Updated Mandatory Disclosure Rules Issued

Evelyn Jacks

CRA and Finance Canada would like to be more effective in thwarting aggressive tax planning schemes.  Despite previous mandatory disclosure rules, the “timely, comprehensive and relevant” information CRA wants hasn’t been forthcoming.  Guidance to new mandatory disclosure rules, which received Royal Assent June 22, 2023, were published July 25 and the penalties for failure to file the required 9-page RC312 are huge, for both taxpayers and their advisors. Of particular concern are new “notifiable transaction” rules. Tax and financial advisors may have difficulty understanding their respective responsibilities. Here’s an overview with the key points:  

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What needs to be reported? The mandatory disclosure rules require that both “notifiable transactions” and “reportable transactions” are disclosed.  Notifiable transactions are those that the Minister specifically designates, from time to time. Reportable transactions, on the other hand, require reporting if certain specified criteria are met. Specifically, they occur when two criteria are met:

• A transaction or series of transactions has one of three generic hallmarks: contingent fee arrangements, confidential protection or contractual protection
• It can reasonably be concluded that one of the main purposes of entering into the transaction or series of transactions is to obtain a tax benefit

A taxpayer who enters into a reportable transaction (or another person who enters into the reportable transaction for the benefit of the taxpayer) is required to report the transaction to the CRA within 90 days of the earlier of:

• The day the taxpayer (or the person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction, and
• the day the taxpayer (or the person who entered into the transaction for the benefit of the taxpayer) enters into the transaction

What are notifiable transactions?  The definition is not black and white.  According to the CRA guidance, notifiable transactions include:

• transactions CRA finds abusive, and
• transactions of interest – where more information must be submitted to see if a transaction is abusive

The problem is this:  The Minister of National Revenue, with agreement by the Minister of Finance has the authority to designate, from time to time, transactions or series of transactions for purposes of the notifiable transaction rules by communicating in a way the Minister finds appropriate, such as on the CRA webpages.

That means professionals will need to keep an eagle eye on these new developments as they occur and interpret the description of a notifiable transaction by the CRA, who will set out the “fact patterns or outcomes” in sufficient detail to enable taxpayers to comply with the disclosure and filing rules.  There will be examples in “appropriate circumstances”, as well.

Worse, again form RC312 must be filed to report notifiable transactions within 90 days of the date of designation of the existence of a notifiable transaction at the earlier of:

• the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction, and
• the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) enters into the transaction.

A promoter or advisor who offers a scheme that, if implemented, would be a notifiable transaction, will be required to report within the same time limits. There is an exception if it is reasonable to believe that the information is subject to solicitor-client privilege. 

Also, only advisors who know or are reasonably expected to know of their reporting requirements are required to file the form.  The guidance provides an example of an investment banker who plays a leading role in managing the implementation of a notifiable transaction for a client.  CRA notes this person would typically be expected to know that the transaction is a notifiable transaction even if the individual may not be a tax expert as it is expected that the individual would be aware of the purpose and objectives of the transaction.

On the other hand, an accounting firm providing ancillary services, engaged to plan and implement a notifiable transaction, may not have a reporting obligation if they have limited knowledge or involvement.

Bottom Line:  CRA and Finance Canada want those contemplating transactions they consider to be abusive to tell them in advance. 

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/mandatory-disclosure-rules-overview/guidance-document.html#toc18