Ottawa is looking to catch more of what it consider to be too aggressive tax planning arrangements by asking for public consultation on new rules to govern the reporting of certain transactions that at present need not be reported to the Canada Revenue Agency.

While rules requiring the reporting of tax shelters, as defined by the Income Tax Act, already exist, there are many aggressive tax-planning strategies that don’t meet the definition by law of a tax shelter, the government contends. The transactions may be found to be abusive.

As part of this year’s federal budget, the government is proposing a regime under which a tax avoidance transaction featuring at least two of three “hallmarks” would be reportable to the CRA. The existence of the hallmarks would not in and of the themselves constitute evidence of abuse, the government contends, but their presence often indicates that an abusive transaction could be taking place.

A reportable transaction would be an avoidance transaction, as currently defined in the Income Tax Act, entered into by a taxpayer that bears at least two of the following three hallmarks:

1. A promoter or tax advisor in respect of the transaction is entitled to fees that are to any extent attributable to the amount of the tax benefit from the transaction; contingent upon the obtaining of a tax benefit from the transaction; or attributable to the number of taxpayers who participate in the transaction.

2. A promoter or tax advisor in respect of the transaction requires “confidential protection” about the transaction.

3. The taxpayer or the person who entered into the transaction for the benefit of the taxpayer obtains “contractual protection” in respect of the transaction.

The failure of a taxpayer to report a reportable transaction could lead to the CRA denying the tax benefit resulting from the transaction. However, the reporting of a reportable transaction would have no bearing on whether the benefit is allowed, the government says.

“The CRA might ultimately find that a transaction is fine, but they want to know about the existence of it, instead of waiting to stumble upon it,” says Jamie Golombek, the Toronto-based managing director of tax and estate planning for CIBC Private Wealth Management.

Reporting regimes making use of hallmarks as a means of identifying aggressive tax planning have been used in the U.S. and Britain and have been recently introduced in the province of Quebec.

Should the new reporting proposals become law, it could make some taxpayers “think twice” about entering into certain transactions that bear two or more of the hallmarks, as the mere act of not reporting could cause the tax benefit resulting from the transaction to be disallowed, Golombek says.

The government says that details of the new reporting proposals will be released “at the earliest opportunity” and that the information regarding the consultation process will be announced at that time.

IE