Canada: Québec Implements Its Proposed Aggressive Tax Planning Measures

On October 15th, 2009, the Québec Minister of Finance announced the implementation of legislative measures designed to counter arrangements which it deems to constitute aggressive tax planning. Briefly, the four main measures announced consist of the following:

1. Mandatory disclosure to Revenue Québec of transactions (including arrangements or events) resulting in a tax benefit of at least $25,000 or resulting in a reduction of income of at least $100,000, in situations where such transactions are subject to either an undertaking of confidentiality on the part of the taxpayer; or a remuneration of the taxpayer's advisor, in relation to the transaction, that is contingent, in whole or in part, on the realization of the tax benefit.

The penalty for non-compliance with such disclosure obligations ranges from $10,000 to $100,000. The basic penalty is $10,000, increasing by $1,000 for every day starting on the second day following the deadline to make the disclosure, up to a maximum penalty of $100,000.

In addition, where a taxpayer fails to comply with a mandatory disclosure obligation, the normal reassessment period in respect of that taxpayer (and any person related or associated to that taxpayer) is suspended in respect of the particular transaction until such time as the disclosure is made.

2. An expansion of the general anti-avoidance rule (the "GAAR"), a rule which can deny a tax benefit that otherwise results from a correct technical application of the Taxation Act (Québec) (the "Act"), but that results in an abuse or misuse of the Act or the provisions relied upon. This amendment is specifically intended to expand the definition of "avoidance transaction" in order to render the GAAR potentially applicable to transactions the primary purpose of which is to obtain a tax benefit resulting from the laws of Québec other than the Act, from federal laws or from the laws of a province other than the Province of Québec.

3. A three-year extension of the normal reassessment period of three or four years where the GAAR applies, thus extending such period to six or seven years. This extension can be avoided where disclosure is made; and

4. The application of penalties to both taxpayers and promoters where the GAAR applies. Such penalties can be avoided where disclosure is made. The penalty for taxpayers is 25% of the additional tax payable or reduction of a tax refund and the penalty for promoters is 12.5% of the consideration received by them in relation to the particular transaction.

Public Consultation Process

The aggressive tax planning measures, as initially proposed in a working paper released on January 30th, 2009, were the object of a public consultation process. Various tax and business associations, in which several Davies tax lawyers are actively involved, made representations in the course of this process with a view to alerting the Minister to numerous serious unforeseen consequences of this initiative.

Administration of the Aggressive Tax Planning Measures

Application and Coming into Force

The measures relating to the mechanism of mandatory and preventive disclosures will be implemented with effect as of October 15th, 2009 to transactions occurring after that date. However, certain transitional rules are provided. The amendment to the definition of "avoidance transaction" for the purposes of the GAAR will have retroactive effect, save for certain specific exceptions.

Mandatory Disclosures

Specific administrative rules are set forth with respect to mandatory disclosures:

  • Such disclosures must be made by prescribed form;
  • Such disclosures will not be considered to be an admission or concession;
  • The deadline to make such disclosures for a particular taxation year of a taxpayer is the filing due date of the taxpayer for such taxation year;
  • A disclosure will be deemed complete where the prescribed form is filed with Revenue Québec and no additional information has been requested by Revenue Québec within 120 days of such filing; and
  • Taxpayers who have omitted to make a mandatory disclosure may avail themselves of Revenue Québec's voluntary disclosure policy in order to avoid the penalties associated with the failure to disclose (which, as noted above, can reach up to $100,000).

Preventive Disclosures

It should also be noted that it is provided that a taxpayer can avoid the extension of the normal reassessment period and the imposition of penalties in respect of a transaction by making a preventive disclosure. Such preventive disclosures must also be made by a prescribed form by the filing due date of the taxpayer for the relevant taxation year.

The Bottom Line

These rules may yield unforeseen consequences for corporations and other entities with activities in Québec. As with any new tax measures, a proactive approach is the best way to avoid becoming the object of such unforeseen consequences particularly with respect to the application of the Québec GAAR.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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