New reporting requirements: reportable transactions
On June 26, 2013, the Government of Canada passed legislation requiring disclosure of reportable transactions to the Canada Revenue Agency (CRA). The legislation addresses concerns about how aggressive tax avoidance transactions affect the fairness of the income tax system – everyone must pay the correct amount of taxes.
What is a reportable transaction?
A reportable transaction is a specific type of tax avoidance transaction Footnote 1 or, in other words, any transaction undertaken alone or as part of a series of transactions, in order to avoid paying taxes. Reportable transactions are entered into by, or for the benefit of, a person and they have at least two of the following three features or “hallmarks”:
- The promoter or advisor, including any non-arm's-length party (referred to collectively as “promoter or advisor”), is entitled to a fee that is:
- based on the amount of the tax benefit from the transaction;
- contingent upon obtaining a tax benefit that results from the transaction; or
- attributable to the number of persons participating in the transaction (or similar transaction) or who have been provided access to advice from the promoter or advisor about the tax consequences of the transaction (or similar transaction).
- The promoter or advisor of the transaction obtains “confidential protection” Footnote 2 for the transaction.
- The taxpayer, the person who entered into the transaction on behalf of the taxpayer (including any non-arm's-length party), or the promoter or advisor has or had “contractual protection” Footnote 3 for the transaction (other than as a result of a fee described in the first hallmark).
A reportable transaction does not include a transaction that is, or is part of a series of transactions that includes, the acquisition of a tax shelter or the issuance of a flow-through share for which an information return has been filed with the Minister.
The new legislative requirements apply to reportable transactions entered into after December 31, 2010 and reportable transactions that are part of a series of transactions entered into before January 1, 2011 and completed after December 31, 2010.
To whom do the new reporting requirements apply?
Under the new legislation, a person (including an individual, corporation, trust, or partnership) must disclose a reportable transaction by filing an information return with the CRA. This reporting requirement also applies to any person who enters into such a transaction for the benefit of another person.
If one or more promoters or advisors are entitled to fees as described in the hallmarks for a particular transaction, each of these promoters or advisors must also file an information return with the CRA.
What is the process for reporting a reportable transaction?
Form RC312, Reportable Transaction Information Return, must be filed on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction. It must be filed separately from any information return, including an income tax return.
For information returns that must be filed before July 1, 2012, (that is, for the 2010 and 2011 calendar years), Form RC312 must be filed before October 23, 2013. For the 2012 calendar year, the CRA will administratively extend the filing due date of the RC312 to October 23, 2013.
Disclosing a reportable transaction will have no bearing on whether the tax benefit is allowed under the Income Tax Act. Form RC312 is filed for administrative purposes and is not an admission that the General Anti-Avoidance Rule (GAAR) applies to any transaction or that any transaction is part of a series of transactions. Similarly, it does not mean that the CRA agrees with the intended tax consequences or benefits of the transaction.
What are the consequences of not reporting a reportable transaction?
Penalty for not reporting
If a Form RC312 for a reportable transaction is not filed when required, each person who has to file this form will be liable to pay a penalty, notwithstanding any agreement between the parties as to who is going to file the return. The amount of the penalty is equal to the total of all the fees for the transaction that the promoter or advisor is entitled to receive (these fees are described in the first and third hallmarks under “What is a reportable transaction” on the previous page). A promoter or advisor is liable to pay a penalty only to the extent of the fees to which he or she is entitled.
Suspension of the tax benefit
In addition to the penalty, the tax benefit is denied until the obligation to file Form RC312 has been satisfied and the penalty and interest have been paid.
A person required to file a Form RC312 for a reportable transaction will not be liable for a penalty for not filing that information return if that person has exercised the degree of care, due diligence, and skill that a reasonably prudent person would have exercised in similar circumstances.
Extended reassessment period
For taxation years ending after March 20, 2013, new legislation, introduced in Economic Action Plan 2013, requires that:
- where Form RC312 has not been filed as required, the reassessment period is extended by three years after the date, if any, that the information return has been filed; and
- a waiver of this extended reassessment period may be filed with the CRA within this additional three-year period.
Economic Action Plan 2013 also proposes to limit the scope of an assessment, reassessment, or additional assessment of a taxpayer's taxation year during the extended reassessment period to what can reasonably be regarded as relating to the tax benefit. This budget measure is not included in the technical bill. It will be introduced in Parliament at a later date.
Form RC312, Reportable Transaction Information Return, is also available on the CRA's Web site.
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