The Notice of Ways and Means Motion (“NWMM”) re-introduces the August 27, 2010 Proposals originally announced in the 2010 Federal Budget requiring reporting of Tax Avoidance Transactions. The primary change from the August 27, 2010 Proposals, consistent with the January 11, 2011 Comfort Letter, is not to require lawyers to report information which is subject to solicitor-client privilege.
The NWMM applies to require advance reporting to CRA of “avoidance transactions” (as defined for the general anti-avoidance rule (“GAAR”)) which bear at least two of three “hallmarks”:
- fees based or contingent upon a tax benefit;
- confidentiality, i.e. a limitation on disclosure in favour of a promoter or advisor; and
- “contractual protection.”
The scope of these proposals will depend upon the interpretation of the three hallmarks, which remain broadly drafted and subject to significant interpretive uncertainties.
A “fee” payable to an “advisor” or “promoter,” each broadly defined, will be subject to the fee hallmark if the fee is to any extent based upon or contingent upon a tax benefit or is attributable to the number of persons participating in the transaction or similar transactions or provided access to advice or an opinion regarding the tax consequences of the transaction or similar transactions.
“Confidential protection” is not limited to undertakings of the confidentiality of a tax structure, but appear to extend to commercial confidentiality provisions if given to an advisor or promoter in respect of an avoidance transaction or series.
“Contractual protection” means any form of protection against failure of the transaction or series to achieve any tax benefit, or payment or reimbursement of amounts in the course of a dispute with respect to a tax benefit and also includes any undertaking provided by a promoter of assistance in the course of a dispute in respect of a tax benefit. It is not clear that typical commercial representations and indemnity in respect of tax attributes, for example of a company being sold, would not trigger this hallmark in circumstances where the vendor is a “promoter” and the transactions is part of a series which includes an avoidance transaction.
While the NWMM applies to avoidance transactions entered into after 2010, by virtue of the incorporation of the series of transactions test, the NWMM would apply to require disclosure in 2013 of avoidance transactions entered into prior to 2011 which are part of a series of transactions completed after 2010. Given the broad scope of the “series of transactions” test confirmed by the Supreme Court in Copthorne HoldingsLtd. v. The Queen,  2 C.T.C. 29 (see Osler Update of December 21, 2011), the NWMM has significant retroactive application to avoidance transactions entered into prior to the original announcement in the 2010 Budget.
Pursuant to the NWMM, the tax consequences of a transaction or series may be redetermined to deny tax benefits in respect of avoidance transactions for which required advance reporting has not been made, irrespective of the absence of any misuse or abuse under subsection 245(4), although late reporting may be made upon payment of penalties and interest.
A promoter or advisor entitled to fees based or contingent upon tax benefits in respect of a reportable transaction or attributable to the number of participants in the transaction shares the obligation to report the transaction and is subject to a penalty for non-reporting. Reporting of the transaction by one person satisfies the obligations of all those required to report. The penalty for non-reporting by a taxpayer or its representative is equal to all fees (including future or contingent fees) based or contingent upon a tax benefit or attributable to the number of participants. Promoters or advisors are jointly and severally liable to the extent of their share of such fees. The imposition of penalties is subject to a due diligence defence.
Taxpayers, promoters and advisors or those entering into contractual, advisory or professional relationships who have entered into such relationships, including prior to 2011 where a transaction occurring after 2010 may be considered to form part of the series of transactions, need to consider whether they could be subject to disclosure requirements and penalties for late disclosure.
Reporting is required annually on or before June 30 in respect of transactions which first became reportable transactions in the preceding calendar year. Transactions which would otherwise be required to be reported before July 1, 2012 are to be reported within 120 days of Royal Assent being given to these proposals.
Given the breadth of the drafting of these proposals, the scope of application of this regime will be dependent upon interpretation and administration by the Canada Revenue Agency or, ultimately, the courts. Hopefully, the application of these proposals will be limited to the “aggressive tax planning arrangements” which apparently prompted the proposals, bearing out the prediction in the accompanying Explanatory Notes that “it should be the case that normal commercial transactions that do not pose an increased risk of abuse would not have to be reported under this new reporting regime.”