On January 30, 2009 the ministère des Finances (Québec) released its Working Paper on Aggressive Tax Planning. The Working Paper sets out proposed changes to Québec tax legislation to strengthen Québec’s response to ATP schemes. Taxpayers across Canada should take note of these proposals as they may be indicative of the direction that Canadian tax authorities may take in addressing tax avoidance. Interested parties may submit their views on the Working Paper before March 1, 2009.

In her 2008-2009 Budget Speech, the Minister of Finance for the Province of Québec announced the Québec government’s plan for a concerted response to aggressive tax planning (ATP). The plan included additional funding for the ministère du Revenu (Québec) to support a specialised unit whose purpose would be to fight against ATP arrangements. The plan also included a review of fiscal policy to address ATP.

This review culminated in the release by the ministère des Finances (Ministère) of its Working Paper on Aggressive Tax Planning (Working Paper) on January 30, 2009. The Working Paper sets out proposed changes to Québec tax legislation to strengthen Québec’s response to ATP schemes.

The Ministère’s proposed response to ATP is articulated around four main changes:

(1) a mandatory early disclosure regime for certain ATP arrangements;  

(2) an extended limitation period for reassessments based on the general anti-avoidance rule (GAAR);  

(3) a clarifying amendment to restrict the concept of bona fide purposes central to the notion of an avoidance transaction for purposes of GAAR; and  

(4) a penalty regime where GAAR applies.

Mandatory Early Disclosure

In its Working Paper, the Ministère identifies behaviour patterns associated with an ATP risk including confidentiality undertakings by a taxpayer in favour of the taxpayer’s advisor and contingent or “success” fee arrangements. The Ministère proposes mandatory early disclosure rules which would require a taxpayer to disclose a transaction involving a tax benefit in several situations, namely:

(i) where the taxpayer has retained the services of, and given a confidentiality undertaking to, an advisor in respect of the transaction;  

(ii) where the advisor’s remuneration in respect of the transaction is wholly or partially conditional on the tax benefit being achieved, or is wholly or partially established on the basis of the tax benefit;  

(iii) where the advisor’s fee may be refundable to the taxpayer in the event the expected tax benefit is not achieved; or  

(iv) where the advisor's remuneration is wholly or partially earned only after the expiry of an applicable limitation period.

For this purpose, an advisor is a person or partnership that provides help, assistance or advice regarding the design or implementation of the transaction, or who commercialises or promotes the transaction.

Extended limitation period for GAAR reassessments

The Ministère proposes to enhance the government’s ability to detect and respond to ATP by extending the period within which the government can issue a GAAR reassessment by three years. To allow taxpayers to avoid the additional uncertainty created by an extended limitation period for GAAR reassessments, a preventive disclosure process would be introduced. As well, the extended limitation period would not apply to transactions disclosed under the proposed mandatory early disclosure rules.

Clarifying Amendments to GAAR

The Ministère acknowledges that in light of Canada’s harmonised income tax laws, the amendments that can be made unilaterally to the Québec GAAR without adversely impacting Canada’s coordinated tax administration system are limited. For this reason, the Ministère notes that, while an economic substance test would strengthen the government’s ability to attack ATP schemes under GAAR, the unilateral additional of an economic substance test to the Québec GAAR is not desirable.

Rather, the Working Paper proposes to clarify that the concept of a bona fide purpose excludes, in addition to the obtaining of a tax benefit, the reduction, avoidance or deferral of tax or other amount payable under, or the increase in a refund of tax or other amount payable under, a Québec law other than the Taxation Act, a law of another province of Canada or a federal law. In the view of the Ministère, such a change would bring the Québec GAAR into line with GAAR in other provinces.

Penalty Regime for GAAR

Based on the conclusion that the risk-reward ratio facing a taxpayer contemplating an aggressive tax plan favours the taxpayer, the Working Paper proposes that a penalty regime be introduced for transactions that are successfully reassessed under GAAR. The proposed penalty would be equal to 25% of the additional tax resulting from the application of GAAR. It would not be applicable to an avoidance transaction disclosed by the taxpayer under either the proposed mandatory early disclosure regime or the preventive disclosure rules on or prior to the statutory filing deadline for the taxation year in which the transaction occurs. The taxpayer could also object to the penalty on the basis of a due diligence defence.

The Working Paper also proposes a penalty for the promoter of an ATP scheme that is the object of a GAAR reassessment so as to curb the “new business model” of tax intermediaries involving the promotion of “off the shelf” tax products. The proposed definition of a “promoter” is fairly broad, but the Working Paper suggests that a tax advisor who develops a tax planning arrangement at the request of a client or who provides an opinion on a tax planning arrangement would not be covered by the definition. The penalty applicable to the promoter would be 12.5% of the amount receivable by the promoter for the avoidance transaction.

The proposals outlined in the Working Paper are purposely designed to create minimal disturbance in the ability of tax authorities in Canada to coordinate their efforts in fighting ATP transactions. Incorporation of these proposals into Québec’s tax legislation could foreshadow legislative changes in other Canadian jurisdictions as tax administrators seek to bolster their ability to curb tax avoidance arrangements. Accordingly, any legislative developments in Québec that may stem from the Ministère’s Working Paper will be of interest to taxpayers across Canada.