Mandatory disclosure rules – Guidance

Mandatory disclosure rules

The lack of timely, comprehensive and relevant information on aggressive tax planning strategies is one of the main challenges faced by tax authorities worldwide. Early access to such information provides the opportunity to respond quickly to tax risks through informed risk assessments, audits and changes to legislation.

The Income Tax Act previously contained rules requiring that certain transactions be reported to the Canada Revenue Agency (CRA). However, the CRA’s experience with these rules since their introduction indicates that they are not sufficiently robust to address these concerns.

General comments

The Base Erosion and Profit Shifting Project, Action 12: Final Report (BEPS Action 12 Report) of the Organisation for Economic Co-operation and Development and the Group of 20 makes a number of recommendations relating to the enactment of mandatory disclosure rules. Many of the measures recommended in the BEPS Action 12 Report have been implemented in jurisdictions with comparable tax systems. The experience in these jurisdictions provides a useful model for the administration and enforcement of similar rules in Canada.

The following document is intended to provide guidance regarding the CRA’s approach to the application of the mandatory disclosure rules. The mandatory disclosure rules include revisions to the existing rules related to reportable transactions. The mandatory disclosure rules also require reporting with respect to notifiable transactions and uncertain tax treatments. Notifiable transactions differ from reportable transactions in that notifiable transactions are those that the Minister specifically designates as requiring reporting whereas reportable transactions require reporting if certain specified criteria are met.

The CRA’s approach to the application of these rules will develop over time based on our experience in dealing with specific factual circumstances.

Reportable transactions

The mandatory disclosure rules in respect of reportable transactions apply when two legislated criteria are met:

1. A transaction or series of transactions has one of three generic hallmarks: contingent fee arrangements, confidential protection or contractual protection
2. It can reasonably be concluded that one of the main purposes of entering into the transaction or series of transactions is to obtain a tax benefit

A taxpayer who enters into a reportable transaction (or another person who enters into the reportable transaction for the benefit of the taxpayer) is required to report the transaction to the CRA within 90 days of the earlier of:

• the day the taxpayer (or the person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction, and
• the day the taxpayer (or the person who entered into the transaction for the benefit of the taxpayer) enters into the transaction

The amended reportable transaction rules in section 237.3 apply with respect to reportable transactions entered into after royal assent, i.e. after June 21, 2023. They will also apply to transactions that “straddle” royal assent. For example, if a person contracted to enter into reportable transaction on June 1, 2023, but did not enter the relevant transaction until June 30, the reporting obligation will apply and the 90 day reporting period will begin on June 30, 2023. If a person enters into a series of transactions that straddle the date of royal assent, the reporting requirement will be triggered with the first reportable transaction entered into subsequent to royal assent.

The reporting obligations continue to extend to a promoter or an advisor, as well as persons who do not deal at arm’s length with the promoter or advisor and who are entitled to receive a fee with respect to the transaction, subject to the above-noted time limits.

The legislation provides an exception in that information is not required to be disclosed if it is reasonable to believe that the information is subject to solicitor-client privilege.

The prescribed form is Form RC312, Reportable Transaction and Notifiable Transaction Information Return.

No hallmarks – legislative exclusion from reporting

For greater certainty, there is no legislative reporting obligation under the reportable  transaction regime for a transaction or series of transactions where none of the three generic hallmarks - contingent fee arrangements, confidential protection or contractual protection - are present even though it can reasonably be concluded that one of the main purposes of entering into the transaction or series of transactions is to obtain a tax benefit.

For instance, without limiting the foregoing, this could include transactions such as estate freezes, debt restructuring, loss consolidation arrangements, shareholder loan repayments, purification transactions, claiming of the capital gain exemption, divisive reorganizations and foreign exchange swaps. This list is not exhaustive.

Interaction with the general anti-advance rule (GAAR)

Pursuant to budget proposals in respect of the GAAR, a penalty equal to 25% of the tax benefit may apply as well as an extension of the statute barred period by 3 years. Both measures will not apply if a disclosure is made, either voluntarily, or as required legislatively. Note that these proposals are not yet in effect.

Tax shelters and flow-through shares – legislative exclusion from reporting

Disclosure under the reportable transaction regime is not required for the acquisition of a tax shelter or the issuance of a flow-through share where the appropriate information return has been filed under those latter regimes.

Tax shelters - Canada.ca

Instructions For The Flow-Through Share Program - Canada.ca

No reporting obligation under the reportable transaction regime

As noted, in order for a transaction to be a reportable transaction, it must meet at least one of the three legislated hallmarks. The following activities would generally not, in and of themselves, meet a legislative hallmark and, as such, would not result in a transaction being subject to a reporting obligation insofar as the transaction is limited to the circumstances below:

Contingent fee arrangements

• Billing practices and circumstances of an advisor in respect of an avoidance transaction involving the collection of a standard fee (that is, generally available to the public under normal commercial terms and in comparable circumstances) by a financial institution:
  • for the establishment and ongoing administration of a financial account, such as a registered retirement savings plan (RRSP), or a financial instrument, such as a related segregated fund investment, including where the fee is determined in relation to the amount of the investment
  • where the fee offered to a particular client is discounted in relation to the number of financial accounts maintained by the financial institution for the particular client
  • for the establishment of a bank account for a trust
  • for a loan to allow for the subscription of shares by a family trust as part of an estate freeze, the annual fee earned by the Trustee(s) or fees for the establishment of a bank account for such a trust
  • for the repayment of a shareholder loan where a taxpayer is indebted to a Canadian-controlled private corporation, borrows sufficient funds from a Canadian Bank and the latter charges lending fees and interest
  • as a normal per-transaction charge for each security trade in the context of a year-end tax-loss selling program operated by the financial institution
• On this basis, no reporting obligation would generally arise for a financial institution that collects a standard fee in relation to the provision of an ordinary financial account that is broadly offered in a normal commercial or investment context in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly.
• A fee for the claiming of the scientific research and experimental development (SR&ED) tax credits
• A fee for the preparation of an annual income tax return that results in a taxpayer obtaining a refund of tax, including entitlement to personal tax credits, such as the disability tax credit or refundable tax credits, the Canada child benefit, the GST/HST credit or the Canada workers benefit
• Fees based on the numbers of preparations of and filings of income tax elections in respect of a transaction or series of transactions
  • As an example, a commercial reorganization may require the filing of multiple T2057s pursuant to section 85 of the Income Tax Act for the purpose of deferring capital gains. A firm may bill for the preparation of the T2057s on a per-transferor basis given the work to be done for each taxpayer will be similar. For greater certainty, the fees are only contingent on the number of returns prepared and not the attainment of the tax benefit
• In certain circumstances, a firm may bill a fee attributable to the number of taxpayers that participate in or have been provided access to the advice given on the tax consequences of the transaction. For greater certainty, the fees are only contingent on the number of returns or elections prepared and not the attainment of the tax benefit. A few examples are outlined below:
  • A section 85.1 rollover (other than subsection 85.1(3) for foreign affiliates)  – share for share exchanges: Situations where section 85.1 provides for a tax-deferred exchange shares of a public corporation for treasury shares of another public corporation (that is, commonly used in takeover bids, share exchanges that are undertaken pursuant to plans of arrangement, and other acquisitions of shares of a target corporation in exchange for shares of the purchaser) to the extent that it is not part of a broader series
  • A section 85 rollover in the context of a share-for-share exchange to defer a gain in a large commercial reorganization to the extent that it is not part of a broader series
  • Wind-ups under subsection 88(1) and amalgamations described in subsection 87(1) resulting in the following tax benefits – being the rollover, on a tax deferred basis of the shareholders’ shares or of properties of the subsidiary/predecessor corporations
• A reporting obligation is not expected to arise, absent other facts to the contrary, as a result of a fee that is based solely on the value of the services provided in respect of a transaction or series and determined without reference to the tax results of the transaction or series. This would cover, for example, the practice of value billing by professionals such as lawyers and accountants in which a fee is agreed to at the time of billing and is based on criteria (other than the value of the tax benefit resulting from the transaction or series) which might include:
  • the level of training and experience of the persons engaged in the work
  • the time expended by the persons engaged in the work
  • the degree of risk and responsibility which the work entails
  • the priority and importance of the work to the client, and
  • the value of the work to the client
• Additionally, a contingent litigation fee arrangement in relation to an appeal of a tax assessment by a lawyer in respect of a tax benefit from a completed transaction or series would not on its own, generally constitute the provision of a contractual protection. Therefore, the litigator would not generally be an advisor in respect of a transaction or series solely because of the existence of the contingent litigation fee arrangement that is implemented after the completion of the transaction or series that is the subject of an appeal
• However, a reporting obligation would be expected to arise for a litigator in relation to a contingent litigation fee arrangement that is put in place with a taxpayer, advisor or promoter in respect of a transaction or series prior to the completion of the transaction or series

Confidential protection

• Protection of trade secrets that do not relate to tax does not give rise to a reporting requirement

Contractual protection

• A limitation of liability clause in a professional engagement letter would normally not, in and of itself, trigger a reportable transaction reporting hallmark, provided that the purpose of the limitation clause is to generally limit the accountant’s liability for negligence (i.e., it is related to professional indemnity insurance) New
• Normal professional liability insurance of a tax practitioner would not in and of itself satisfy the contractual protection reporting hallmark and, therefore, the existence of this liability insurance would not give rise to a reporting requirement
• Standard representations, warranties and guarantees between a vendor and purchaser, as well as traditional representations and warranties insurance policies, that are generally obtained in the ordinary commercial context of mergers and acquisitions transactions to protect a purchaser from pre-sale liabilities (including tax liabilities), are not expected to give rise to reporting requirements for reportable transactions
• A reporting obligation would not arise solely in respect of contractual protection in the form of insurance that is integral to an agreement between persons acting at arm’s length for the sale of a business where it is reasonable to conclude that the insurance protection is intended to ensure that the purchase price paid under the agreement takes into account any liabilities of the business immediately prior to the sale and the insurance is obtained primarily for purposes other than to obtain a tax benefit from the transaction or series. A few examples are outlined below:
  • Indemnities related to existing pre-closing tax issues, or the amount of existing tax attributes (tax pools, capital cost allowance, etc.)
  • An acquisition by a public company where the acquisition transaction is specifically and carefully structured by the public acquiror (the Purchaser) and its tax advisors to achieve a paragraph 88(1)(d) bump of non-depreciable capital property owned by the target company (the Target) and the Purchaser obtains specific contractual covenants and/or indemnities from the Target and the significant shareholders of the Target (whether under the acquisition agreement or under separate support agreements) that are intended to ensure the Target and/or the significant shareholders do not take certain steps that may cause the bump denial rules to apply and, in the event the covenants are breached, that the Purchaser is indemnified for the additional taxes payable as a result of the loss of the paragraph 88(1)(d) bump. Contractual protection obtained in respect of indemnifications provided by the Purchaser would generally not be considered to trigger the contractual protection hallmark
  • Tax insurance acquired in relation to the purchase of taxable Canadian property from a non-resident of Canada, who could be liable for 25% (or in some cases 50%) of the purchase price for the property pursuant to subsection 116(5) of the Act in the absence of a certificate of compliance issued by the CRA under subsection 116(2) or subsection 116(4) in respect of the disposition. Tax insurance may allow the parties to complete the transaction and go their separate ways without concern for lingering tax liabilities. Contractual protection obtained through tax insurance in such circumstances would generally not be considered to trigger the contractual protection hallmark
  • A pre-sale transaction involving the payment of intercorporate dividends to a holding company in order to extract safe income from the target company. Contractual protection obtained in respect of the calculation of safe income on hand matters would generally not be considered to trigger the contractual protection hallmark
• For greater certainty, this exception would not extend to other insurance or protections that may be obtained to cover specific identified tax risks, including, for example, through the use of tax liability insurance policies in relation to avoidance transactions. The existence of such insurance may often be an indication of aggressive tax planning.
• Standard price adjustment clauses, such as those contemplated in Income Tax Folio S4-F3-C1, Price Adjustment Clauses, are not considered to meet the contractual protection hallmark
• For greater certainty, an advance income tax ruling, in and of itself, obtained from the CRA or other tax administrations on non-Canadian tax issues by a person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes an avoidance transaction is not to be considered contractual protection in respect of the avoidance transaction or series
• As stated above, a contingent litigation fee arrangement in relation to an appeal of a tax assessment by a lawyer in respect of a tax benefit from a completed transaction or series would not on its own generally constitute the provision of a contractual protection. Therefore, the litigator would not generally be an advisor in respect of a transaction or series solely because of the existence of the contingent litigation fee arrangement that is implemented after the completion of the transaction or series that is the subject of an appeal
• Establishment of an RRSP - A Canadian client (Client) establishes a self-directed RRSP with a Canadian Bank. An employee at the Canadian Bank may provide general information to the Client regarding the tax benefits of opening and contributing to an RRSP. Under the RRSP plan document (the RRSP Document), a subsidiary of the Canadian Bank agrees to act as the plan trustee (the Trustee). The RRSP Document provides that the Client will indemnify the Trustee in the event that the RRSP plan is subject to tax (the Tax Indemnity), for example, as a result of holding a non-qualified investment. The terms of the RRSP Document are consistent with standard market practice. While the establishment of an RRSP may constitute an avoidance transaction, the Tax Indemnity is not considered to be contractual protection in respect of the avoidance transaction, on the basis that this indemnity is a form of protection that applies in the normal commercial or investment context

Clerical and secretarial services – no reporting

A person who provides only clerical or secretarial services with respect to the reportable transaction would not have a filing obligation.

Advance income tax ruling

In the context of transactions where a favourable advance income tax ruling has been issued and a reporting obligation exists, a copy of that ruling can be attached to the prescribed form. There would be no need for detailed reporting other than the identification of the reporting person.

For greater certainty, any transaction not disclosed in the advance income tax ruling that is otherwise subject to the reportable transaction regime would need to be reported.

Partners and employees

For greater certainty, for a partnership or employer who receives a fee as an advisor or promoter in respect of an avoidance transaction and discloses a reportable transaction as required, its partners or employees would generally not also need to make a disclosure.

Notifiable transactions

The legislation includes new reporting obligations to provide the CRA with pertinent information relating to tax avoidance transactions and other transactions of interest on a timely basis.

The Minister of National Revenue has the authority to designate, with the concurrence of the Minister of Finance, transactions or series of transactions for purposes of the notifiable transaction rules (herein referred to as “notifiable transactions”). Transactions can be designated in the manner that the Minister of National Revenue considers appropriate, such as on the Canada Revenue Agency webpages.

Notifiable transactions will include both transactions that the CRA has found to be abusive, and transactions identified as transactions of interest (i.e., where more information is required to determine if a transaction is abusive). The description of a notifiable transaction will set out the fact patterns or outcomes that constitute the transaction in sufficient detail to enable taxpayers to comply with the disclosure rule. It will also include examples in appropriate circumstances.

The term substantially similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy.

Further, the term substantially similar must be broadly construed in favour of disclosure, such that the purpose of the obligation to report is not frustrated by slight variations in facts, tax consequences, or tax strategy. For example, a transaction may be substantially similar to a notifiable transaction even though it involves different entities or uses different provisions of the Income Tax Act.

A taxpayer who enters into a transaction that is the same as, or substantially similar to a notifiable transaction – or another person who enters into such a transaction in order to procure a tax benefit for the taxpayer – will be required to report the transaction in prescribed form to the CRA within 90 days ^{Footnote 1} of the earlier of:

• the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) becomes contractually obligated to enter into the transaction, and
• the day the taxpayer (or a person who entered into the transaction for the benefit of the taxpayer) enters into the transaction

A promoter or advisor who offers a scheme that, if implemented, would be a notifiable transaction, or a transaction that is substantially similar to a notifiable transaction, as well as a person who does not deal at arm’s length with the promoter or advisor and who is entitled to receive a fee in respect of the transaction, will be required to report within the same time limits.

The legislation provides an exception in which information is not required to be disclosed if it is reasonable to believe that the information is subject to solicitor-client privilege. 

Reasonable expectation to know – no reporting

Only advisors who know or are reasonably expected to know of their reporting requirements are required to file.

For example, an investment banker who plays a leading role in managing the implementation of a notifiable transaction for a client would typically be expected to know that the transaction is a notifiable transaction even if the individual may not be a tax expert as it is expected that the individual would be aware of the purpose and objectives of the transaction. On the other hand, advisors who provide ancillary services or have narrow mandates in respect of a notifiable transaction may not be expected to know that the transaction is a notifiable transaction, depending on the nature of their involvement and expertise.

For example, an accounting firm may be engaged to plan and implement a notifiable transaction. Both the firm itself, as well as individual employees or partners, may be advisors in respect of the notifiable transaction. However, it is reasonable to expect that some of those people may not have a reporting obligation, for example, due to the limited nature of their knowledge or involvement. This is expected to be the case particularly with respect to more junior employees and those who have limited roles that do not give them visibility of the broader transaction or series as well as the associated tax treatment and tax benefit. (It is also important to note that, in this example, partners and employees who are advisors would be deemed to have their reporting obligations met if the firm properly reports the notifiable transaction – see the next section, “Partners and employees.” Therefore, the example would become relevant only when the firm has failed to meet its reporting obligation.)

Partners and employees – no reporting

Employees and partners are deemed to have met their reporting requirement when the employer or partnership has filed the required information return.

Clerical and secretarial services – no reporting

A person who provides only clerical or secretarial services with respect to the notifiable transaction will not have a filing obligation.

Due diligence - notifiable transactions – no reporting

A person who obtains or expects to obtain a tax benefit from a notifiable transaction and a person who enters into such transactions for the benefit of such a person will not have a reporting obligation if that person has exercised the degree of care, diligence and skill to determine whether a transaction is a notifiable transaction that a reasonably prudent person would have exercised in comparable circumstances. A person who obtained the tax benefit would generally meet their due diligence obligations by asking their advisors about potential reporting obligations that might arise from the transactions (and being informed by their advisors that no such reporting obligations will arise on account of the transaction being a notifiable transaction or substantially similar to a notifiable transaction).

The prescribed form is Form RC312. Notifiable transactions will be listed on a CRA web page.

Reportable uncertain tax treatments (RUTTs)

An uncertain tax treatment is a tax treatment used or planned to be used in an entity’s Canadian income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law.

These rules require specified corporate taxpayers to report particular uncertain tax treatments to the CRA. A reporting corporation would generally be required to report an uncertain tax treatment in respect of a taxation year where the following conditions are met:

• The corporation is required to file a Canadian return of income for the taxation year. That is, the corporation is a resident of Canada or is a non-resident corporation with a taxable presence in Canada
• The corporation has at least $50 million in assets at the end of the financial year that coincides with the taxation year. This threshold would apply to each individual corporation
• The corporation, or a consolidated group of which the corporation is a member, has audited financial statements prepared in accordance with International Financial Reporting Standards or other country-specific GAAP relevant for domestic public companies (for example, U.S. GAAP)
• Uncertainty is reflected in those audited financial statements (for example, the entity concluded it is not probable that the taxation authority will accept an uncertain tax treatment and thus, as described by the International Financial Reporting Standards Interpretations Committee, it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment)

Uncertain tax treatments are required to be reported at the same time that the reporting corporation’s Canadian income tax return is due.

The prescribed form is the RC3133, Reportable Uncertain Tax Treatments Information Return.

Clarity on specific RUTT matters

Timing of RUTTs

If the RUTT is included on the balance sheet of the financial statements, then it should be reported on Form RC3133. The amount should be reported whether it is new in the year or if it has been reported in previous years. If the amount is released in the year, then it is not required to be reported on Form RC3133, even if it is included in the comparative amounts on the financial statements. 

As an example, if an uncertain tax position for the 2021 tax year is still on the balance sheet at the end of the 2023 tax year, then it would have to be reported in respect of each of the 2021, 2022 and 2023 tax years. Similarly, if an uncertain tax position is set up in 2021 but reversed in 2022, then it needs to be reported in 2021 only. 

Equity method of accounting

If the reporting corporation has uncertain tax positions that are reported on financial statements using the equity method, the reporting corporation is required to report RUTTs on Form RC3133. However, when the investment itself pertains to a reporting corporation, only the latter will be required to complete its own RC3133.

Partnerships

Reporting corporations are expected to disclose RUTTs that relate to their partnership interests. If the reporting corporation meets the criteria for disclosure, uncertain tax positions included in any partnerships should be included on Form RC3133, according to their proportional share. 

Report in Canadian dollars

The amount(s) on Form RC3133 must be reported in Canadian dollars ($CAD). If the reporting corporation’s books and records are in a functional currency other than Canadian dollars, then a reasonable foreign exchange rate should be used to convert the RUTT amounts to $CAD (refer to section 261 of the Income Tax Act). 

In this regard, the CRA will generally accept, as the relevant spot rate for a particular day, a rate quoted by a source other than the Bank of Canada if it is:

• widely available
• verifiable
• published by an independent provider on an ongoing basis
• recognized by the market
• used in accordance with well-accepted business principles
• used for the preparation of the taxpayer's financial statements
• used consistently from year to year by the taxpayer

(From Income Tax Folio S5-F4-C1, Income Tax Reporting Currency)

Non-consolidated reporting

Similar to reporting for corporate income taxes, consolidated reporting is not permitted on Form RC3133. Each corporation must prepare and submit an RC3133 form with its own RUTT reporting. 

Uncertain tax treatments that relate to provisions of the Income Tax Act (Canada)

The reporting corporation is required to disclose uncertain tax treatments that relate to provisions of the Income Tax Act (Canada), including among other things, Part XIII tax and Part VI tax issues. Reporting is not required for taxes that are not covered under the Act (for example, GST, provincial taxes, and non-Canadian taxes). 

Taxation year to which RUTT pertains

The taxation year to which the RUTT pertains means the taxation year in which the taxable income was affected. The year to which the RUTT pertains can be a taxation year that is different than the year the uncertainty is reflected in the financial statements. For example, if there is a change of facts in 2023 impacting a filing position from 2021, the RUTT pertaining to 2021 will be reported on the RC3133 form of 2023. 

Short taxation year

A reporting corporation is expected to file Form RC3133 for each taxation year in which it files a corporate income tax return and has relevant financial statements. 

Audited financial statements prepared under two or more GAAPs

If a corporation is included in multiple audited financial statements, the corporation must report a RUTT on Form RC3133 if an uncertain tax position was recorded in any of those audited financial statements. 

Taxpayer penalty

With respect to persons who enter into reportable or notifiable transactions or for whom a tax benefit results from a reportable or notifiable transaction, the rules include a penalty of

• $500 per week for each failure to report a reportable transaction or a notifiable transaction, up to the greater of $25,000 and 25% of the tax benefit, or
• for corporations that have assets that have a total carrying value of $50 million or more, $2,000 per week, up to the greater of $100,000 and 25% of the tax benefit

Advisor and promoter penalty

With respect to advisors and promoters of reportable or notifiable transactions, as well as persons who do not deal at arm’s length with them and who are entitled to a fee with respect to the transactions, a penalty would be imposed for each failure to report. The penalty is equal to the total of:

• 100% of the fees charged by that person to a person for whom a tax benefit results
• $10,000, and
• $1,000 for each day during which the failure to report continues, up to a maximum of $100,000

In order to avoid imposing two sets of penalties upon a person who both 1) enters into a reportable or notifiable transaction for the benefit of another person, and 2) is a person who does not deal at arm’s length with an advisor or promoter in respect of the reportable or notifiable transaction and is entitled to a fee, the legislation provides that such a person would be subject only to the greater of these two penalties.

RUTT penalty

For corporations subject to the requirement to report uncertain tax treatments, the rules include a penalty for failure to report each particular uncertain tax treatment equal to $2,000 per week, up to a maximum of $100,000.

Penalties - oversight

A person who fails to file an information return in respect of any of the mandatory disclosure rules when they otherwise are required may be subject to a penalty. Penalties for failure to report pursuant to the mandatory disclosure rules will be subject to Headquarters’ oversight and approval requiring mandatory referrals.

A person who is required to file an information return pursuant to the reportable transaction regime as well as corporations subject to the RUTT regime are not liable to a penalty if it is determined that they have exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This limitation is commonly referred to as a “due diligence defence.”

Due diligence – reportable transactions and RUTTs

The language for the due diligence defence with respect to penalties under the reportable transactions portion of the mandatory disclosure rules remains unchanged and parallels that of the existing due diligence defence for director’s liability under the Income Tax Act. The due diligence defence for director’s liability under the Income Tax Act has existed for over 40 years. The existing director’s liability due diligence provision has been the subject of litigation and subsequent guidance by the courts, including the Federal Court of Appeal. In light of the guidance provided by the courts, the following basic principles will inform the CRA’s approach to the due diligence defense provisions set out in the mandatory disclosure rules legislation:

• The test employed in the mandatory disclosure rules legislation will be whether the person required to file the return has exercised the degree of care, diligence and skill to prevent the failure to file that a reasonably prudent person would have exercised in comparable circumstances 
• The reference to a reasonably prudent person is a clear indication that the test is objective rather than subjective. This means that the relevant person required to file the return will not be judged according to his own personal knowledge abilities and capacities
• The objective standard makes it clear that the factual aspects of the circumstances surrounding the actions of the person required to file the return are important as opposed to the subjective motivations
• The words “in comparable circumstances” are important. An objective standard does not mean that the particular circumstances of the person required to file the return be ignored. Rather, they must be considered against an objective “reasonably prudent person” standard, and
• Whether a person has exercised the degree of care, diligence and skill required to prevent the failure to file will be based on the facts and circumstances of each case

Other administrative reporting guidance

Reportable and notifiable transactions - recurring tax benefit / transactions

A recurring tax benefit would need to be reported only once. For greater clarity, this would be applicable only if the same tax benefit recurs and there are no new transactions.

Guidance – RC312 approach

A field on Form RC312 entitled “recurring tax benefit /transactions” would need to checked by the relevant person(s) at the time the initial transaction is required to be reported to outline any subsequent anticipated relevant period or periods the tax benefit would recur.

Reportable and notifiable transactions - interaction  

The same transaction could be a reportable transaction and a notifiable transaction.

Guidance - RC312 approach

The relevant person would indicate on Form 312 that the transaction is both a reportable transaction and a notifiable transaction. The relevant person has to complete only Part 3, “Notifiable transaction” and then continue with Part 5, “Penalty” of the form.

RUTTs - reporting for events already known to the CRA

Matters that are already disclosed to the CRA through official filings, such as a notice of objection, an advance income tax ruling, a matter that is in the tax court procedures, or a previously filed RC312 or RC3133 form, the disclosure requirements can be satisfied by referencing and attaching previously filed documents in the descriptive areas of the form and completing the remaining fields on Form RC3133.