Mandatory reporting proposals may be too broad, expert says

The new rules for mandatory disclosure requirements were first introduced in the 2021 federal budget (Getty Images/EmirMemedovski)

Expanded tax reporting requirements have been proposed in Canada, with the aim of targeting aggressive tax strategies. During a 60-day consultation period, which began February 4, 2022 when the draft legislation was released, the federal government consulted with taxpayers and other stakeholders on these proposed changes. Although the rules have not been finalized, it’s important for CPAs to understand where the proposals currently stand.

WHAT TO KNOW ABOUT REPORTABLE TRANSACTIONS

Of the rules announced, the reportable transaction requirement may have the broadest impact on taxpayers and their advisors.

“Many believe the rules may be too broad,” says Bruce Ball, FCPA, vice-president of taxation at CPA Canada, “and may require reporting that is not consistent with the original budget announcement and The Organization for Economic Co-operation and Development guidelines.”

With the current rules, a transaction must be reported if a two-part test is met: the transaction must be an “avoidance transaction” under the general anti-avoidance rule and it must have two of three “hallmarks” designed to identify specific types of potentially aggressive tax transactions. These include a fee hallmark, confidential protection hallmark and contractual protection hallmark. [See Mandatory tax reporting – problems and solutions for more information.]

Two key changes are proposed along with other amendments. First, the “avoidance transaction” definition will apply where obtaining a tax benefit is one of the main purposes,” says Ball. This can include non-controversial tax benefits that are not at all aggressive.

Secondly, reporting is triggered if only one hallmark is present. The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada (Joint Committee) flagged the “reporting net” will be mostly based on the hallmarks and the concern is that ordinary commercial transactions could trigger at least one hallmark, creating a reporting requirement.

The reporting requirement applies to both taxpayers and advisors, generally within 45 days.

Another concern is that an “advisor” is broadly defined, so those who are not the key advisors may not know when a reporting requirement exists. In many plans and transactions, multiple advisors are often needed with different skillsets.

With a proposed application date of January 1, 2022, it appears that reporting requirements will arise before the proposals become law.

IMPORTANT CHANGES TO NOTIFIABLE TRANSACTIONS

The idea of notifiable transactions—introduced in the 2021 federal budget—are transactions that are the same or substantially similar to designated transactions (generally aggressive tax plans). “Substantially similar” to a designated transaction or series means the transaction or series leads to similar tax consequences or it is factually similar or based on the same tax strategy. So, if a transaction meets this test, a disclosure requirement will exist, again with a January 1, 2022 effective date and 45-day reporting window.

Final decisions on these designated transactions will be made by the Minister of National Revenue, agreed upon by the Minister of Finance.

A backgrounder was previously released with the draft legislation. It outlines six sample transactions (see the Tax blog for more details).

The Joint Committee has identified a number of issues with both the reportable transaction and notifiable transaction proposals in a submission made to the Department of Finance.

NEW REQUIREMENTS FOR UNCERTAIN TAX TREATMENTS (UTT)

“A UTT is a tax treatment used, or planned to be used, in a corporation’s income tax filings when it is uncertain that the tax treatment will be accepted and that uncertainty is reflected in the corporation’s (or group’s) audited financial statements for the year,” says Ball.

Corporations affected by this will be required to file certain information for each UTT for tax years beginning after 2021.

“The need for complete disclosure of tax risks by corporations to their external auditors in the context of their financial reporting obligations is crucial so that auditors can fulfil their responsibilities in the interest of the Canadian public,” says Ball. So, these rules are a concern if the new reporting requirement undermines disclosures between a corporation and its auditor. In addition to discussing its broad concerns, CPA Canada’s submission also highlighted a number of technical issues.

For all three sets of rules, significant penalties can apply where required disclosures are not filed or filed late.

Although it is important for the CRA to have all of the information it needs to administer the tax system, it is equally important to ensure these additional reporting requirements are focused and do not result in unreasonable compliance costs.

STAY INFORMED

Get more details about mandatory reporting changes and related concerns. Plus, watch for updates on these issues on our tax blog and tax news page.