Can GAAR and “Reportable Transactions” Co-exist in a Fair Tax System?

Finance Canada’s new law on Reportable Transactions (subsection  237.3) co-exists with the General Anti-Avoidance Rules (GAAR in S. 245) in an interesting way. 

The former requires self-assessment of a potentially GAARable series of transactions by the taxpayer; the latter, cannot be self-assessed at all. Nonetheless, advisors and their clients must now report potentially abusive planning in advance using Form RC312, to be filed by June 30 annually and separately from other tax forms for administrative purposes. The government has assured taxpayers this is not an admission that S. 245 applies to the transaction or series of transactions.  

Under GAAR (S. 245)  an "avoidance transaction" is a single, or series of transactions that result in a tax benefit (a deferral, reduction, or avoidance of tax), unless the transaction has been arranged primarily for bona fide purposes other than to obtain the tax benefit.

Under subsection 237.3, an avoidance transaction is a reportable transaction, or series thereof, where at least two of the following three “hallmarks” are satisfied in respect of the transaction(s):

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.

The CRA has provided the following definitions for reference in the application of new S. 237.3 Reporting for Tax Avoidance Transactions:

A “tax avoidance transaction” means any transaction that would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit (section 245 of the Income Tax Act).

“Confidential protection,” in respect of a transaction or series of transactions, means anything that prohibits the disclosure—to any person or to the Minister—the details or structure of the transaction or series under which a tax benefit results (not the same as client-solicitor privilege).

“Contractual protection” refers to any form of insurance (other than standard professional liability insurance) or other protection, including, without limiting the generality of the foregoing, an indemnity, compensation, or a guarantee that, either immediately or in the future and either absolutely or contingently:

(i) protects a person against a failure of the transaction or series to achieve any tax benefit from the transaction or series; or

(ii) pays for or reimburses any expense, fee, tax, interest, penalty, or similar amount that may be incurred by a person in the course of a dispute about a tax benefit from the transaction or series; and any form of undertaking provided by a promoter, or by any person who does not deal at arm's length with a promoter that provides, either immediately or in the future and either absolutely or contingently, assistance, directly or indirectly in any way, to a person in the course of a dispute about a tax benefit from the transaction or series.

The onus of proof is onerous. These new rules apply to individuals, corporations, trusts and partnerships. If there is more than one tax advisor involved in the reportable transaction, all must file an information return to the CRA with detailed information that identifies others in the transactions. A transaction will not be reportable if it includes the issuance of a flow-through share and information has been filed with the Minister, or if the transaction involves the acquisition of a tax shelter.

Can subsection 237.3 and S. 245 co-exist in a fair tax system based on self-assessment? Whether there is an impugned transaction or not, these new laws amplify the need for taxpayers to have processes to identify potentially reportable transactions. That’s because they intersect with sections 231 of the Income Tax Act, which deal with audits, inspections, and powers of enforcement by the CRA. These powers will extend to the new rules for reportable transactions. According to the new laws, that’s notwithstanding the fact that at the time of audit or inspection, this return may not have been filed for the tax year in which the benefit would result.

Similar reporting initiatives have been implemented in the United States and Australia. The Internal Revenue Service in the U.S. has proposed a form that certain corporations will be required to complete detailing the transactions that are on the borderline of permissibility.

“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 October 15.

LAST TIME: CRA: Reportable Transactions Add New Tax Filing Deadline