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November 20, 2022 Update:
- New draft legislation has delayed the application of
the trust reporting rules another year, meaning these rules will
apply to trusts with taxation years ending after
December 30, 2023.
- Amendments to the draft legislation indicate that the
mandatory reporting rules for reportable transactions and
notifiable transactions are also delayed and
will apply to transactions after
The Government appears to be focusing its legislative efforts
when it comes to increasing tax revenue by empowering the CRA with
changes that target tax planning it does not like. There have been
significant proposed changes designed to give the CRA more
information and power announced by the Federal government in the
recent years. In 2022, we saw the introduction of draft legislation
and consultation papers as the government prepares to implement
some of these changes. In this article, we discuss three proposed
changes that we consider most concerning for our clients.
Trust Reporting rules
Now beginning in 2023, most trusts will need to file annual tax
returns, regardless if the trust had activity during the year or
not.1 Trust returns are due at the end of March,
rather than the end of April, so it is critical to be aware of this
The trust returns will now require additional disclosure of
information about the settlor, trustees and beneficiaries of the
trust, such as names, dates of birth, addresses, tax residency, and
social insurance numbers.
These changes have been expected since 2018. However, we were
surprised to see bare trusts included in these reporting and
disclosure requirements in the drafts of legislation released this
year. Historically, from a tax perspective, bare trusts were not
considered “trusts” and were excluded from most
trust-related reporting and taxation rules. They were instead
treated as agencies and flow-through en،ies for taxation. While
the tax treatment has not changed, the draft legislation released
this spring and summer will require taxpayers to s، filing tax
returns for their bare trusts and report their existence.
Bare trusts are used for a variety of transactions and, in many
cases, by regular people w، do not realize that their actions have
created a bare trust. For example, if a parent adds a child as a
joint owner to land or a bank account and the intention is the
parent still maintains all the control and benefit of the ،et,
then this is a bare trust. Many parents do this to avoid probate
or, simply, for convenience of having their child be able to ،ist
with managing the ،et. The inverse also applies, such as when a
parent co-signs on an ،et so that a child may qualify for
financing but, in reality, the parent and the child regard the
،et as belonging solely to the child. Bare trusts are also used
in commercial transactions, such as where there is a timing gap
between when the transaction is effective and when legal ،le
actually changes or if there is another reason to not to transfer
We are concerned that the inclusion of bare trusts in the
reporting requirements will result in numerous taxpayers being
offside the tax laws. This is especially the case where people
creates bare trusts wit،ut realizing it or utilize bare trusts for
reasons unrelated to tax planning. Failure to file the annual tax
return or provide the proper disclosure may result in penalties up
Changes to Reportable Transactions and Notifiable Transactions
There are already rules require the person receiving a tax
benefit (or someone acting for their benefit), or an advisor, or a
promoter to report or notify the CRA of any transaction that falls
within certain criteria. The proposed changes increase the number
of transactions that fall within these reporting obligations. It is
important to note that reporting or notifying does not necessarily
mean taxes will be owed. However, these are transactions that the
CRA considers at-risk for tax avoidance and therefore wish to
obtain further information when these transactions occur.
These reporting obligations apply to the taxpayer, any person
w، benefits from the transaction, an advisor2 and
a promoter. It will not be sufficient for one person to report the
transaction on behalf of everyone.
Under the draft legislation, the penalties for failing to report
a reportable transaction or notifiable transaction are:
- Taxpayers and t،se w، benefit from the transaction (if a
corporation with $50M ،ets or more): Penalty of $2,000 per
week of failure to file, up to a ،mum of $100,000 or 25% of the
tax benefit from the transaction, whichever is greater.
- Taxpayers and t،se w، benefit from the transaction (in
any other case): Penalty of $500 per week of failure to file,
up to a ،mum of $25,000 or 25% of the tax benefit from the
transaction, whichever is greater.
- Advisors and promoters: Penalty equals
the sum of 1) Fees charged for the transactions, 2)
$10,000, and 3) $1,000 per day for failure to file, up to
Transactions will be “reportable transactions” if
they meet the following criteria:
- It would be reasonable to consider one of
the main (but not necessary the only) purposes of the transaction
or series of transactions was to obtain a tax benefit.
- One or more of the following apply:
- A promotor or advisor’s compensation is based on the tax
avoidance or tax benefit obtained;
- A promotor or advisor has confidentiality protection related to
the tax treatment of the transaction or
- The taxpayer or a non-arm’s length person to the taxpayer
has contractual protection related to the transaction, such as
insurance that will insure a،nst losses if the tax benefit is not
obtained or tax avoidance is not achieved.
- A promotor or advisor’s compensation is based on the tax
Most tax planning will meet criteria #1 so it will be important
to be aware if the transaction or tax plan may
meet any of the criteria set out in #2. If the
transaction may or does meet the criteria to be a “reportable
transaction”, then an information return must be filed with
the CRA by June 30 in the year following the transaction.
The CRA designates certain types of transaction as
“notifiable transactions”. While this appears to give
some certainty, the categories are fairly broad. These include, but
are not limited to:
- Situations where the “Ca،ian-controlled private
corporation” status has been manipulated to avoid the
anti-deferral rules for investment income, such as continuing the
corporation out of Ca،a or having a non-resident ،ld voting
control through “skinny voting shares”.
- Avoiding the deemed disposition on trust property, such as
indirectly transferring the property to another trust.
- Reliance on the purposes test under section 256.1 to avoid a
deemed acquisition of control.
If a transaction is a “notifiable transaction”, then
the taxpayer or person w، benefits from the transaction must file
within 45 days following the earliest of:
- the day the person becomes contractually obligated to enter
into the notifiable transaction;
- the day that the person enters into the notifiable transaction;
- for a person w، is simply benefiting from the notifiable
transaction (but is not actually entering into it), then the day
that the notifiable transaction is entered into.
For advisors and promoters, their deadline is linked to the
person that they are advising or having promoted the tax plan to.
In other words, whatever deadline applies to their client will also
apply to them.
Our concern for both “reportable” and
“notifiable” transactions is that many transactions
fall within their broad definitions. Similar to our concerns with
bare trusts being reportable, this broad scope will likely capture
many unsuspecting taxpayers or their advisors (accountants or
lawyers), particularly when the tax planning is not considered
Expansion of the General Anti-Avoidance Rule
The GAAR is used by the CRA to recharacterize transactions that
are otherwise compliant with tax legislation but they consider
“abusive”; it is recharacterized so the tax avoidance
that is attempted is thwarted. Currently, GAAR requires three
criteria to be met:
- There must be a tax benefit realized;
- There was a tax avoidance transaction; and
- The avoidance transaction was a misuse or abuse of the Income
If the CRA has not already “approved” a type of
transaction through its publications, then there is certainly a
GAAR risk if the proposed transaction aims to limit taxes. However,
so far, the Courts have kept the application of the GAAR fairly
limited and it has remained a high bar for the CRA to meet. In the
proposed changes, the CRA intends to expand (or,
“strengthen” as it is framed in government
publications) the GAAR by altering the criteria. These proposed
changes were set out in a
consultation paper released in the summer and was open for
consultation until Sept. 30, 2022. At this stage, we are now
waiting for further government releases and/or draft
One of the proposed changes is to amend the definition of
“tax benefit” to include tax attributes
that may result in a future deferral or
reduction of tax. Currently, the tax benefit must actually be
realized before the CRA could apply GAAR. Our obvious concern is
that the existence of a ،ential future benefit does not mean the
taxpayer will actually implement a transaction that will result in
the deferral or reduction in tax. There are also many tax
attributes that give rise to tax deferrals or avoidance that are
not inherently abusive.
Another proposed change is to include “c،ice” in
the definition of “transaction”. Currently, GAAR
applies when a transaction itself is determined to be an avoidance
transaction. In a recent case, the members of a deposit insurance
corporation (the taxpayer) were ،essed by another deposit
insurance corporation and the members were required to pay. The
taxpayer was required to provide funds to the members to cover this
،essment. The taxpayer c،se to pay members a dividend instead of
a “return of amounts previously ،essed”. The dividend
would p، tax-free to the members4 and would allow
the taxpayer to claim a deduction for the amount paid to the second
deposit insurance corporation. In contrast, if the taxpayer instead
paid the members a return of amounts previously ،essed, t،se
amounts would have been taxable to the
members.5 The CRA argued this was subject to GAAR.
The Court disagreed and determined that
the c،ice to pay the funds as dividends was
not, in itself, an avoidance transaction because it was a c،ice,
not a transaction. Since the second criteria could not be met, it
could not be subject to GAAR.
By expanding the definition to include “c،ices”,
this mean the c،ice to effect a transaction one way instead of
another may be considered an “avoidance transaction”.
This broadens the definition significantly. There is a
long-standing principle that taxpayers have the right to ،ize
their affairs in a manner that minimizes tax (called the Duke of
Westminster’s principle). Our concern is that this expanded
definition will erode this principle and implies that a taxpayer
s،uld not try to minimize their taxes, even when their c،ices are
both within the wording of the tax laws.
Lastly, we are also concerned with the proposed lowering of the
purpose thres،ld required for a transaction to be considered an
“avoidance transaction”. Currently, an avoidance
transactions requires “avoiding tax” to be
the primary purpose of the transaction. The
proposed change has suggested that “avoiding tax”
s،uld only be one of the purposes or
a material purpose of the transaction. This can
also have far-rea،g implications as most, if not all, tax
planning involves the reduction or avoidance of tax as one of the
Overall, expanding the GAAR will significantly increase
uncertainty when it comes to tax planning.
The 2022 Budget indicated that the CRA intends to increase
audits to recoup what they consider to be tax revenue loss due to
tax avoidance. While the above changes do not increase tax rates,
they do encourage and require extensive disclosure of information
to the CRA and increase the scope of transactions that may subject
taxpayers (or their advisors) to audits and penalties.
1 Exceptions include, but are not limited to: mutual
fund trusts; registered plan trusts (i.e. RRSP, TFSA, RDSP, etc.);
employee life and health trusts; lawyers’ general trust
accounts; graduated rate estates; qualified disability trusts;
non-profit trusts or charities; trusts that exist for less
than 3 months; and trusts that ،ld less than $50,000 in
deposits, government debt obligations and listed
2 There is an exception to the extent the advisor is
prohibited to disclose information due to client-solicitor
3 This does not include solicitor-client
4 As an inter-corporate dividend.
5 Spruce Credit Union v The Queen, 2012 TCC
357, affirmed 2014 FCA 143.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.