Keeping those tax deals confidential? Be wary.

There was no mention of it in the Federal Budget Speech, but there is a very important proposal in the Budget Plan that could have serious implications for wealth advisors, particularly those involved in sophisticated tax planning.

It has to do with requiring the reporting of certain tax avoidance transactions that fall outside existing tax shelter registration requirements.

The trend toward information reporting The Canadian government is following a path that a number of jurisdictions have taken of late—to require disclosure of certain transactions that may warrant greater scrutiny by tax authorities. This includes many major economies and some of our closest trading partners, including the U.S., U.K., Ireland, New Zealand and Australia.

Closer to home, in January last year provincial authorities in Quebec circulated a working paper titled "Aggressive Tax Planning" for public consultation. Following those discussions, Revenu Québec announced in October that it would be intensifying its efforts in this area, including requiring the mandatory disclosure of confidential or conditional remuneration transactions. Penalties for non-compliance can be as much as $100,000, with no time limit for the agency to review undisclosed transactions.

The proposal There are existing substantive rules in the Income Tax Act intended to counter aggressive tax planning, including information reporting to help identify certain transactions and participants.

Further, there are rules that may be applied to deny tax benefits, including the General Anti-Avoidance Rule (GAAR).

Still, we operate within a self-assessment system that relies on taxpayer disclosure to support the integrity of the system. The government sees these foregoing substantive rules as being more effectively applied if CRA is able to identify aggressive tax planning in a timelier manner.

The proposal uses the term "hallmark" to describe the characteristics of an avoidance transaction that will be deemed a reportable transaction. Transactions would have to be reported if they bear at least two of the following three hallmarks:

A promoter or tax advisor in respect of the transaction is entitled to fees that are to any extent: a) attributable to the amount of the tax benefit from the transaction; b) contingent upon the obtaining of a tax benefit from the transaction; or c) attributable to the number of taxpayers who participate in the transaction or who have been given access to advice from the promoter or advisor regarding the tax consequences from the transaction.

A promoter or tax advisor in respect of the transaction requires "confidential protection" about the transaction.

The taxpayer or the person who entered into the transaction for the benefit of the taxpayer obtains "contractual protection" in respect of the transaction (other than as a result of a fee described in the first hallmark).

According to the proposal, the presence of these hallmarks doesn't necessarily imply there is abuse, but rather indicates there is a higher risk of abuse which merits a closer look by the CRA.

It's important to understand this is strictly a reporting exercise. Disclosure would have no bearing on whether the tax benefit is allowed, nor would it be considered an admission that the GAAR applies to the transaction.

Scope and timeframe of implementation The focus is on whether the transaction itself may be reportable by the taxpayer, not whether other individuals must report or be registered in some manner.

Nonetheless, professionals of all stripes will want to be aware whether they are touched by a given transaction—even if only tangentially. They may not be required to take action, but it's prudent to be aware.

The proposal language is a bit vague and references "promoter or tax advisor," without any further details of how widely that net may be cast—at least not in the Budget Plan document. It will be interesting to see how this definition is fleshed out once all parties concerned have weighed in during the public consultation process.

As to timeline to implementation, the quick speed of the Quebec experience should be instructive. The Budget Plan purports the proposal (as modified through consultations) is intended to apply to transactions after 2010, and series of transactions completed after 2010.

CRA's best tool? On a personal note, I'm reminded of a conversation in an earlier business life a dozen or so years back.

During lunch at a wealth-planning conference I was running, a senior official in the International Tax Directorate was asked about recent legislative changes. He commented that it was certainly nice to have new tools, but that their best tool remained…divorce.

Apparently, at least at that time, acrimonious marriage breakdown was a catalyst to not-so-anonymous tips to their hotline.

And you thought disclosure was just an issue between you and the CRA.

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Doug Carroll, JD, LLM (Tax), CFP, TEP is vice-president of tax and estate planning at Invesco Trimark Ltd.

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