Exterior of CRA headquarters building
CRA / Government of Canada

Planned updates to the Income Tax Act’s general anti-avoidance rule could trigger a wave of voluntary reporting to the Canada Revenue Agency (CRA) in addition to those required under its new mandatory disclosure rules.

Under proposals introduced as part of the 2023 federal budget — though not yet in force — the CRA would get an extra three years on top of the normal reassessment period to conduct general anti-avoidance rule (GAAR) assessments, with taxpayers liable for penalties worth 25% of the tax benefit obtained from any transactions found subject to GAAR.

However, in administrative guidance issued earlier this month, the CRA confirmed the proposed GAAR penalty and reassessment extension will not apply to transactions reported under its new mandatory disclosure regime, which took effect in June. The exemptions are effective regardless of whether the disclosure was made “voluntarily, or as required legislatively,” the guidance states.

“This means if the GAAR changes are enacted, taxpayers and their advisors will need to consider whether to report transactions under the mandatory disclosure rules even if not required,” said Tara Benham, the national leader of Grant Thornton’s Canadian tax practice.

Although the new mandatory disclosure regime significantly lowers the threshold for what the CRA considers an “avoidance transaction,” the reporting obligation only kicks in 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
  3. contractual protection is provided to the taxpayer or other parties in the event a tax benefit is challenged or ultimately fails to materialize

Toronto tax lawyer David Rotfleisch said advisors and promoters who err on the side of non-disclosure run the risk of the CRA going ahead with a reassessment years later on the basis that GAAR applies.

“If you disagree, then you get into a Tax Court fight over whether you should have had to report it, before you can even get to argue that the reassessment is statute-barred,” he said. “That’s probably the nastiest element of this guidance.”

The new disclosure regime also creates a new category of “notifiable transactions,” requiring reporting by advisors and promoters involved in transactions identical or substantially similar to ones the CRA has previously identified as potentially abusive.

Benham said the CRA guidance on both reportable and notifiable transactions was largely predictable, providing welcome clarity on the types of situations the Department of Finance had already signalled would be exempt from the rules.

“What is surprising is that the CRA did not introduce transitional relief measures, such as extending the filing deadline or providing penalty relief, to allow sufficient time for compliance when a new transaction is designated as a notifiable transaction,” she said. “Additionally, the CRA did not add a de minimis rule to exempt transactions with immaterial tax benefit from disclosure, which accounting firms were hoping to see.”

For transactions closed on and after June 22, every advisor or promoter involved in a reportable transaction or series of transactions has 90 days from the close date to make their own separate disclosure to the CRA. Penalties for non-compliance for promoters and advisors could rise as high as $110,000 plus the value of all fees charged.