parliament hill / Vladone

Critics of the federal government’s expanded Income Tax Act reporting requirements should not get their hopes up after the Department of Finance delayed the implementation of its mandatory disclosure regime until a bill containing the measures receives royal assent.

“We’re not telling clients to expect any big changes in the law,” said Barry Travers, national leader of KPMG Canada’s public sector tax practice.

“The delay is giving some people the belief that there might be some tweaks, but there’s nothing to indicate that will be the case,” he added, noting that the federal government already knew the major concerns of stakeholders when it released its draft legislation, having made its initial call for submissions back in February.

Currently, avoidance transactions — defined as having a tax benefit as their primary purpose — need to be reported to the CRA only when two of the following three hallmarks are present:

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

Under the government’s proposed legislation, a tax benefit would only have to be one of the main purposes of the transaction, and just one of the hallmarks present for it to be reportable.

The Chartered Professional Accountants of Canada was one of the groups to identify potential problems with the rules, warning that they set the bar for reportable transactions so low that many routine and non-aggressive tax planning strategies could be caught.

Bruce Ball, the organization’s vice-president of taxation, was encouraged by the federal government’s postponement, which he said will give CPA Canada a chance to restate its recommendations for improvement, including a “materiality” test to reduce the scope of reportable transactions and exclude minor transactions where only a small tax benefit was obtained.

“There are still issues that we want to get resolved and have a discussion with the government about,” Ball said.

Travers is working on the assumption that the legislation will receive royal assent at some point in 2023. At the very least, he said this will give his clients much-needed preparation time for the new disclosure regime. In the meantime, he hopes the government will update its forms for reportable transactions to reflect the new rules.

“Part of the heartburn for organizations is they don’t know what actually is required to [be] reported,” he said. “Usually, the format of the reporting form gives a good indication.”

The delay in implementation also applies to a proposed 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.

However, the in-force date for reporting requirements concerning “uncertain tax treatments” will remain unchanged for tax years after 2022, although the Department of Finance added that penalties in this category will only apply after royal assent. These new rules would require larger corporations with assets over $50 million to disclose to the CRA any transactions flagged in the company’s audited financial statements as uncertain to comply with tax law.

Ball said a delay was not as urgent for the uncertain tax treatment changes, since the first disclosures will only become due in 2024, at same time as corporations’ income-tax deadline, as opposed to the 45-day limit for disclosure triggered by the date of a reportable or notifiable transaction.