In the past few years, the objectives of identifying and putting an end to aggressive tax planning schemes have weighed heavily on the minds of tax authorities around the world. Aggressive tax planning ("ATP") concerns these authorities because it erodes government revenues and the integrity of the tax system. The tax avoidance schemes of ATP in the field of Canadian taxation may not violate any literal proscription of the law, and thus may fall short of tax evasion, but they still violate the policy that that law is trying to implement.
Since 2004, the Canada Revenue Agency launched major initiatives against ATPs. The United States in recent years substantially increased the disclosure requirements imposed on taxpayers and coupled them with important penalties for failure to disclosure. In the 2008-2009 Budget, Quebec joined this effort, by announcing $5.3 million dollars in funding for a specialized unit targeted at combating ATP as well as a pending review of the legislative framework of taxation in Quebec. On January 30, 2009, the Minister of Finance, Monique Jerôme-Forget, delivered on the first step in that review process through a Working Paper on current actions taken in the fight against ATP and proposed alternatives for improvement.
The proposed improvements borrow heavily from the US changes identified above, but tailor the initiatives to the Quebec reality. They seek to make tax planning for the sake of the resulting tax benefits, instead of for some other economic reason, a more costly gamble for both the taxpayer and his advisor. Thus, mandatory early disclosure rules are proposed which would target taxpayer behavior considered at risk for being linked with ATP schemes; namely, confidential transactions with an advisor vis-à-vis other persons or the tax administration, and transactions whose remuneration to the transaction advisor is tied to the tax benefits that they generate. These rules would be backed up by a penalty of up to $100,000 for those failing to file and a suspension of the limitation period on the Minister of Revenue to re-assess the tax. The drafting of these proposed rules will be challenging, particularly with regards to the definitions of certain terms such as disclosure "early in the transaction".
Amendments are also proposed to the Quebec General Anti-Avoidance Rule ("GAAR"). The definition of obtaining a tax benefit will be amended, in line with the current practice of other provinces, to specify more clearly what is not considered to be a bona fide purpose. The period of limitation would also be extended (by three years) in those cases where the Minister of Revenue applies GAAR to the transaction. In addition, a preventive disclosure mechanism would be introduced to avoid the application of the additional three-year period. The additional three-year period would not apply to a taxpayer who complied with the mandatory early disclosure rules discussed above. If the Working Paper proposal goes forward, it remains to be seen whether GAAR will continue to be a "provision of last resort" - so that the extension of the limitation period would only be possible where no specific anti-avoidance provision applies - or whether the Revenue Minister will gain additional flexibility to side-step the usual limitation period by raising GAAR more generally. Additionally, attention should be paid to the report's apparent sympathy for the introduction of an "economic substance" litmus test into the GAAR.
Not only are the proposed modifications to GAAR expected to identify more instances where taxpayers are liable for additional tax, but they will also discourage future ATP by imposing a penalty both on the taxpayer and the "promoter" in regards to an ATP scheme whenever GAAR is found to apply. The penalty proposed is 25% of the additional tax due under GAAR for taxpayers and 12.5% of the amounts received from the transaction for the promoter. An advisor who develops a tax planning arrangement or gives his opinion on a planning arrangement is not covered by the definition of promoter. Again, the penalty under GAAR could however be avoided by disclosing the transaction under the preventive and/or mandatory early disclosure rules discussed above.
The Minister of Finance is currently accepting comments and suggestions on this Working Paper. Comments may be filed online before March 1st, 2009.