The requirement for taxpayers and their advisors to disclose reportable transactions to CRA has been expanded for transactions entered into after June 21, 2023. This change is part of a broader suite of changes requiring the disclosure of tax strategies considered aggressive by the government. Similar requirements exist in other countries, including the United States, the United Kingdom, the European Union and Australia.

Transactions that must be reported
A transaction or series of transactions must be reported if it is an avoidance transaction and if one hallmark of aggressive tax planning (contingent fee, contractual protection or confidential protection) is present. Where there are no hallmarks, the transaction is not reportable, even if there is a tax benefit.

Avoidance transaction
An avoidance transaction is one where it can be reasonably considered that obtaining a tax benefit was one of the main purposes. This could capture many normal transactions as tax (either alone or with other motivators) is often a main factor.

Contingent fee arrangements hallmark
This hallmark is present if an advisor or promoter (or non-arm’s length person to them) has or had entitlement immediately or in
the future and either absolutely or contingently, to a fee based on, or contingent on, a tax benefit.

Contractual protection hallmark
This hallmark is present if the taxpayer, another person who entered into the transaction for the benefit of the taxpayer, an advisor or a promoter or a non-arm’s length person to any of these persons has or had contractual protection in respect of the transaction or series.

Contractual protection means any form of insurance (other than standard professional liability insurance) or other protection. For example, this could include an indemnity, compensation or a guarantee. The insurance or protection must protect against a failure to achieve the tax benefit or provide support in the course of a dispute related to the tax benefit.

Confidential protection hallmark
This hallmark is present if an advisor or promoter (or non-arm’s length person to them) obtains or obtained confidential protection in respect of a tax treatment related to the avoidance transaction or series from a person they sold the plan to or provided assistance or advice to.

Confidential protection prohibits disclosing the details or structure of the transaction or series to any person (including CRA). Disclaiming or restricting an advisor’s liability is not confidential protection if it does not prohibit the disclosure of the details or structure of the transaction or series.

CRA opined that the protection of trade secrets that do not relate to tax does not constitute the presence of the confidential protection hallmark.

Deadline
The deadline for reporting is 90 days after the earlier of the transaction or becoming contractually obligated to undertake the transaction.

Penalties
Penalties of $500 per week, up to the greater of 25% of the tax benefit and $25,000, apply to most taxpayers. For corporations with at least $50 million of assets, the penalty is $2,000 per week up to the greater of 25% of the tax benefit and $100,000.

ACTION: Expanded disclosures to CRA are required when a taxpayer enters into an avoidance transaction and at least one of three hallmarks of aggressive tax planning are present. Ensure you are fully aware of this disclosure requirement and filing if necessary.

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