The release of the Canada Revenue Agency’s first official list of “notifiable transactions” has done little to quell the uncertainty around its new mandatory disclosure regime.
Taxpayers and their advisors have begun disclosing “reportable transactions” under the 90-day deadline in the new rules, which went into force earlier this year and dramatically lowered the threshold for what the CRA considers an “avoidance transaction.”
The clock did not begin ticking on the new category of notifiable transactions, however, until the CRA formalized its designations on Nov. 1, adding five sets of transactions to a list that could grow.
The new list was almost identical to the version presented in February 2022 when the mandatory disclosure legislation was first proposed.
Barry Travers, national leader of KPMG Canada’s public sector tax practice, said tax advisors and their clients remain concerned by the vagueness of the government’s guidance on the subject, which requires reporting of any transaction that is the same or “or substantially similar” to those designated as notifiable, with the CRA calling for interpretations to be conducted “broadly in favour of disclosure.”
“The list could be 100 when you start thinking of the permutations or something that comes close,” Travers said. “Everyone is kind of in guess mode right now.”
In the meantime, many advisors and taxpayers will end up defaulting to a more conservative approach to disclosure, said Lesley Kim, a Calgary partner in the tax law group with Miller Thomson LLP.
“The penalties are so high that it means people are more likely to err on the side of caution and disclose transactions that are very innocuous,” she said, leading to lots of paperwork for the CRA to go through.
Under the rules, every advisor or promoter involved in a reportable or notifiable transaction must make their own separate disclosure to the CRA, although lawyers are temporarily exempted pending a court ruling on a constitutional challenge brought by a group of law societies. Penalties for non-compliance for promoters and advisors could rise as high as $110,000 plus the value of all fees charged.
The CRA’s list designated the following five transactions:
- Straddle transactions in which the taxpayer is allocated a business loss from the loss legs of an offsetting foreign exchange position after buying an interest in a partnership that had realized the gain legs immediately before the acquisition.
- Trust property transactions carried out to avoid or defer the 21-year deemed realization rule, including indirect transfers of trust property to another trust or a non-resident, as well as transfers of trust value using a dividend.
- Settlement or extinguishment of commercial obligations during a temporary assignment into bankruptcy for an amount that is less than the principal amount of the debt.
- Transactions in which the taxpayer relies on “purpose tests” in section 256.1 of the Income Tax Act to avoid a deemed acquisition of control and argue that attribute trading restrictions do not apply.
- Back-to-back lending transactions in which non-residents indirectly provide financing to a taxpayer who claims either that the debt and interest are not subject to the thin capitalization rules, or that its interest payments are subject to a lower withholding tax than under a direct financing arrangement.
Although the draft version of the list released in 2022 suggested the CRA would designate transactions designed to avoid Canadian-controlled private corporation status as notifiable, they were not included in the official version confirmed in November. Kim said the CRA may have considered the designation was no longer necessary because the federal government has since proposed legislation to tackle the issue directly.