Reportable Transactions: What They Are and What They Aren’t

What Are Reportable Transactions

On June 22, 2023, the new changes to the reportable transaction regime became law when the legislation received Royal Assent. We previously raised concerns over the broadness of the language in the draft legislation. The Canada Revenue Agency (“CRA”) has now released guidance to clarify the reporting rules. While this guidance is welcome and assuages some of our concerns, there still remains a lot of uncertainty that we hope will eventually be clarified through further CRA publications, CRA assessments, or by a Court.

This article summarizes the new rules for reportable transactions and lists our key takeaways. 

Transactions that occur after June 22, 2023, will be reportable if they meet the following criteria:

(a) A transaction or series of transactions has one of three hallmarks: contingent fee arrangements, confidential protection, or contractual protection; and

(b) It can reasonably be concluded that one of the main purposes of entering into the transaction or series of transactions is to obtain a tax benefit.

The reporting obligation applies to the taxpayer, any person who benefits from the transaction(s), advisors, promoters, and any non-arm’s length to an advisor or promoter who also receives a fee with respect to the transaction(s), all of which will have separate obligations to report.

The transaction(s) must be reported within 90 days of the day that the taxpayer (or the person who entered into the transaction for the taxpayer’s benefit) becomes contractually obligated to enter into the transaction, or the day the taxpayer (or such person) enters into the transaction, whichever is earlier.

The legislation provides an exception in that information is not required to be disclosed if it is reasonable to believe that the information is subject to solicitor-client privilege.

Failure to report can result in severe penalties to the taxpayer[1] or to an advisor, promoter or a non-arm’s length to an advisor or promoter who also receives a fee with respect to the transaction(s).[2]

What Are Not Reportable Transactions

The guidance published by the CRA provided examples and clarifications of what does not meet the criteria for a reportable transaction.

Broad Clarifications

  • The CRA reiterates that both criteria must be met in order to be a reportable transaction. A transaction with a main purpose of obtaining a tax benefit but does not have a hallmark will not be considered a reportable transaction. The CRA provided a non-exhaustive list of examples of transactions that would not be reportable unless one of the hallmarks is also present (even though one of the main purposes is to obtain a tax benefit):
    • Estate freezes;
    • Shareholder loan repayments;
    • Purification transactions;
    • Claiming the capital gains exemption;
    • Divisive reorganizations (often referred to as “butterfly transactions”);
    • Debt restructuring;
    • Loss consolidation arrangements; and
    • Foreign exchange swaps.
  • Transactions that “straddle” the June 22nd Royal Assent date will be subject to the reporting obligation if it is a reportable transaction. Based on the published guidance, it appears that the 90-day timeframe begins when the next “triggering” event occurs after June 22. For example, if the taxpayer entered into the agreement before June 22 but the transaction closed on June 30, then the 90 days begins on June 30. It does not start on June 22, the Royal Assent date, even though the taxpayer become contractually obligated to enter into the transaction before June 22.
  • The new penalty and extension to statute barred assessments under proposed General Anti-Avoidance Rules will not apply if disclosure is made under these reporting obligations.
  • Persons who are completing only clerical or secretarial services with respect to a reportable transaction are not obligated to report.

Contingent Fee Arrangements – What They Are Not

The following are not considered to be a “contingent fee arrangement” hallmark. This list is not exhaustive.

  • Fees for preparing a number of elections related to reorganizations, such as filing T2057 elections for a section 85 transaction, or fees for the number of taxpayers who choose to participate in or have access to advice given on tax consequences of a transaction or series of transactions. The fee must be based on the number of elections filed or participants, not on the anticipated tax benefit received.
  • Fees based on the value of services provided, not on the tax benefit received. Value billing by lawyers and accountants would fall under this exception if such value billing were based on factors such as: the level of training and experience of the professional, time expended by the professional, degree of risk and responsibility of the work, importance of the work to the client, and the value of the work to the client.
  • Contingent litigation fees by a lawyer assisting a taxpayer in an assessment or reassessment unless the litigation lawyer is considered to be the taxpayer, advisor or promoter for a reason other than the contingent nature of their litigation work.

Confidential Protections – What They Are Not

Protection of trade secrets that do not relate to tax are not considered to be caught by the “confidential protection” hallmark.

Contractual Protection – What It’s Not

The following are not considered to be a “contractual protection” hallmark. This list is not exhaustive.

  • Normal professional liability insurance for work completed by professionals.
  • Standard price adjustments clauses, as set out in the Income Tax Folio S4-F3-C1.
  • Standard representation, warranties, and guarantees between a vendor and purchaser, or insurance policies intended to apply to same, in the ordinary commercial context of a merger and acquisition that protects the purchaser from pre-closing liabilities, including tax liabilities.
  • Insurance that is integral to the agreement between arm’s length parties in a sale of business where it is reasonable to conclude that the insurance protection is to ensure the purchase price accounts for any liabilities that exist immediately before the sale. In this exception, the insurance cannot have been obtained primarily for a tax benefit. This exception can apply to the following examples:
    • Insurance against the vendor’s indemnities for pre-closing tax issues or for existing tax attributes;
    • Insurance to protect the purchaser where the parties agree to structure the deal to give a section 88(1) bump and the protection applies where the vendor’s actions result in the 88(1) bump being denied;
    • Insurance to protect the purchaser when purchasing taxable Canadian property from a non-resident vendor, who may have withholding and reporting obligations under section 116 of the Income Tax Act;
    • Insurance to protect the parties where the vendor completes pre-closing dividend transactions to extract safe income to a holding company, and insurance is obtained over the safe income on hand calculation.
  • Obtaining an advance tax ruling in and of itself is not considered to be contractual protection, even if that advance tax ruling is for an avoidance transaction. The CRA has also confirmed that if the transaction occurs where an advance ruling was issued and if that transaction is a reportable transaction, then the person reporting can simply attach a copy of the advance ruling to the prescribed form, along with their identifying information, and no further details need to be filled into the prescribed form.
  • The indemnities under most Registered Retirement Savings Plans contracts do not give rise to a contractual protection hallmark.

Key takeaways:

  1. It will likely come down to whether any one hallmark is met.

    Only requiring one of the main purposes for entering into the transaction(s) to be to obtain a tax benefit means any transaction(s) with a tax planning element would meet that test. This means it will likely all come down to whether one of the three hallmarks is met.

  2. The CRA guidance suggests the majority of “standard” tax planning transactions will not be reportable.

    The CRA published guidance addressed many of our main concerns in relation to “standard” tax planning. However, given that CRA guidance is not law, there are still some risks the CRA could change their policy. Further, how auditors and taxpayers (and their advisors) interpret the CRA guidance may vary. It would be safest when relying on the CRA guidance to be very careful to fit solidly within the letter of the guidance.

  3. Almost everyone involved in a transaction that is caught under these reportable transaction rules will have a reporting obligation.

    This will mean that it will be crucial not only to identify when transactions are reportable, but also to identify and make sure everyone who has to report knows.

  4. 90 days to report.

    This is a very quick turnaround, faster than any other reporting requirement, and in some cases key information, such as values, may not even be finalized by the date reporting is due. It will therefore be critical to be on top of when such a reporting requirement exists.

  5. Clarification is needed regarding the solicitor-client privilege exception.

    How this will work in practice is not clear. Legal opinions regarding potential tax treatment of a transaction should not ever be reportable, as they are clearly subject to solicitor-client privilege. However, the existence of transactions likely will not be considered subject to solicitor-client privilege for taxpayers.

    A significant unknown will be how this exclusion will impact lawyers’ reporting requirements, given that lawyers may have their own reporting requirements as advisors. Are lawyers excluded from any reporting requirement on the basis of solicitor-client privilege? Will they still have to report in some cases? And if so, when? And how does this interact with lawyers’ other obligations such as confidentiality and to avoid circumstances when there could be a conflict of interest with their clients?

  6. Severe penalties for failing to report.

The penalties will quickly add up to thousands, hundreds of thousands, or millions of dollars, so failing to report when necessary, will be disastrous.

Finally, it is worth noting there are other reporting obligations that can apply even if not a reportable transaction.[3]

If you intend to enter into any tax-driven transactions or tax planning, our Tax Group would be happy to discuss with you.

[1] For corporations with greater than $50 million of assets, $2,000 per week for each failure, up to the greater of $100,000 or 25% of the tax benefit. In all other cases, $500 per week for each failure to report, up to the greater of $25,000 or 25% of the tax benefit.

[2] The sum of 1) Fees charged for the transactions, 2) $10,000, and 3) $1,000 per day for failure to file, up to $100,000.

[3] There are also new reporting obligations for trusts, for notifiable transaction, and for reportable uncertain tax treatments. These are outside the scope of this article.