On October 15, 2009, the Québec Minister of Finance announced the implementation of new measures designed to counter perceived aggressive tax planning by changing the risk/ reward ratio for taxpayers. These changes could be significant to all Canadian taxpayers who have a permanent establishment or carry on business in Québec and to advisors who promote tax plans in Québec.

In addition to expanding and toughening its general anti-avoidance rule (GAAR), Québec has instituted mandatory disclosure requirements for certain transactions, introduced harsh penalties and extended the time to reassess. Except as noted below, the new rules are effective for transactions occurring on or after October 15, 2009.

Mandatory Disclosure

Mandatory disclosure will apply to transactions where the following two conditions apply:

  1. The transaction results in a tax benefit of at least $25,000 or a reduction in income of at least $100,000; and
  2. The transaction is undertaken with an undertaking of confidentiality on the part of the taxpayer or where the tax advisor's remuneration is contingent (even partly) on the success of the tax plan.

Such mandatory disclosure is due on the taxpayer's filing due date. The penalty for late disclosure is $10,000 for the first day plus an additional $1,000 for each subsequent day, up to a maximum of $100,000. Further, failure to make mandatory disclosure will allow Québec to reassess the taxpayer (or any person related to or associated with the taxpayer) at any time until the required disclosure is effectively made.

The disclosure must be made in the prescribed form and, when so filed, it will be deemed to be complete if Revenue Québec does not request additional information within 120 days. The disclosure itself should not be considered an admission or concession by the taxpayer that the transaction involves aggressive tax avoidance, however it will clearly heighten the audit risk.

The new mandatory disclosure requirement will be subject to Québec's existing voluntary disclosure policy. This means that a taxpayer who has failed to meet the mandatory disclosure requirement may be able to avoid the resulting penalties by satisfying the conditions of Québec's voluntary disclosure policy.

GAAR Expanded

The Québec GAAR operates to undo benefits to the taxpayer resulting from a transaction or series of transactions that constitutes an "avoidance transaction". This occurs when a transaction results, directly or indirectly, in a tax benefit unless it was undertaken or organized chiefly for bona fide purposes.

Québec has now narrowed its concept of bona fide purposes so that the Québec GAAR may also apply to transactions entered into with the purpose of reducing, avoiding or deferring tax owing under Québec law other than the Taxation Act, the law of another province or under federal law. Unlike the other amendments, this expanded definition has retroactive effect – it applies to transactions entered into after October 15, 2009, but may also apply to those entered into before if the taxation year in question is not otherwise time-barred.

More Time to Reassess, Plus Penalties

In addition to expanding the Québec GAAR's scope of application, the normal reassessment period (three or four years, depending on the circumstances) has been extended by three years for taxpayers reassessed under the GAAR.

The measures also introduce penalties when a taxpayer is reassessed under the Québec GAAR. Accordingly, if the GAAR applies, the taxpayer will not only be subject to tax and interest but also to a new penalty. This penalty, which is unique to Québec, is imposed at the rate of 25 percent of the additional tax. A separate penalty may be imposed on the promoter of a tax plan at the rate of 12½ percent of the fees received or receivable in relation to the transaction. Note, however, that neither the penalties nor the extended reassessment period apply if the taxpayer has complied with either the mandatory disclosure discussed above or has otherwise disclosed the transaction under a new preventive disclosure system. Also, the penalty will not apply if the taxpayer can establish a due diligence defence.

This new preventive disclosure system will exist only in the GAAR context. This system will require the preventive disclosure to be made in a prescribed form as well as a complete description of the facts and tax consequences of a transaction. The disclosure must be sufficiently detailed to permit the authorities to analyze the transaction and its tax consequences. However, the taxpayer need not disclose tax advice or other opinions given with regard to the transaction. As with mandatory disclosure, the disclosure is due on the filing date of the taxpayer's return.

Careful Consideration of New Rules is Required

The new rules have changed the risk/reward balance involved in filing a tax return in Québec and creates new obligations on the part of promoters of tax-motivated structures. Whether other tax jurisdictions decide to follow Québec's initiative to give added muscle to their own GAAR is an open question.

In the meantime, these new rules need to be considered and any tax-motivated transaction by taxpayers with a presence in Québec will require added diligence and compliance work.

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.