Budget softens mandatory tax disclosure regime

A minor budget measure could put a major dent in a constitutional challenge of the Canada Revenue Agency’s new mandatory disclosure regime.

The regime affects taxpayers and their financial advisors who engage in transactions whose primary purpose is a tax benefit.

Per the 2024 federal budget, the government intends to remove reportable and notifiable transaction information returns from the Income Tax Act’s general failure-to-file penalty provision, which provides for a fine of up to $25,000 and a term of imprisonment up to a year for violators.

The application of the general penalty provision was “unnecessary,” the budget explained, in light of the mandatory disclosure rules, which specify their own maximum penalty of $110,000 plus the value of all fees charged.

Bhuvana Rai, lawyer with Mors & Tribute Tax Law in Toronto, said the move may have more to do with undermining the Federation of Law Societies of Canada’s (FLSC) ongoing legal challenge against the mandatory disclosure rules.

The threat of jail time was a key plank of the group’s claim that they violate section 7 of the Charter, which protects the right to life, liberty and security of person. “Generally speaking, advisors would no longer face any criminal penalties,” Rai said. “That’s the real change.”

Still, she said the budget amendment is unlikely to deliver a knock-out blow to the FLSC claim.

“I’m not sure it’s dead in the water at all,” Rai said. “They’re trying to make one small change so that a lot of things in the challenge are addressed, without dealing with other issues, like how the rules require lawyers to essentially snitch on their clients.”

In legal filings with the B.C. Supreme Court, the FLSC also argues the mandatory disclosure rules violate section 8 of the Charter — which protects against unreasonable search and seizure — because provisions requiring lawyers to report information about their clients’ activities threaten solicitor/client privilege.

Roy Millen, the FLSC’s lead lawyer on the Charter challenge and partner with Blake Cassels and Graydon LLP in Vancouver, said in an emailed statement that his team is still considering the implications of the budget’s penalty change.

Late last year, a B.C. Supreme Court judge granted an injunction temporarily exempting lawyers from the mandatory disclosure rules until a final decision is made on the legal challenge.

Rai is hoping she and her fellow lawyers never have to comply. However, taxpayers and their other advisors remain subject to the reporting requirements and have begun making disclosures under the rules.

Considering the severity of the potential penalties and the absence of a threshold for the amount of tax at stake, Rai said many people are understandably erring on the side of caution when declaring their notifiable and reportable transactions.

“There’s a lot of reporting and a lot of replicated reporting,” she said. “For each report that’s filled out, no matter how small, sadly it’s the client who ends up having to pay for it.”

Added Rai: “I have to wonder how the CRA is going to deal with the influx of reporting.”