Exterior of CRA headquarters building
CRA / Government of Canada

The Canada Revenue Agency has clarified that simply including a common clause in contracts won’t trigger a reporting obligation under the new mandatory disclosure regime.

The passage of Bill C-47, which received royal assent on June 22, dramatically lowered the threshold for what the CRA considers an “avoidance transaction” and created a reporting obligation for taxpayers and their advisors when one of the following hallmarks is present:

  1. advisors or promoters are engaged on a contingent fee arrangement;
  2. advisors or promoters receive confidentiality protection regarding the transaction; or
  3. contractual protection is provided to the taxpayer or other parties in the event a tax benefit is challenged or ultimately fails to materialize.

With the 90-day deadline — Sept. 20 — approaching for the first mandatory disclosures under the new law, many accountants feared that including limitation-of-liability provisions in their professional engagement letters would trigger the “contractual protection” hallmark.

In late August, the CRA updated its administrative guidance to confirm that such a clause “would normally not, in and of itself, trigger a reportable transaction reporting hallmark,” as long as its purpose was related to professional indemnity insurance.

John Oakey, vice-president of taxation with CPA Canada, said the issue became a priority in the group’s lobbying efforts once C-47 became law.

“It’s a very encouraging development,” Oakey said. “It has become fairly standard practice for accountants to include this kind of clause in their engagement letters, and the original guidance that was provided by the CRA just did not address it.”

Without the updated guidance, he added the CRA could have faced an overwhelming deluge of reports from accountants eager to avoid the stiff penalties for non-compliance by promoters and advisors, which could rise as high as $110,000 plus the value of all fees charged.

“We told the CRA that every accountant out there that uses a limitation-of-liability clause is going to report on every one of their client transactions,” Oakey said.

Before C-47, the “avoidance transaction” definition could only be met by those whose primary purpose was obtaining a tax benefit. Under the new law, a tax benefit only needs to be one of the main purposes of the transaction, while just one of the listed hallmarks has to be met to make the transaction reportable, down from the two hallmarks required under the old mandatory disclosure regime.

According to Oakey, the limitation-of-liability issue was raised in the consultation process with the Department of Finance, but became more urgent once C-47 became law and CRA took over active administration of the process.

“We have a laundry list of issues that still need clarification, but this one was at the top of the list,” he said, adding that CPA Canada is pushing for further guidance on other subjects, including which particular events may start the clock on the 90-day reporting deadline.

“We will continue to reach out to the CRA and provide feedback and commentary as we move forward,” Oakey said.