Understanding Canada’s Enhanced Mandatory Disclosure Rules: A Practical Guide for Taxpayers and Advisors

Canada’s expanded mandatory disclosure rules require taxpayers, advisors and promoters to report certain transactions to the Canada Revenue Agency (CRA).[1] Failure to do so can lead to significant penalties, extend the period during which the CRA can reassess taxes, and increase the likelihood of the CRA applying the general anti-avoidance rule (GAAR).

These rules cover three types of transactions: reportable transactions, notifiable transactions and a taxpayer’s accounting for uncertain tax treatments. This article provides an overview of the rules for reportable transactions and offers practical guidance on how to navigate them.

What Makes a Transaction Reportable?

Not all transactions need to be reported under the mandatory disclosure rules. To qualify as a reportable transaction, there must be an “avoidance transaction” that benefits a person or entity. In addition, one of three specific hallmarks must apply.

An avoidance transaction may be part of a series of transactions, and any step within that series could potentially be reportable. Here are the key hallmarks that trigger reporting obligations, which can apply to the person receiving the benefits, promoters and/or advisors.

Hallmark 1: Contingent or Variable Fees

This hallmark applies to advisors, promoters and others who are not dealing at arm’s length with them. It comes into play when these parties receive, directly or indirectly, consideration for:

• Providing advice or an opinion with respect to the transaction or series;
• Creating, developing, planning, organizing or implementing the transaction or series;
• Promoting or selling an arrangement related to the transaction or series;
• Preparing tax documents or other related filings; or
• Providing contractual protection.

A person providing tax advice cannot be a promoter if there is no arrangement that is being promoted or sold. Furthermore, the hallmark does not apply if fees are fixed and not dependent on tax benefits or the number of participants in an arrangement.

Hallmark 2: Confidential Protection

This hallmark applies when any transaction details are withheld from any person or the CRA under which the tax benefit results or would result.

While some confidentiality is typical in advisor agreements, this rule focuses on restrictions that prevent disclosure of key transaction details that could result in tax benefits.

Hallmark 3: Contractual Protection

Contractual protection includes any form of insurance or indemnity that guarantees protection against a failure of the transaction to achieve a tax benefit.

The rules exclude standard professional liability insurance or protections primarily intended for business sales or transfers.

CRA guidance

The CRA has provided guidance which may further limit the application of each hallmark’s factors where “standard” protections are used in a transaction.[2] While it can be argued that this CRA guidance is nonbinding, the CRA’s general statements are helpful and could potentially serve to reduce ambiguity.

When to Report

The rules require taxpayers to file an information return within 90 days of the earlier of two events:

• The day on which the person becomes contractually obligated to enter into the reportable transaction(s), and
• The day on which the transaction is effected.

It is important to note that these deadlines can arise even before a transaction closes. Additionally, transactions forming part of a series of transactions may affect reporting timelines.

Practical Tips for Managing Mandatory Reporting

If you are involved in a transaction, here are some practical tips to ensure compliance with the enhanced mandatory disclosure rules:

• Before the transaction: Understand the transaction’s structure, including the roles of advisors and promoters, and whether any insurance will be involved. Assess the risk and make sure decision-makers understand the reporting requirements.
• During negotiations: Ensure that the sale agreement clearly outlines how reporting will be handled, and designate a person responsible for overseeing compliance. Establish communication channels to ensure that all parties meet reporting obligations.

Consider Timing: Be mindful of reporting deadlines and allow time for review and decision-making.

How Can A&M Help?

A&M can help navigate the expanded Canadian mandatory disclosure rules by:

• Analyzing whether an investment or transaction requires reporting;
• Helping design transactions that meet both commercial and tax objectives without triggering unnecessary reporting;
• Developing guidelines for decision-makers, negotiators and investment teams when negotiating deals;
• Developing systems to track reporting obligations on ongoing projects; and
• Assisting with any required filings.

For more information on how these rules might affect your business or transaction, or if you need help in your approach to negotiations, please reach out to Carla Hannemann from our A&M Tax Canada team.

[1] Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.) Income Tax Act

[2] Canada Revenue Agency, “Mandatory disclosure rules – Guidance,” Modified August 15, 2024, https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/mandatory-disclosure-rules-overview/guidance-document.html

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