Canada’s enhanced MDRs are a set of reporting requirements which received royal assent on June 22, 2023. The Income Tax Act previously contained rules requiring that certain transactions be reported to the Canada Revenue Agency (CRA). However, the CRA’s experience with these rules since their introduction indicates that they are not sufficiently robust to address these concerns. The mandatory disclosure rules include revisions to the existing rules related to reportable transactions. The mandatory disclosure rules also require reporting with respect to notifiable transactions and uncertain tax treatments. Notifiable transactions differ from reportable transactions in that notifiable transactions are those that the Minister specifically designates as requiring reporting whereas reportable transactions require reporting if certain specified criteria are met.
MDR is comprised of three distinct regimes:
- reportable transactions, triggered by generic hallmarks, to apply to transactions entered into after royal assent
- notifiable transactions, triggered by resemblance to specifically designated transactions, to apply to transactions entered into after royal assent
- uncertain tax treatments, triggered by financial statement recognition, to apply to tax years beginning after 2022 (specific penalties for late‑filing to apply only to tax years beginning after royal assent)
The reportable and notifiable transaction regimes require information reporting by taxpayers and any relevant advisers or promoters. The deadlines are generally 90 days from the implementation date of the relevant transactions. Where a transaction is part of a series of transactions, it is possible to file one form that discloses all such transactions.
The uncertain tax treatments regime applies only to large corporate taxpayers (generally those with assets of at least $50 million) and the reporting deadline is the same as for the corporate tax return (i.e. six months after year end).
- What is a reportable transaction?
- For a transaction to be reportable, it must be an “avoidance transaction”. “Avoidance transaction” means a transaction if it may reasonably be considered that one of the main purposes of the transaction, or of a series of transactions of which the transaction is a part, is to obtain a tax benefit.
- What are the existing reportable transaction rules?
- Current rules require taxpayers to report a transaction if:
- it is considered an “avoidance transaction,” as that term is defined for the purposes of the general anti avoidance rule, and
- it meets at least two of three hallmarks (i.e. a tax benefit based fee, confidentiality protection and contractual protection)
- Current rules require taxpayers to report a transaction if:
- What are the changes to the reportable transaction rules?
- These rules (Income Tax Act sections 237.3 to 237.5) consist of:
- changes to existing reportable transaction rules
- a new rule to report notifiable transactions
- These rules (Income Tax Act sections 237.3 to 237.5) consist of:
- a new rule to report reportable uncertain tax treatments
- related penalties.
- These rules apply to:
- transactions occurring after June 21, 2023, for reportable and notifiable transactions, and
- tax years beginning after 2022 for reportable uncertain tax treatments.
- Revised Rules:
- the threshold for an “avoidance transaction” is lowered so that a transaction would be considered an avoidance transaction if it can reasonably be concluded that “one of the main purposes” of entering into the transaction is to obtain a tax benefit
- only one of the three hallmarks is required to be present for a transaction to be reportable
- However, there are some relieving changes being made to the hallmarks, such as adding exceptions for:
- scientific research and experimental development claims, in the “fee” hallmark
- standard representations and warranties protection in the context of an arm’s length sale of a business, in the “contractual protection” hallmark
- Exceptions
- All three MDR regimes contain “standard” due diligence exceptions.
- For the notifiable transactions regime:
- the standard exception applies mainly in respect of taxpayer reporting obligations
- an additional, broader exception is provided for advisers and promoters, which is based on whether they should reasonably be expected to know if the transaction is a notifiable transaction
- Solicitor client privilege exceptions are also provided in the reportable and notifiable transactions regimes.
- When do you need to disclose a reportable transaction?
- You must disclose a reportable transaction if you are:
- a person who gets or expects to get a tax benefit
- a person who enters into the reportable transaction for the benefit of the above-noted person
- You must disclose a reportable transaction if you are:
- a promoter or an advisor entitled to a fee for the transaction, or
- a person who does not deal at arm’s length with the promoter or advisor and who is entitled to receive a fee for the transaction.
- What are the Penalties for failing to disclose a reportable and notifiable transactions?
- The penalties for failure to report these transactions are significant:
- for taxpayers, they can be up to: the greater of $100,000 and 25% of the tax benefit sought
- for advisers or promoters, they are the total of the fees charged, plus $10,000, plus an additional amount of up to $100,000
- The penalties for failure to report these transactions are significant:
- What is a Notifiable transaction?
- A transaction becomes a notifiable transaction if it is the same or substantially similar to one that is designated by the Minister. Notifiable transactions would include both transactions that the Canada Revenue Agency (CRA) has found to be abusive and those identified as transactions of interest.
- In February 2022, the Department of Finance released a backgrounder that set out a number of sample “designated” transactions (or series of transactions), as follows:
- manipulating Canadian controlled private corporation status to avoid anti deferral rules that apply to investment income
- creating loss straddle transactions using a partnership
- avoiding the 21 year deemed disposition of trust property
- manipulating bankruptcy status to reduce a forgiven amount relating to a commercial obligation
- relying on purpose tests in an anti-avoidance rule relating to tax attribute trading restrictions in order to avoid a deemed acquisition of control
- using back to back arrangements to circumvent the thin capitalization and non resident withholding tax rules
- What is an uncertain tax treatment?
- An uncertain tax treatment is a tax treatment used, or planned to be used, in an entity’s income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law.
- A corporation must report an uncertain tax treatment when all of the following apply:
- It is required to file a Canadian return of income for the taxation year
- It has at least $50 million in assets at the end of the financial year that coincides with the taxation year
- It, or a related corporation, has audited financial statements prepared in accordance with International Financial Reporting Standards or other country-specific Generally Accepted Accounting Principles (GAAP) relevant for domestic public companies (for example, U.S. GAAP)
- Uncertainty in respect of the corporation’s Canadian tax for the taxation year is reflected in those audited financial statements
- A corporation must report an uncertain tax treatment when all of the following apply:
- An uncertain tax treatment is a tax treatment used, or planned to be used, in an entity’s income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law.
- What are the penalties of an uncertain tax treatment?
- Penalties for late‑filing an uncertain tax treatments information return are $2,000 per week per unreported item, up to a maximum of $100,000 per item.