CRA: Reportable Transactions Add New Tax Filing Deadline

Taxpayers and their advisors have one more tax filing deadline to add to their list this year: Form RC312 must be filed before October 23, 2013 in some cases, so mark your calendars.

The reason? The Government of Canada has become increasingly concerned with aggressive tax planning and has recently ensured it has more tools to fight the battle; Form RC312 is one of them. It requires that a “reportable transaction” be filed with the government by any taxpayer, including a partnership, advisor, or promoter.

New legislation has passed (announced on June 26^th ) and the compliance that comes with the new rules is extensive. Specifically, if you have been involved in a “reportable transaction”, you will be required to file a Reportable Transaction Information Return in Form RC312 on or before June 30^th of the calendar year, following the calendar year in which the transaction first became reportable. This form must be filed separately from other information returns, such as your income tax return.

But there is a retroactive requirement for three years: for 2010, 2011, and 2012 calendar years Form RC312 must be filed before October 23, 2013. This is because the reportable transaction scheme was initially announced in Budget 2010.

So what is reportable? A reportable transaction is an avoidance transaction that is entered into by or for the benefit of a person, and each transaction that is part of a series of transactions that includes the avoidance transaction if at any time any two of three “hallmarks” apply:

1. The tax advisor of a tax plan is entitled to a fee based on:
   1. obtaining a tax benefit for the taxpayer;
   2. the amount of the benefit procured from the transaction(s); or
   3. the number of taxpayers participating in the transaction(s).

2. The advisor obtains “confidential protection” for the transaction; or
    
3. There is “contractual protection” for the transaction.

Section 237.3 adopts the definition of “tax avoidance transaction” from section 245, the General Anti Avoidance Rules (GAAR). Reporting a transaction is not determinative of or even relevant to whether the tax benefit will be allowed under the Act; it’s administrative and taxpayers and their advisors have been assured it will not be considered an admission that the GAAR will be applicable. 

Still, “pre-reporting” a potential GAARable situation seems to put the taxpayer and his/her advisors in a difficult position, as it runs contrary to the GAAR itself, a concept well explained by lawyers Pamela Cross and Stephanie Wong of BLG, who first dissected the rules for a report in 2011.

“Requiring taxpayers to determine whether a transaction is an avoidance transaction would appear to run contrary to the GAAR itself, which cannot be self-assessed by the taxpayer. As the rules are currently drafted, could a taxpayer’s ability to dispute a subsequent GAAR assessment in court be prejudiced merely by virtue of filing, since the taxpayer could be considered to have admitted that a transaction is an avoidance transaction, i.e., it had no bona fide purpose other than to obtain a tax benefit?

Also, taxpayers who are uncertain about whether a transaction satisfying two of the hallmarks constitutes an avoidance transaction may feel compelled to file under threat of a significant monetary penalty and disallowance of the tax benefit. . . Similarly, it is not clear that the due diligence defence in subsection 237.3(11) would be of any benefit where a person reasonably concludes that the transaction is not a reportable transaction since it expressly applies only to reasonable efforts to “prevent a failure to file”

It remains to be seen if the resulting law has fully answered these concerns. Finance Canada has provided explanatory notes to confirm that normal commercial transactions are "in general" not considered to be reportable, and a “due diligence” defence in subsection 237.3(11) provides for a "case-by-case interpretation", which we’ll discuss next time.

Those who fail to report a reportable transaction when required will be liable to pay a penalty equal to the total of the fee for the transaction that the advisor was entitled to receive. Further, all tax benefits will be denied until Form RC312 has been filed and the penalty and any interest have been paid.

While it is too early to tell all the ramifications of 237.3 of the Income Tax Act, and how its defence will be played out in court, it can be said with confidence that tax planning now comes with some significant concerns and potential additional expense as both taxpayers and their advisors seek to protect themselves from penalties.

“Prudent Planning” will be on the agenda of the Distinguished Advisor Workshops Trio this year—November's Corporate Tax and Year End Planning Bootcamp, January's Personal Tax Bootcamp, and May's Audit Defence and Regulatory Compliance Bootcamp—as we provide more details and business management tools to help. Early registration ends September 30.

NEXT TIME: REPORTABLE TRANSACTIONS: Due Diligence Defence Under Section 237.3