In the Budget Implementation Act 2023, the federal government has expanded the mandatory disclosure rules in the Income Tax Act (ITA). The impact of these changes may not be limited to tax practitioners specifically advising on tax transactions. Any licensee who serves clients in respect of certain transactions with tax consequences may be required to report those transactions to the Canada Revenue Agency (CRA).
The ITA amendments will:
- Expand the existing reportable transactions regime significantly, including broadening the definition of reportable “avoidance transactions”, and reducing from 3 to 1 the number of hallmarks that must be present to require the reporting of an avoidance transaction.
- Create a new category of “notifiable transactions” that must be reported to the CRA. Notifiable transactions are transactions designated by the Ministers of Finance or National Revenue and transactions that are the same or substantially similar to those designated transactions.
- Remove the “reliance” or “relieving” rule, which deemed full and accurate reporting by one party to be reporting by all parties.
- Create new penalties for non-reporting by advisors, including licensees, set at the total of:
- The fees charged in respect of the transaction,
- $10,000, and
- $1,000 multiplied by the number of days the failure continues up to a maximum of $100,000.
In most cases, reporting obligations apply to transactions entered into after June 22,2023, when the Act received Royal Assent. Licensees must report to the CRA within 90 days of the day the taxpayer becomes contractually obligated to enter into the transaction or enters into it. Failure by any person to file a report as and when required will extend the normal period in which the transaction may be reassessed until three or four years (depending on the taxpayer) after all applicable reporting requirements have been met.
Licensees acting on transactions that may be reported should consider Section 3.3 Confidentiality of the Rules of Professional Conduct, or Rule 3.03 Confidentiality of the Paralegal Rules of Conduct.
If a transaction must be reported, the licensee should advise clients in writing that their confidential information will be disclosed to the CRA.
According to the Budget Implementation Act, 2023, disclosure of information is not required if it is reasonable to believe that the information is subject to solicitor-client privilege. Therefore, licensees should consider whether any of the information required by the CRA is subject to solicitor-client privilege and advise clients that they will not report that information.
Licensees who have questions about their obligations under the Rules of Professional Conduct or the Paralegal Rules of Conduct should contact the Practice Management Helpline.
The Law Society continues to discuss the impact of these changes with the federal government. Additional options are also being considered and we will keep the professions informed about any further steps. Information will be provided on our website as it becomes available.
