This article provides a general overview of the new Québec rules for mandatory disclosure of specified transactions introduced by the entry into force of An Act to give effect to fiscal measures announced in the Budget Speech delivered on 21 March 2019 and to various other measures. The legislation was passed into law on September 24, 2020, and for our purposes we shall call it the "Specified Transactions Act".
Among other things, the Specified Transactions Act introduced a series of provisions in the Quebec Taxation Act, I-3 (the "Taxation Act") which have the effect of extending mandatory disclosure of certain tax planning deemed aggressive or abusive by the Government of Quebec. The Specified Transactions Act allows the Government to publish in the Gazette officielle du Québec (the "Gazette") from time to time a list of transactions which require mandatory disclosure.
On March 17, 2021, the Quebec Minister of Revenue determined the first set of transactions to be published in the Gazette. Under the legislation, a "specified transaction" is a transaction where the form and substance of the facts concerning a taxpayer are very similar to those transactions described by the Minister and published in the Gazette.
The objective of this article is to outline the main disclosure requirements with respect to specified transactions and the consequences of non-compliance with the disclosure requirements as well as to describe the transactions determined by the Minister as of the writing of this article.
1. Disclosure requirements regarding "specified transactions"
1.1 No necessary disclosure for transactions beginning prior to March 17, 2021
The disclosure requirements described below apply in respect of a specified transaction only if the carrying out of the specified transaction begins after the date of publication in the Gazette. In other words, transactions that occur prior to their publication on the list of specified transactions are not subject to the disclosure requirements.
It remains to be seen how the Government will treat a series of transactions.
1.2 Description of the disclosure requirements
In order to comply with the disclosure requirements with respect to a transaction where the form and substance of the facts concerning the taxpayer are very similar to those of the facts of a transaction determined by the Minister, the taxpayer must transmit to Revenu Québec a duly completed information return TP-1079.DI. This obligation exists regardless of the value of the tax benefit associated with a given transaction.
What is particularly concerning is the interpretation of what constitutes a transaction of similar form and substance.
As well, any adviser or promoter who commercializes a specified transaction or promotes it is required to transmit to Revenu Québec a duly completed information return TP-1079.CP-V.
1.3 Delay to comply with the disclosure requirements
Taxpayers must send to the Minister an information return in respect of a specified transaction on or before the later of:
(a) the 60th day after the day determined by the Minister in respect of which the obligation to disclose the specified transaction applies (the specified transaction will be given a specific start date); and
(b) the 120th day after the day of the publication in the Gazette of the specified transaction (this date corresponds to 15 July 2021 with respect to the four transactions determined below).
Advisors or promoters must send to the Minister an information return in respect of a specified transaction on or before the later of:
(a) the 60th day after the day on which the adviser or the promoter commercializes the particular transaction or promotes it for the first time; and
(b) the 120th day after the day of the publication in the Gazette of the specified transaction.
2. Penalties for non-compliance with the disclosure requirements
Where a specified transaction is carried out by a taxpayer or a partnership and the relevant information return is not transmitted to Revenu Québec on time, the taxpayer or the partnership, as the case may be, incurs the following penalties:
(a) a penalty of up to $100,000 comprising a penalty of $10,000 and a penalty of $1,000 a day, as of the second day, for every day the failure continues; and
(b) a penalty equal to 50% of the tax benefit that would result, directly or indirectly, from the transaction for any taxation year.
Moreover, taxpayers can be subject to additional penalties or consequences, such as the suspension of the start of the normal reassessment period until the filing of the duly completed disclosure form or the application of the 50% General Anti-Avoidance Rule (“GAAR”) penalty.
Where a specified transaction is commercialized or promoted by an advisor or a promoter and the relevant information return is not transmitted to Revenu Québec on time, the advisor or the promoter, as the case may be, incurs the following penalties:
(a) a penalty of up to $100,000 comprising a penalty of $10,000 and an additional penalty of $1,000 a day, as of the second day, for every day the failure continues; and
(b) a penalty equal to 100% of the aggregate of all amounts each of which is the consideration that the promoter or adviser, or a person or partnership related to or associated with the promoter or adviser, has received or is entitled to receive, directly or indirectly, for the implementation of the transaction.
3. The promoters’ GAAR penalty 2.0
It should be noted that the Québec 2021-2022 Budget which was tabled on March 25, 2021, indicates that the tax legislation will be amended so that the GAAR penalty applicable to a promoter of a transaction or series of transactions that includes a transaction that Revenu Quebec considers is subject to GAAR will apply autonomously, regardless of whether there is a penalty applied beforehand on the taxpayer who is subject to the GAAR-based assessment. This GAAR penalty is in addition to the non-disclosure mentioned above.
However, the Québec 2021-2022 Budget indicates that for greater clarity, the GAAR penalty will only be applied to a promoter once the Minister of Revenue has established a GAAR-based assessment against a taxpayer. In other words, both the promoter and the taxpayer will be assessed at the same time and they must independently defend themselves. This is somewhat contradictory at best and will be better understood when the draft legislation issues.
This autonomous application of the penalty for promoters will apply as of the date of the sanction of the amendment to the current law.
4. List of "specified transactions"
The Mandatory Transaction Disclosure Regulation (the "MTD Regulation") was published in the Gazetteon March 17, 2021. As a result of the application of the MTD Regulation, the Minister determined the first four transactions for the purposes of the definition of specified transactions, with additional transactions expected to be determined in the future:
(1) Avoidance of deemed disposal of trust property;
(2) Payment to a non-treaty country;
(3) Multiplication of the capital gains deduction; and
(4) Tax attribute trading.
The MTD Regulation provides broad and complex definitions with respect to each of the first four specified transactions but a particular transaction does not have to encompass every component of these definitions in order to be subject to the disclosure rules. In fact, having a similar form and substance to any of the specified transactions will suffice to be subject to disclosure.
Moreover, Schedule A of the MTD Regulation establishes with respect to each of the specified transactions, the taxpayers subject to the disclosure obligation and, if applicable, the partnerships whose members are subject to that obligation, as well as the day on and after which that obligation applies.
4.1 Avoidance of deemed disposal of trust property
The Québec Taxation Act, like the federal tax legislation, has a series of provisions that deem an ordinary trust to dispose of its property on its 21st anniversary. Moreover, the tax legislation has an anti-avoidance provision which provides that if the trust property is assigned to another trust, the initial 21st anniversary date will not be extended.
In general terms, the specified transaction refers to tax planning that is put in place to circumvent these provisions and thereby defer tax on the accrued gain.
According to the additional information provided by Revenu Québec, an example of such specified transaction is provided. Revenu Quebec finds it offensive for a trust to distribute on a tax-deferred basis its assets to a beneficiary that is a corporation wholly owned by another trust where the distribution is prior to the 21st anniversary of the transferring trust. This basically extends the deemed disposition date for another 21 years. This could be done multiple times.
The obligation of a trust that is party to such specified transaction to disclose the transaction applies as of the day when the trust distributes the particular property.
4.2 Payment to a non-treaty country
The Minister has deemed a specified transaction to exist where a Quebec taxpayer or a partnership (which partnership is required to file a Quebec information return) meets the following conditions:
(a) the transaction relates to a business carried on in Québec by the particular person or by the particular partnership;
(b) another person or another partnership of which such other person is a member and that is not resident in Canada and with whom the particular person or the particular partnership does not deal at arm’s length is a party to the transaction, while being a resident or carrying on a business in a country with which the Government of Québec or of Canada at that time has not entered into a ‘’tax agreement’’; and
(c) the particular person or the particular partnership deducts in computing taxable income under Part I of the Taxation Act for the particular fiscal period a total amount of not less than $1,000,000 relating to amounts payable to the other person or the other partnership other than an amount to pay for tangible property.
Revenu Québec indicates that the expression ‘’tax agreement’’ means an agreement for the avoidance of double taxation of income and does not include agreements with respect to the exchange of tax information.
The additional information provided by Revenu Québec does not include examples of this specified transaction. However, Revenu Québec has announced that for a disclosure of such specified transaction to be complete, it should indicate, where applicable, the series of transactions and not just the transaction that constitutes the payment.
The obligation to disclose the specified transaction applies as of either the later of the day that is 60 days before the particular person’s filing due-date or before the filing due-date of the member of the particular partnership for the member’s taxation year in which the particular fiscal period ends, as the case may be.
4.3 Multiplication of the capital gains deduction
The Taxation Act allows individuals to receive a capital gain exemption (“CGE”) regarding the gain on the disposition of qualified shares of a corporation that carries on an active business in Canada. The third specified transaction involves transactions that have the effect of multiplying the CGE among several persons.
The additional information provided by Revenu Québec indicates that the third category of specified transactions generally targets the following types of tax planning:
(1) an individual uses an accommodating party in order to benefit more than once from the CGE, and has some or all of the accommodating parties’ earnings diverted to them;
(2) the spouse of the shareholder acquires shares in order to multiply the CGE that can be claimed through a manipulation of the spousal rollover provisions.
Moreover, as an example, Revenu Québec indicates that the third category of specified transactions includes tax planning that resembles the facts of the following cases:
(1) Laplante v. The Queen, 2017 CCI 118 (confirmed by 2018 FCA 193)1
(2) Gervais v. Canada, 2018 FCA 3.
The obligation to disclose the specified transaction applies as of the later of :
- the day of the transfer or loan of funds to the person benefitting from the diversion of funds, if such is the case; or
- the day of the disposition of the shares.
Where there is an explicit or implicit agreement to divert funds, the date of the transfer or loan is deemed to be the date of the agreement.
4.4 Tax attribute trading
The tax legislation has rules restricting the use of tax attributes such as losses, capital dividends, undepreciated capital cost, etc. following the acquisition of control of a corporation or trust.
In general terms, the fourth category of specified transactions refers to tax planning that is put in place to circumvent this prohibition of trading tax attributes between unaffiliated persons. According to the additional information provided by Revenu Québec, this specified transaction targets the following tax planning operations:
(1) a taxpayer uses the tax attributes of another taxpayer and is not affiliated to that other taxpayer immediately before the beginning of the series of transactions, or
(2) the use of tax attributes by a corporation or trust as a result of its capitalization by a third party, including for the purpose of carrying on a new business, where there is a link between such capitalization and the use of the tax attributes of the corporation or trust.
For the moment, as examples, Revenu Québec indicates that the fourth category of specified transactions includes tax planning that resembles the facts of the following cases:
(1) Birchcliff Energy v. The Queen, 2019 FCA 1512
(2) Deans Knight Income Corporation v. The Queen, 2019 TCC 763.
These cases involve a taxpayer corporation using its non-capital losses, scientific research and experimental expenditures and investment tax credits to shelter the income of a new unrelated business. The owners of the loss corporation will maintain legal control of the corporation to avoid application of stop-loss rules and they will be remunerated for the tax shelter.
The obligation to disclose this category of specified transactions applies as of the day that is 60 days before the particular taxpayer’s filing due-date for the first taxation year in respect of which the particular taxpayer uses the respective tax attribute.
5. Just the beginning….of the end of tax planning? Of course not.
It is clear to see how the uncertainty principle will be used to try to throttle tax planning and threaten the ability of tax professionals to advise their clients and implement tax planning.
While this may be seen as a fund raising technique for the provincial government, this is a short sighted strategy. It will not help to attract business and its commercial benefits.
The role of the Quebec professional tax advisor will become that much more important especially for International, national or regional businesses operating in Quebec.
Where the doors are closed, a good professional advisor climbs through the window. Tax planning is alive and well.