Canada: Tax Assistance

Certain specified transactions must be disclosed from now on

Quebec recently announced certain changes to mandatory disclosure mechanism that introduced the requirements for taxpayers to disclose certain specified transactions within specified time limits. So far, Quebec has announced four of the specified transactions that are subject to new reporting requirements. Consequently, taxpayers who carried out these transactions must report them to Revenue Quebec by completing and filing a prescribed form by July 15, 2021. Failure to disclose a specified transaction or file the prescribed form on time may lead to stiff tax penalties.

What are the specified transactions that must be disclosed?

On March 17, 2021, Quebec announced four transactions:

• Avoidance of deemed disposal of trust property
  The main goal of this type of transaction is to circumvent the avoidance of the deemed disposition rule for capital property of a trust on its 21^st year. Trusts subject to this rule include those that are residence in Quebec and that dispose of, for less than its fair market value, capital property or land that is held directly or indirectly by another trust after the series of transactions.
• Payment to a non-treaty country
  This usually includes certain tax deductible payments of at least $1,000,000 to a country with which the Government of Quebec or of Canada has not entered into a tax agreement. The transaction must be disclosed 60 days before the filing due-date.
• Multiplication of the capital gains deduction
  This type of transaction typically involves a transfer of funds by an individual to certain shareholders or persons with a non-arm's length individual following the disposition of a qualified small business corporate share by an individual, or a trust under which is the individual is a beneficiary.
• Tax attribute trading.
  The transactions involved are those that prevent the application of attribute trading restriction rules under the Income Tax Act.

Quebec has provided broad and complex definitions for each of the 4 transactions

Quebec will also provide a full list of additional transactions that are also subject to the new reporting requirement on an on-going basis in the Gazette Officielle du Quebec. For each of these specified transactions, Quebec has provided broad and complex definitions. Consequently, certain transactions that have similar form and substance to those described in the Gazette may also be subject to these rules.

Deadlines to make the disclosure

The disclosure requirements apply only if the specified transaction starts after the date of publication in the Gazette which is March 17, 2020. Therefore, any specified transaction that occurred prior to the publication on the are not subject to the disclosure requirements. However, in the context of a series of transactions, the disclosure requirement may still apply even if the series started before March 18, 2021.

As of March 18, 2021, a taxpayer must complete form TP-1079.DI-V – "Mandatory or Preventive Disclosure of Tax Planning" in order to disclose a specified transaction. The deadline to complete this disclosure varies and is the later of:

• The day that is 60 days following the day provided by the Regulation, as further described below, or
• 120 days after the day on which the minister published the transactions to which the specified transaction relates in the Gazette officielle due Quebec – regarding the four published specified transactions, it is July 15, 2021.

The deadline for each type of transaction is further described below. Note that in some cases the filing date is the tax return date. In other cases the filing date is arbitrary and is 60 days following the occurrence of the transaction:

• For avoidance of deemed disposal of trust property, the obligation to disclose starts following the distribution of the property from the trust, therefore the deadline is the later of 60 days after the date of distribution of the property or July 15, 2021.
• For payment to a non-treaty country, the obligation to disclose arises on the day that is 60 days before the taxpayer's filing due date for its taxation year in which the relevant fiscal period of the partnership ends. Therefore, the deadline for the disclosure is the later of either the taxpayer's filing due date or July 15, 2021.
• For multiplication of the capital gains deductions, the disclosure of the specified transaction will be required to be made on or before either 60 days following the day specified in the Regulation (which varies depending on the type of planning used — e.g., the day the qualified small business corporation shares are disposed of) or 15 July 2021, whichever is the later.
• For tax attribute trading, the disclosure will be required to be made on or before either the filing due date for the first taxation year in respect of which the tax attribute is used or 15 July 2021, whichever is the later.

Penalties for taxpayers, advisers and promoters

1. Special rules for taxpayers

The penalty for a taxpayer who fails to properly disclose a specified transaction will be:

• $10,000 and an additional penalty of $1,000 per day (up to a maximum total penalty of $100,000) and,
• 50% of the tax benefit for the entire taxation year that resulted directly or indirectly from the transaction.

Moreover, taxpayers may also face other penalties such as suspension of the start of the normal reassessment period until a duly completed prescribed disclosure form is filed. However, if the General Anti-Avoidance Rule (GAAR) applies to the transaction, there may be additional consequences.

2. Special rules for advisers and promoters

Due to the new requirements, advisers and promoters must also disclose specified transactions that they commercialized or promoted where the form and substance of a transaction is similar to those transactions. The form to be filed is TP-1079.CP-V which is called "Mandatory Disclosure of Tax Planning by an adviser or Promoter."

The deadline for advisers and promoters to file this form is by the 60^th day after the day the obligation to disclose the specified transaction applies (e.g. the day the adviser or promoter first commercializes or promotes the specified transaction), or, for the four transactions announced on March 17, 2021, July 15, 2021 (i.e. 120 days after the specified transactions are published in the Gazette), whichever is later. A penalty may be imposed on the advisers or promoter for the 100% of the consideration received or that they are entitled to receive either directly or indirectly to a related or associated person or partnership from a person or partnership who implements a specified transaction that they commercialized or promoted. Under certain conditions, advisers and promoters may also be subject to a penalty of $10,000 and an additional penalty of $1,000 per day (up to a maximum total penalty of $100,000).

Pro tax tips – taxpayers and advisers must comply with these new tax disclosure requirements

The main purpose of these new tax disclosure requirements is to increase tax transparency and it is imperative for both taxpayers and advisers to have a good understanding of the particular transactions that are subject to the rules and deadline and penalties for each party. Call our office to speak with an experienced Canadian tax lawyer for guidance.