On June 22, 2023, expanded mandatory disclosure rules contained in sections 237.3 and 237.4 of the Income Tax Act took effect via the Budget Implementation Act, 2023. The amendments widen the range of transactions that must be reported to the CRA and apply to taxpayers, promoters, and “advisors” – a definition which may include lawyers and paralegals. Legal professionals assisting their clients with transactions resulting in tax benefits may be now required to report these to the CRA. Many have voiced concern over these amendments, arguing their effect conflicts with principles of confidentiality and duty to one’s client.
Amendments to the Mandatory Disclosure Rules
The amendments to the mandatory disclosure rules include:
- A broadened definition of what the CRA considers an “avoidance transaction,” which includes situations where it can reasonably be concluded that one of the main purposes of entering into the transaction was to obtain a tax benefit.
- A new category of “notifiable transactions” which must be reported. Notifiable transactions differ from “reportable transactions” in that notifiable transactions are those that the Minister of National Revenue specifically designates as requiring reporting whereas reportable transactions require reporting if certain specified criteria are met.
- Removal of the “reliance” or “relieving” rule, which deemed full and accurate reporting by one party to be reporting by all parties. In the past, it was sufficient for one report to be made to CRA (by the taxpayer, for example). Now, every party involved in a reportable or notifiable transaction, including the taxpayer and any promoters or advisors, must each report these transactions to CRA.
- Large penalties for non-compliance totalling:
- The fees charged in respect of the reportable transaction;
- $10,000; and
- $1,000 per day for each day the failure continues to a maximum of $100,000.
According to the legislation, transactions that meet the expanded requirements must be reported to the CRA within 90 days of entering into the transaction. However, the expanded requirements only apply to transactions “straddling” June 22, 2023 and onwards.
While disclosure is not required where it is reasonable to believe the information is subject to solicitor-client privilege, the high penalties for non-compliance will make legal professionals think twice before choosing whether to disclose. There is real concern that disclosing such transactions to the CRA will bring lawyers’ legal obligations and their clients’ interests into conflict with one another.
As a result, the Federation of Law Societies of Canada (“Federation”) filed an application on September 11, 2023 in the British Columbia Supreme Court (“BCSC”) seeking to exempt legal professionals from and challenging the constitutionality of the amendments. The Federation expressed support for the government’s effort to address tax avoidance but emphasized that the chosen method must respect important legal and constitutional principles like solicitor-client privilege.
But what are legal professionals and their clients to do in the meantime? Do the amendments apply regardless pending the BCSC’s decision? The Attorney General of Canada has temporarily agreed to exempt legal professionals, including lawyers, paralegals and articling students, from the mandatory disclosure provisions until either November 20, 2023, or the day of the BCSC’s decision, whichever comes first. For the moment, it is uncertain whether the effect of these changes is limited to tax practitioners, or whether legal professionals will be captured by the legislation as well.
The application was scheduled on October 20, 2023 and updates will be available in the coming weeks.
For more information, please see the CRA’s administrative guidance here.
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