge by the CRA of the expected tax results, but this can also include certain types of indemnities in commercial agreements (including, in certain circumstances, gross-up clauses for withholding taxes).
Reporting deadline
If the transaction or series of transactions meets the criteria noted above, then the transaction (or series) must be reported to the CRA within 90 days of the earlier of the date the person becomes contractually obligated to enter into (or actually enters into) the transaction(s). Taxpayer, advisors and promoters each have their own reporting obligations.
Penalties
Failure to comply with the reporting obligations may result in significant penalties, set out as follows:
- For most taxpayers, penalties will be the greater of CA$25,000 and 25% of the tax benefit.
- For advisors and promotors, penalties will be the total of all fees charged plus CA$10,000 plus an additional amount of CA$1,000 per day for each day the failure continues up to CA$100,000.
- For corporations with assets that have a carrying value of CA$50 million in its previous year, penalties will be the greater of CA$100,0000 and 25% of the tax benefit.
We recommend that you communicate with your tax advisors regarding any proposed transactions to determine whether there are any reporting obligations under the new rules.
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