There has been talk about new Mandatory Disclosure Rules since the budget meeting in 2021; however, 2023 might finally be the year these rules go into effect. The Canadian Income Tax Mandatory Disclosure Rules were officially introduced to Parliament on April 20, 2023 as Bill C-47.
This bill requires taxpayers to disclose certain information when filing tax returns, making it important to understand the basics of reportable and notifiable transactions, and when uncertain tax treatment applies.
Prior to Bill C-47, taxpayers only needed to report transactions under Mandatory Disclosure Rules to receive a tax benefit when two of the three characteristics were present:
- Contingency Fee
- Confidential Protection
- Contractual Protection
Now, only one of these three characteristics needs to be present for taxpayers to report the transaction. In addition, the definition of “avoidance transaction” has been expanded. Under Bill C-47, the CRA now views an avoidance transaction as one where it’s reasonable to consider the main purpose of the transaction to obtain a tax benefit.
It’s important to note that reporting by one party does not alleviate the reporting requirement of the other party. In an effort to crack down on non-compliance, the penalties associated with reportable transaction negligence have been increased.
Another component of the new Mandatory Disclosure Rules is the addition of notifiable transactions. The CRA has found that many taxpayers exploit the current reporting system, which is why they are proposing the following changes be added to the list of notifiable items:
- Transactions that attempt to avoid Canada-controlled private corporation (CCPC) status to receive higher tax advantages.
- Transactions that dispose of trust property through indirect transfers and dividends.
- Transactions that forgive commercial obligations through bankrupt status.
- Transactions that are set up as back-to-back arrangements where the proper capitalization rules are not applied.
- Transactions that involve straddle loss creation by partnerships.
Many of the proposed notifiable transactions apply to businesses. Additionally, the reporting timeframe has been adjusted to 45 days. Previously, you had 90 days to report certain transactions.
Uncertain Tax Treatment
There are also proposed adjustments to transactions with uncertain tax treatment. These adjustments mainly apply to Canadian corporations and are due when the income tax return is filed. The corporation must meet the following conditions:
- The corporation has a taxable presence in Canada.
- The corporation has at least CA$50 million in assets at the end of the tax year.
- The corporation has audited financials prepared in accordance with IFRS.
- The corporation has uncertainty regarding the income tax for the current year within those audited financials.
When these conditions apply, the corporation will need to convey its uncertain tax treatment to the CRA in conjunction with the annual income tax return.
If you are a Canadian business owner, you might find yourself being subject to the new proposed Mandatory Disclosure Rules. As the CRA continues to revisit existing policies and procedures, you can expect more clarity and regulations surrounding income tax reporting.
For more information on the latest tax law changes, reach out to one of our team members at NRK Accounting today.