MUST YOU DISCLOSE YOUR TAX PLANNING TO THE CRA?
Income Tax Act section 237.3 has “reportable transaction” rules in place, effective since 2011, requiring certain tax planning to be disclosed to the CRA. If two of three “hallmarks” of a tax scheme are present, it must be reported. The hallmarks are:
(a) contingent fees for the promoter of the scheme — the amount they get paid depends on how much they save you
(b) confidentiality — you are not allowed to disclose the scheme to others (typically because the promoter doesn’t want others copying a plan they developed)
(c) “contractual protection”, such as insurance or a promise to cover the costs of appealing if you are reassessed by the CRA.
Draft legislation released on February 4, 2022 will make the reporting apply if you have even one of the above hallmarks. Thus, for example, if an advisor charges you a fee based on success of a tax plan, without either of the other hallmarks, it will now be a “reportable transaction” that you will have to disclose to the CRA.
Both taxpayers and promoters must report any reportable transactions. And the penalties for not reporting are severe. The penalty may be equal to the entire contingent fee potentially payable to the promoter. And both taxpayers and promoters are liable for the penalty. As well, until the reporting is done and the penalty is paid, the tax benefits of the scheme will be denied, and the usual limitation period for the CRA to reassess is suspended.
As well as the reportable transaction rules, the draft legislation introduces new “notifiable transaction” rules (section 237.4). The CRA will publish a list of schemes that it considers offside. If you are involved in one of these schemes, whether as taxpayer, advisor or promoter, you will have to notify the CRA or again be subject to severe penalties. The Department of Finance has published an initial list of the notifiable schemes. They include: using bankruptcy to eliminate a debt in a way that prevents the negative tax consequences of the commercial debt forgiveness rules; arranging for a corporation to not be a “Canadian-controlled private corporation” so as to avoid the high tax on investment income; avoiding the “21-year deemed disposition” rule for trusts; and several others.
Finally, the draft legislation introduces “uncertain tax treatment” rules for corporations with assets over $50 million and audited financial statements. They will be required to disclose to the CRA the details of uncertainties that affect their financial statements.
At time of writing, all of these rules had not yet been introduced in Parliament as a Bill. However, they will almost certainly be passed this year. They are scheduled to apply for 2022 and later years.