Mandatory disclosure rules – Guidance, 15 August 2024 CRA Webpage

Reportable Transactions

Contingent fee arrangements

A fee does not come within (a) of reportable transaction where:

• It is a standard fee (that is, generally available to the public under normal commercial terms and in comparable circumstances) by a financial institution is charged respecting listed matters.
• In certain circumstances, it is attributable to the number of taxpayers that participate in or have been provided access to the advice given on the tax consequences of the transaction; for greater certainty, the fee can be only contingent on the number of returns or elections prepared and not the attainment of the tax benefit.
• The fee is paid by an insurance professional to a client’s advisor for a referral regarding a proposed policy to fund taxes arising on death, or the fee is paid by the advisor to the insurance professional for the referral of the estate freeze work.
• The fee is based solely on the value of the services provided in respect of a transaction or series and is determined without reference to the tax results of the transaction or series; this would cover, for example, the practice of value billing by professionals such as lawyers and accountants in which a fee is agreed to at the time of billing and is based on criteria (other than the value of the tax benefit resulting from the transaction or series).
• It is under a contingent litigation fee arrangement in relation to an appeal of a tax assessment by a lawyer in respect of a tax benefit from a completed transaction or series.

Reportable Transactions

Confidential protection

• “Protection of trade secrets that do not relate to tax does not give rise to a reporting requirement.”
• Standard confidentiality agreements that do not require tax advice to be confidential, such as a letter of intent that includes a confidentiality requirement, do not give rise to a reporting requirement.
• Standard commercial confidentiality provisions in standard client agreements or documentation, which do not contemplate a specific identified tax benefit or tax treatment would not, in and of themselves, result in a reporting obligation."

Reportable Transactions

Contractual protection

• “Standard representations, warranties and guarantees between a vendor and purchaser, as well as traditional representations and warranties insurance policies, that are generally obtained in the ordinary commercial context of mergers and acquisitions transactions to protect a purchaser from pre-sale liabilities (including tax liabilities), are not expected to give rise to reporting requirements for reportable transactions”
• “A reporting obligation would not arise solely in respect of contractual protection in the form of insurance that is integral to an agreement between persons acting at arm’s length for the sale of a business where it is reasonable to conclude that the insurance protection is intended to ensure that the purchase price paid under the agreement takes into account any liabilities of the business immediately prior to the sale and the insurance is obtained primarily for purposes other than to obtain a tax benefit from the transaction or series” - and "[f]or greater clarity, the contractual protection hallmark would not arise solely where the insurance or indemnity is based on the actions or inactions of a person to achieve a tax result."
• “Standard commercial indemnities provisions in standard client agreements or documentation, which do not contemplate a specific identified tax benefit or tax treatment would not, in and of themselves, result in a reporting obligation.”
• “[T]ax return insurance would not constitute contractual protection insofar as the insurance is extended to a taxpayer’s filings generally, and does not contemplate any particular transaction or series of transactions entered into by a taxpayer … .”

Examples include:

• “Indemnities related to existing pre-closing tax issues, or the amount of existing tax attributes (tax pools, capital cost allowance, etc.)”
• A public-company acquiror “obtains specific contractual covenants and/or indemnities from the Target and the significant shareholders of the Target … that are intended to ensure the Target and/or the significant shareholders do not take certain steps that may cause the bump denial rules to apply … This could also apply in a private corporation context.”
• Tax insurance "or other contractual protection" is provided to the purchaser of taxable Canadian property from a non-resident regarding its liability for 25% or 50% of the purchase price absent a s. 116 certificate being issued by CRA.
• Where there was a pre-sale payment of a safe income dividend, contractual protection is obtained regarding the calculation of safe income on hand.

• "Indemnities or covenants to a purchaser and/or target in respect of Part III tax liabilities and other adverse tax consequences arising from dividends paid as part of a pre-closing reorganization."

• "Standard contractual representations and indemnities with respect to the failure to deduct or withhold an amount under section 215, in an arm's length situation ... ."

• A standard clause in a partnership agreement providing for reasonable assistance to a partner to help resolve an audit.

• On an s. 132.2 merger, the fund manager indemnifying the trustee of the terminating fund for any liabilities that might arise in respect of the terminating fund (commercial disputes, securities law claims, etc.).
• A standard indemnity clause in the trust terms protecting a trustee, provided that when the clause was created it was not reasonable to conclude that an aggressive tax avoidance transaction was contemplated.

“The contractual protection hallmark will not apply in a normal commercial or investment context in which parties deal with each other at arm's length and act prudently, knowledgeably and willingly, and does not extend contractual protection for a tax treatment in respect of an avoidance transaction.”

• Examples include tax indemnities in standard provisions such as gross-up clauses in loan agreements or ISDA agreements, or in employment and severance agreements

• As another example, an employee of a Canadian bank provides general information to a client regarding the tax benefits of contributing to an RRSP and the RRSP plan document provides that the client will indemnify the trustee (a bank subsidiary) in the event that the RRSP plan is subject to tax, for example, as a result of holding a non-qualified investment: this indemnity “is not considered to be contractual protection in respect of the avoidance transaction, on the basis that this indemnity is a form of protection that applies in the normal commercial or investment context.”

Notifiable Transactions

Reasonable expectation to know – no reporting

• Only advisors who know or are reasonably expected to know of their reporting requirements are required to file – for example, this generally would not extend to “more junior employees and those who have limited roles that do not give them visibility of the broader transaction or series as well as the associated tax treatment and tax benefit” even if their employer did not file.

Notifiable Transactions

Due diligence - notifiable transactions – no reporting

• “A person who obtained the tax benefit would generally meet their due diligence obligations by asking their advisors about potential reporting obligations that might arise from the transactions (and being informed by their advisors that no such reporting obligations will arise on account of the transaction being a notifiable transaction or substantially similar to a notifiable transaction).”

Reportable uncertain tax treatments (RUTTs)

RUTT restricted to matters reported on Canadian returns

• "An uncertain tax treatment is a tax treatment used or planned to be used in an entity’s Canadian income tax filings for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with tax law."

Timing of RUTTs

• If the RUTT amount is released in the year, then it is not required to be reported on Form RC313, even if it is included in the comparative amounts on the financial statements.

Equity method of accounting

• "If the reporting corporation has uncertain tax positions that are reported on financial statements using the equity method, the reporting corporation is required to report RUTTs on Form RC313. However, when the investment itself pertains to a reporting corporation, only the latter will be required to complete its own RC313."

Footnote 2 (re "straddle transactions")

If a person enters into a series of transactions that straddle the effective date of designation, the reporting requirement will be triggered with the first transaction entered into after the effective date of designation that is part of a series of transactions that is the same as, or substantially similar to one that is designated at that time by the Minister.

Separate reporting by equity-accounting shareholders

If the reporting corporation has uncertain tax positions that are reported on relevant financial statements using the equity method, the reporting corporation is required to report RUTTs on Form RC3133. Each reporting corporation is responsible for reporting its own RUTTs on Form RC3133, not the RUTTs of other related corporations.

No reporting for portfolio investments

Reporting obligations do not generally apply to portfolio investments in private equity limited partnerships or publicly traded partnerships (portfolio partnerships).

Application of NT-2023-05 (re B2B arrangements) to cash pooling arrangements

NT-2023-05. Back-to-back arrangements

In the context of a cross-border [physical or notional] cash pooling arrangement involving a Canadian taxpayer, non-arm’s length non-residents, and an arm’s length intermediary, assuming that the Canadian taxpayer is a debtor and at least one non-resident member of the pool resides in a jurisdiction with a higher interest withholding tax rate than the rate applicable to the intermediary, the arrangement would be a notifiable transaction [described in NT-2023-05] and results in a filing requirement where:

1. the taxpayer files or anticipates filing its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules, or
2. the taxpayer reports or is expected to report that the interest it pays in respect of the arrangement is subject to the lower rate of withholding tax applicable to the intermediary.

A filing generally is not required where the Canadian taxpayer participating in the cash pooling arrangement is solely a creditor … .

[T]he filing of Form RC312 by a person in respect of the earliest transaction in the series of transactions forming the cash pooling arrangement will satisfy that person’s reporting obligation in respect of each transaction that is part of the series.