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How Does the New 'Reportable Transactions' Legislation Impact You?

14/12/2010


There was new legislation proposed in Budget 2010 that will come into effect January 1, 2011. The Minister of Finance calls it “Reporting for Tax Avoidance Transactions” and in simplified terms, it means that whenever a taxpayer engages in a transaction that avoids tax, they need to notify CRA. Let’s think about that for a moment. One of my favourite quotes is from the famous British economist, John Maynard Keynes – “The avoidance of taxes is the only intellectual pursuit that carries any reward”.

Careers, mine included, have been built on the premise of avoiding tax. Some people assume this means shady deals and under-the-table transactions but tax avoidance can actually be a noble cause, providing it is not ‘abusing’ the laws contained within the Income Tax Act. As tax specialists, we spend massive amounts of time developing plans for our clients that minimize their tax liability. Would some of this planning be considered ‘avoidance’? Absolutely. Do we think it’s above-board and completely defensible to the CRA scrutiny? Of course. But do we want to send the CRA a notification outlining our plan and providing full disclosure of all of the transactions. Not really. Logistically, this adds more work to our already-full plates and, realistically, tightens the reins on creative tax planning.

There is, perhaps, a silver lining. Before an avoidance transaction is considered reportable, it must meet two of the three hallmarks established by the Department of Finance. Simply stated, they are as follow:

  1. The advisor or promoter of the transaction receives a fee that is contingent on the taxpayer obtaining a tax benefit;
  2. The advisor or promoter obtains confidential protection with respect to the transaction; and,
  3. The taxpayer/advisor/promoter obtains contractual protection if the transaction fails to obtain a tax benefit.

The fact that these hallmarks are in place indicates that the Minister of Finance does not expect Canadians to stop arranging their affairs in a manner that minimizes their tax liability. In fact, many tax planners will not be impacted by these new rules.

However, that doesn’t mean we are off the hook completely. If anyone else was involved in the transaction, or even in a different transaction that together could be considered part of a series of transactions, and either on their own or in combination with us caused two of the three hallmarks to be met, the transaction would be considered reportable. What this really means is that communication among all parties involved is critical.

If we don’t file the required return, but don’t ask the promoter/lawyer/insurance agent/etc. if a confidentiality agreement or contingent fee arrangement exists, we are in trouble. Failure to file brings serious penalties to all parties involved, even if only one of the parties triggered the obligation to file. Everyone is expected to conduct their own due diligence to ensure compliance with this new legislation.

I’m pretty sure I’m not the only one who doesn’t want to hand over my tax plans to CRA on a silver platter. But I also know that to not pay attention to these new rules would be a costly mistake.