Reportable uncertain tax treatment rules

The mandatory disclosure rules contained in Bill C-47 are now in effect. While there has been a great deal of discussion regarding the reportable and notifiable transaction rules, Bill C-47 also introduced new reporting obligations in respect of “reportable uncertain tax treatments” (“RUTTs”) as set out in section 237.5 of the Income Tax Act (Canada) (the “Act”).

Very generally, section 237.5 requires that certain corporations report uncertain tax treatments to the Canada Revenue Agency (the “CRA”) in the course of filing their annual corporate income tax returns. This reporting obligation applies to taxation years that begin after 2022. In this article, we discuss the implications of these new rules on larger corporations and the consequences of non-compliance.

Definition of a “reporting corporation”

The reporting obligation contained in section 237.5 only applies to a “reporting corporation”, which is defined in subsection 237.5(1) as a corporation that meets all of the following requirements:

1. the corporation has “relevant financial statements” for the taxation year;
2. the “carrying value” of the corporation’s assets is greater than or equal to $50 million at the end of the taxation year; and,
3. the corporation is required to file a Canadian income tax return for the taxation year.

With respect to the first requirement, “relevant financial statements” are defined in subsection 237.5(1) as audited financial statements that are prepared:

1. in respect of the corporation, or in respect of a consolidated group of which the corporation is a member which is required to prepare consolidated financial statements for financial reporting purposes under applicable accounting principles;
2. in accordance with International Financial Reporting Standards (IFRS) or other country-specific generally acceptable accounting principles (e.g., U.S. GAAP) relevant for corporations that are listed on a stock exchange outside Canada; and,
3. for a period of time that ends in the taxation year.

With respect to the second requirement, subsection 237.5(9) provides that whether a corporation satisfies the $50 million asset threshold is to be determined by reference to subsection 181(3) of the Act, which provides that for the purposes of determining the “carrying value” of a corporation’s assets: (a) the equity and consolidation methods of accounting shall not be used; and (b) the amounts reflected in the balance sheet presented to the shareholders of the corporation shall be used. Accordingly, the determination of whether a corporation meets the $50 million asset threshold is based on the corporation’s unconsolidated balance sheet.

The third requirement is that the corporation is required to file a Canadian income tax return. This requirement will be met if the corporation is resident in Canada, or is non-resident corporation with a taxable presence in Canada (e.g., it carries on business in Canada or disposes of taxable Canadian property).

Meaning of Reportable Uncertain Tax Treatments

A RUTT is defined in subsection 237.5(1), and includes a tax treatment in respect of a transaction or series of transactions the corporation uses or plans to use in income tax filings over which there is any uncertainty about whether that tax treatment will be accepted as being in accordance with the relevant tax law, and which is reflected in the relevant financial statements of the corporation for the year (e.g., for financial statements prepared in accordance with U.S. GAAP, where a reserve with respect to a tax position has been recorded in the financial statements).

For clarity, the disclosure obligation respecting RUTTs only applies to tax treatments which relate to the Act; corporations are not required to make disclosures pertaining to uncertain tax treatments beyond the scope of the Act (e.g., provincial tax, GST/HST, and non-Canadian taxes).

The CRA has indicated that reporting corporations must disclose RUTTs that relate to their partnership interests, if any.

Timing for Reporting and Prescribed Form

Subsection 237.5(3) provides that the information return required to be filed under subsection 237.5(2) must be filed on or before the corporation’s filing due date for the relevant taxation year.

The prescribed form for reporting uncertain tax treatments is the RC3133, Reportable Uncertain Tax Treatments Information Return. Form RC3133 requires, among other things, the following information from a reporting corporation:

• the relevant taxation year to which the RUTT pertains;
• a description of the relevant facts;
• the applicable statutory provisions relied on;
• the differences between the corporation’s tax payable determined in accordance with its relevant financial statements and tax treatment (the “RUTT amount”), and whether those differences are temporary or permanent, involve tax attributes, involve a determination of value of property, and involve a cross-border transaction or non-resident entity; and,
• whether the RUTT has already been reported to the CRA through the corporation’s other filings.

The CRA has opined that the taxation year to which a RUTT relates is the year in which the reporting corporation’s taxable income was affected. As a result, a reporting corporation may be required to report a RUTT in a taxation year different from the year that the uncertainty is reflected on the corporation’s financial statements. Further, where a RUTT is included on a reporting corporation’s balance sheet for multiple years, it must be reported on the prescribed form for each year to which the RUTT applies unless the RUTT has been reversed.

Penalties for Failure to Report

Subsection 237.5(5) imposes a penalty for failing to report a RUTT as and when required equal to $2,000 per week, up to a maximum of $100,000 for each failure to report. The penalties contained in subsection 237.5(5) will not apply to a corporation’s taxation years that begin before June 22, 2023.

A due diligence defense in respect of the subsection 237.5(5) penalty is available under subsection 237.5(6). Under that provision, a corporation will not be liable for the subsection 237.5(5) penalty if the corporation has exercised “the degree of care, diligence and skill to prevent the failure to file that a reasonably prudent person would have exercised in comparable circumstances”. Whether the due diligence defense is available is a question of fact.

As we approach the inaugural filing deadline for the Form RC3133, larger corporations should be aware of their reporting obligations in respect of uncertain tax treatments. If you have any questions about your reporting obligations for uncertain tax treatments under Act, please contact a member of the Miller Thomson LLP Corporate Tax group.