On October 17, 2009, the Government of Québec announced that it intends to tackle the issue of aggressive tax planning through the implementation of measures targeting its disclosure and through clarifications to the notion of bona fide purpose in the context of the application of the general anti-avoidance rule (GAAR). While the amendments in the context of the GAAR effectively harmonize Québec's legislation with that of other provinces, the mandatory and preventive disclosure mechanisms aimed at aggressive tax planning constitute a novel approach with respect to tax law conformity. The question presents itself: Do we continue to find ourselves in a system of auto-assessment?
Following the publication of the "Aggressive Tax Planning" working paper in January 2009,1 the Québec Finance Minister published Information Bulletin 2009-5, entitled "Fighting Aggressive Tax Planning," which sets out the various measures to be integrated into Québec tax legislation.
These measures include: 1) mandatory disclosure of transactions involving a confidentiality agreement or conditional remuneration; 2) clarification of the term "bona fide purpose" for purposes of the GAAR; 3) extension of the period of limitation allowing for the issuance of new assessments regarding transactions to which the GAAR applies; and 4) the creation of a regime of penalties applicable to both taxpayers and promoters where the GAAR applies.
1) Mandatory disclosure mechanism
Québec tax legislation will be modified to introduce a mandatory disclosure mechanism for confidential transactions and transactions subject to conditional remuneration.
- Confidential transactions
- Transactions subject to conditional remuneration
2) Notion of bona fide purpose
Information Bulletin 2009-5 provides important clarifications with respect to the notion of bona fide purpose in applying the GAAR. Currently, an avoidance transaction is a transaction or a series of transactions that results in a tax benefit unless it is possible to show that the transaction was principally undertaken for a bona fide purpose other than the achievement of a tax benefit. The current legislation does not exclude the achievement of a tax benefit under any provincial or federal law from the notion of bona fide purpose. According to the new definition of bona fide purpose, a tax benefit, the reduction, avoidance or deferral of tax, the increase of a tax refund pursuant to Québec legislation, other than the Taxation Act, or a law of another province of Canada or a federal law or any other combination cannot be considered a bona fide purpose. Subject to exceptions, this modified definition applies to taxation year 2009 and any taxation year that has not been prescribed or covered by an objection or appeal on October 15, 2009.
The addition of exclusions from bona fide purpose provided in Information Bulletin 2009-5 appears to be the Québec Finance Minister's response to the type of transaction discussed in the January 2009 working paper, such as the Québec Shuffle, which was addressed in OGT Holdings Ltd.5 In that decision, the principal purpose was determined to be the avoidance of provincial tax. The introduction of these new measures has allowed Revenu Québec to broaden the notion of tax avoidance by expressly providing that the reduction, avoidance or deferral of tax, the increase of a tax refund pursuant to Québec legislation, other than the Taxation Act, or a law of another province of Canada or a federal law or any other combination, cannot be considered a bona fide purpose. Tax practitioners who write opinions regarding the application of the GAAR will have to be convinced that the principal purpose of their clients' transactions is not tax motivated to confirm the existence of a bona fide purpose.
3) Increase in the period of limitation
The normal period of limitation6 for the issuance of a notice of assessment or reassessment regarding a transaction or series of transactions is subject to a three-year increase for taxation years ending after October 15, 2009, where the GAAR applies to a transaction or series of transactions carried out on or after October 15, 2009 except in circumstances described above where a series of transactions began earlier and ends prior to January 1, 2010.7 The increase in the period of limitation will not apply in the following circumstances: three years have already been added, or mandatory or preventive disclosure8 has been exercised by the taxpayer. Notwithstanding an increased period of limitation that results from the existing prescription rules pursuant to the Taxation Act, filing the prescribed form (as mandatory or preventive disclosure) will be the only way for a taxpayer to limit the period of limitation to the usual three or four years.
Since the normal period of limitation of a transaction begins on the mailing date of the first notice of assessment, it is hoped that the processing time for tax returns reflecting the tax consequences for transactions addressed by the new measures will not be unduly slowed to delay the date on which the period of limitations begins.
4) Penalty : GAAR
Information Bulletin 2009-5 introduces a regime of penalties applicable to both taxpayers and promoters where the GAAR applies to a transaction carried out on or after October 15, 2009, except in circumstances described above where a series of transactions began earlier and ends prior to January 1, 2010.9 Therefore, a taxpayer who has not made mandatory or preventive disclosure of a transaction to which the GAAR applies will face a penalty equal to 25 per cent of the "tax benefit" withdrawn following the application of the GAAR. The taxpayer may nevertheless avoid penalization by making a mandatory or preventive disclosure or by successfully arguing a due diligence defence.
A promoter will be subject to a penalty equal to 12.5 per cent of the consideration received directly or indirectly, subject to the same exceptions as the taxpayer as well as a defence of due diligence on behalf of the promoter.
No clarification has been made regarding the possibility of Revenu Québec cumulating the penalty for mandatory disclosure with that relative to the GAAR.
Several questions arise concerning the notion of a due diligence defence in the context of the GAAR. If a taxpayer relies on an opinion issued by lawyers concluding that the GAAR does not apply to a transaction or series of transactions, does the submission of this opinion to the tax authorities become the taxpayer's defence in the face of the penalty? How can a taxpayer successfully argue a due diligence defence pertaining to what is essentially a legal question (i.e., does GAAR apply?) other than by presenting a legal opinion to that effect? If this is the case, the submission of the legal opinion to the tax authorities, all the while serving the taxpayer's own purposes with respect to the penalty, will also constitute an essential source of information in the establishment of the assessment.
Pursuant to the new measures regarding disclosure of a transaction to which the GAAR applies, the definition of "promoter" will include any person who: marketed or promoted the transaction, received consideration for marketing or promoting the transaction, or could reasonably be said to have played a substantial role in the marketing or promoting of the transaction. For these purposes, the conduct of an employee will be deemed to be that of his/her employer.
Finally, it is important to question the choice that a taxpayer faces from now on between obtaining an advance tax ruling and preventive disclosure. While the latter option prevents penalties and the increase of the period of limitation, the taxpayer remains uncertain regarding the eventual application of the GAAR. The taxpayer's situation is therefore comparable to the situation he/she would have faced prior to the establishment of the new measures. The best combination would therefore be to obtain an advance tax ruling regarding a transaction in order to know Revenu Québec's position and at the same time disclose preventively to avoid incurring a penalty.
1 Québec Finance Minister, Aggressive Tax Planning, January 30, 2009.
2 See Canada Trustco Mortgage Co. c. R., 2009 S.C.C. 54, OSFC Holdings Ltd. c. Canada, 2001 FCA 260 and Craven c. White (1988),  A.C. 398 (U.K.H.L.).
3 The prescribed form for mandatory disclosure must be produced by the taxpayer's filing due date for the year or, in the case of a partnership, by the date on which the members are required to produce their information return for the fiscal year in question.
4 See discussion regarding "series of transactions" included in the paragraph titled "confidential transactions of item 1."
5 OGT Holdings Ltd. c. Québec (Sous-ministre du Revenu), (2006 QCCQ 6328).
6 Section 1010 Taxation Act.
7 See discussion regarding "series of transactions" included in the paragraph titled "confidential transactions of item 1."
8 Revenu Québec introduced a preventive disclosure mechanism applicable to transactions that may be considered aggressive tax planning carried out on or after October 15, 2009. This preventive disclosure mechanism is comparable to the mandatory disclosure mechanism in terms of who can exercise it, the applicable deadline, and the formalities according to which it must be exercised. It allows a taxpayer to prevent the extension of the period of limitation and imposition of a penalty further discussed more fully below. Preventive disclosure can be made no later than April 15, 2010 for transactions carried out as a series of transactions that ended before October 15, 2009.
9 See discussion regarding "series of transactions" included in the paragraph titled "confidential transactions of item 1.
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.