Canada: Fighting Aggressive Tax Planning


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

Confidential transactions are transactions that obtain a tax benefit, including a reduction, avoidance, or deferral of the tax payable, and that have a contract between the taxpayer and his advisor requiring the former to respect a confidentiality agreement with regard to third parties. These new measures apply to targeted transactions carried out on or after October 15, 2009, unless the transaction forms part of a series of transactions that began prior to October 15, 2009 and is completed before January 1, 2010.
This temporary exception will apply to series of transactions without taking into account the statutory definition of "series of transactions" at Section 1.5 of the Taxation Act (see paragraph 248(10) of the Income Tax Act). By excluding the application of Section 1.5 of the Taxation Act to the notion of series of transactions integrated into the mandatory disclosure mechanism, the transactions that qualify as being part of a series of transactions, and the date on which the series of transactions begins, will be determined according to the common law principles.2
Mandatory disclosure3 must be made using a prescribed form to provide a complete and detailed description of the facts and tax consequences resulting from the transaction in order to allow Revenu Québec to analyze the transaction. Since a taxpayer who is required to make a mandatory disclosure will have also filed their tax return that sets out the desired results of the transaction or series of transactions, it will be essential for a taxpayer to properly articulate the disclosure on the prescribed form in order to ensure its conformity with the taxpayer's tax return. It merits mention that if Revenu Québec does not request additional information within 120 days following the transmission of the form duly completed by the taxpayer, Revenu Québec will consider the disclosure complete.
Failure to disclose a transaction that qualifies for mandatory disclosure by the due date for filing the taxpayer's yearly tax return entails a minimum penalty of $10,000 plus $1,000 a day to a maximum of $100,000.
Failure to disclose will have the additional effect of suspending the period of limitation until the prescribed form is filed, and will lead to permanent uncertainty with respect to the taxpayer's tax liability.
In cases of mandatory disclosure relative to confidential transactions specifically, Information Bulletin 2009-5 introduces a type of anti-avoidance rule in order to reach certain specific situations such as ones involving an agent. This measure targets circumstances where a contract with an advisor is concluded by a person associated with or related to the taxpayer. In such situations, the contract will be deemed to have been concluded by the taxpayer himself/herself. The implications of this measure raise questions, as the only persons included are associated corporations and related taxpayers. Therefore, this measure does not include friends or business partners. It is important to note that this measure was not reproduced in the section regarding transactions subject to conditional remuneration.
  • Transactions subject to conditional remuneration

The new measures concerning mandatory disclosure apply equally to transactions subject to conditional remuneration. Transactions subject to conditional remuneration are transactions where remuneration of the advisor is conditional upon the tax benefit obtained from the transaction, is established based on such tax benefit, is refundable if the tax benefit does not materialize or is acquired only after the expiry of the period of limitation relating to the transaction. This disclosure mechanism is nearly identical to the mandatory disclosure mechanism discussed above, which is applicable to confidential transactions regarding who must conform, the application date, and the formalities of disclosure.
As mentioned in regard to confidential transactions, the mandatory disclosure mechanism applies to a transaction that is carried out on or after October 15, 2009. These measures do not apply to a transaction subject to conditional remuneration that is part of a series of transactions that began before October 15, 2009 and was completed before January 1, 2010.4

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), [1989] 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.

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