On June 22, 2023, Canada’s enhanced mandatory disclosure rules received royal assent. The enactment expanded the rules for reportable transactions and introduced requirements for notifiable transactions and reportable uncertain tax treatments. Further information on the mandatory disclosure rules can be found in our previous articles.
On July 5, 2023, the Canada Revenue Agency (the “CRA”) published guidance on the application of the mandatory disclosure rules (the “Guidance”)[1]. The CRA has since updated this Guidance, providing further clarification.
This article briefly discusses the CRA’s most recent Guidance updates, made as of August 15, 2024 (the “Updates”).
Updated guidance on reportable transactions
The general anti-avoidance rule
The Guidance previously stated that “pursuant to budget proposals,” a penalty equal to 25% of the tax benefit and a three year extension of the statute barred period may apply to transactions captured by the General Anti-Avoidance Rule (the “GAAR”). The aforementioned would not apply if a disclosure were made per the mandatory disclosure rules, either voluntarily or as required by law. The Updates reflect the enactment of the GAAR amendments, which apply to transactions that occur on or after January 1, 2024 and the new penalty provision, which applies to transactions that occur on or after June 20, 2024.
Contingent fee arrangement hallmark
The Guidance outlines activities which would generally not satisfy the legislative hallmarks for reportable transactions, including the “contingent fee arrangement” hallmark.
A fee for the preparation of an annual income tax return that results in a tax refund, including entitlement to personal tax credits, would generally not satisfy the contingent fee arrangement hallmark. The Updates clarify that this exclusion from reporting includes fees incurred to determine eligibility for these credits.
The Updates list a new activity in this section as well: advisor referral fees for life insurance policies in the context of estate freezes. The contingent fee arrangement hallmark is not met where the insurance advisor’s or third-party advisor’s entitlement to referral fees depends on successful client referrals made to each other and the total fees increase by the number of successful referrals received.
Contractual protection hallmark
The Guidance also outlines activities which would generally not satisfy the “contractual protection” hallmark.
The Updates state that a limitation of liability clause in a professional engagement letter would usually not trigger the hallmark so long as the clause’s purpose is to limit the professional’s liability for negligence.
Additionally, the Updates indicate that tax indemnities in employment agreements and severance agreements will typically not satisfy the contractual protection hallmark. More specifically, there generally should be no reporting requirement for the employer or employee.
The Updates provide further clarification in the context of insurance or indemnity integral to an arm’s length agreement for the sale of a business. In said context, the contractual protection hallmark would not exist solely where the insurance or indemnity is based on the actions or inactions of a person to obtain a tax result.
Finally, the Updates explain that the contractual protection hallmark is not satisfied where a standard indemnity clause protects a trustee acting per the terms of the trust. The hallmark may apply, however, if it would be reasonable to conclude that an aggressive tax avoidance transaction was contemplated at the time of the clause’s creation or entered into under the pretext of such a clause.
Updated guidance on notifiable transactions
Partners and employees
Regarding notifiable transactions, the Updates indicate that employees and partners are deemed to have satisfied their reporting obligation when the employer or partnership has filed the required information return. The aforementioned applies to an individual who provides services as an employee of a professional corporation that is a partner of the partnership, directors of a corporation, and former partners or former employees. To note, this relief does not apply to independent contractors.
Notifiable Transaction “NT-2023-04”
The Updates refer to “NT-2023-04 – reliance on purpose tests in section 256.1 of the Income Tax Act (Canada) to avoid a deemed acquisition of control.” Where a company or its subsidiaries have unused tax attributes and the conditions of NT-2023-04 are satisfied, each of the aforementioned companies and their advisors are required to file separately.
Notifiable Transaction “NT-2023-05”
The Updates also provide insight on “NT-2023-05 – back-to-back arrangements.” In brief, filing is generally not required for a Canadian taxpayer participating in a cross-border cash pooling arrangement who is (and is reasonably expected to remain) solely a creditor. Should the taxpayer become a debtor in respect of the arrangement, filing is required.
As guidance evolves, taxpayers and advisors may subscribe to the CRA electronic mailing list for alerts regarding new notifiable transactions and updates related to the mandatory disclosure rules.[2]
If you have any questions concerning the Updates or the application of the mandatory disclosure rules, please contact a member of the Miller Thomson LLP Corporate Tax group.
[1] Canada Revenue Agency, “Mandatory disclosure rules – Guidance” (last modified 15 August 2024), online: <https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/mandatory-disclosure-rules-overview/guidance-document.html>.
[2] Canada Revenue Agency, “Electronic mailing list – Notifiable transactions” (last modified 11 October 2023), online: <https://www.canada.ca/en/revenue-agency/news/e-services/canada-revenue-electronic-mailing-lists/electronic-mailing-list-notifiable-transactions.html>.
