2022-0928701C6 2022 CALU Roundtable–Q2 Mandatory Disclosure Rules

Principal Issues: Whether the sale of a standard commercial financial product, which unbeknownst to the sales person is subsequently combined with other tax strategies within a series of transactions that includes an avoidance transaction that is a “reportable transaction” as defined in subsection 237.3(1) of the Act, results in a reporting requirement for the sales person pursuant to subsection 237.3(2) of the Act.

Position: Question of fact.

Reasons: Would require all of the facts and circumstances to answer the question definitively.

Author: Young, Terry
Section: -

2022 CALU CRA Roundtable May 2022

Question 2 - Mandatory Disclosure Rules

Background

The current mandatory disclosure rules in section 237.3 of the Income Tax Act (the “Act”) require certain persons (as described in paragraphs 237.3(2)(a) to (d) of the Act) to file an information return in prescribed form and containing prescribed information in respect of a reportable transaction. Pursuant to subsection 237.3(1) of the Act, a “reportable transaction” is generally defined to mean an “avoidance transaction” (within the meaning assigned by subsection 245(3) of the Act) for which at least two of three hallmarks are met in respect of the avoidance transaction or a series of transactions that includes the avoidance transaction. A reportable transaction is also defined to include each transaction that is part of a series of transactions that includes such an avoidance transaction. Pursuant to paragraph 237.3(2)(c) of the Act, an “advisor” or “promoter” (within the meanings assigned by subsection 237.3(1) of the Act) in respect of a reportable transaction has an obligation to file an information return in respect of the reportable transaction if certain conditions are met.

The term “advisor”, in respect of a transaction or series of transactions is generally defined pursuant to subsection 237.3(1) of the Act to mean each person who provides, directly or indirectly in any manner whatever any “contractual protection” (within the meaning assigned by subsection 237.3(1) of the Act) in respect of the transaction or series, or any assistance or advice in creating, developing, planning, organizing or implementing the transaction or series, to any other person.

The term “promoter” in respect of a transaction or series of transactions is defined pursuant to subsection 237.3(1) of the Act to generally mean any person who promotes or sells an arrangement, plan or scheme (collectively referred to as an “arrangement”), where it can reasonably be considered that the arrangement includes or relates to the transaction or series. A person is also a promoter if the person (i) makes a statement or representation that a tax benefit could result from the arrangement if the statement is made in furtherance of the promoting or selling of the arrangement, or (ii) accepts consideration in respect of the arrangement.

Pursuant to paragraph 237.3(2)(c) of the Act, the obligation of an advisor or promoter to file an information return in respect of a reportable transaction can arise when that advisor or promoter is entitled, either immediately or in the future, to a “fee” (within the meaning assigned by subsection 237.3(1) of the Act) in respect of the reportable transaction or any other transaction that is part of a series that includes the reportable transaction that is described in paragraph (a) of the definition “reportable transaction” in subsection 237.3(1) of the Act.

Paragraph (a) of the definition of “reportable transaction” in subsection 237.3(1) of the Act generally describes a fee that is:

• based on the amount of the tax benefit from the avoidance transaction or series;

• contingent on obtaining the tax benefit from the avoidance transaction or series; or

• attributable to the number of participants in the avoidance transaction or series (or a similar avoidance transaction or series), or the number of persons who have been provided access to advice or an opinion given by an advisor or promoter regarding the tax consequences of the avoidance transaction or series (or a similar avoidance transaction or series).

Question

Assume Ms. A is licensed to sell certain financial products including investment and insurance products. She is approached by the tax advisor for Mr. B, with the request that she assist Mr. B in purchasing one of the financial products she is licensed to sell and which is generally available in the open market and bears normal commercial terms. Mr. B ultimately purchases the financial product and Ms. A receives compensation directly from the financial services company who developed this product. While the compensation Ms. A receives from the sale of the financial product is not contingent on the receipt by Mr. B of any tax benefit, the compensation is directly linked to the amount invested or deposited into the financial product purchased by Mr. B.

Subsequently, the tax advisor for Mr. B, without Ms. A’s knowledge, combines the financial product with certain other tax strategies where the existence and amount invested or deposited into the financial product purchased by Mr. B is used to obtain a tax benefit. The Canada Revenue Agency (the “CRA”) then reassesses Mr. B on the basis that there has been a series of transactions (which includes the purchase of the financial product) that includes an avoidance transaction, that each transaction in the series is a reportable transaction, and that no reporting was provided to the CRA by Mr. B or his tax advisor as required by subsection 237.3(2) of the Act.

Can the CRA confirm that, while the purchase of the financial product may become one of the transactions in the series of transactions that includes an avoidance transaction such that each transaction in the series (including the purchase of the financial product) is a reportable transaction, Ms. A had no reporting obligation under subsection 237.3(2) of the Act with respect to this or any other transaction in the series with respect to Mr. B?  

CRA Response

A determination as to whether a person has a reporting obligation under subsection 237.3(2) of the Act in respect of a reportable transaction must be based on all the relevant facts and circumstances. Based on the limited facts provided, the CRA cannot confirm that Ms. A has no reporting obligation with respect to the sale of the financial product to Mr. B, or any other transaction in the series of transactions described in the question. However, we can offer the following comments.

In determining whether Ms. A has an obligation to file an information return under either paragraph 237.3(2)(c) or (d) of the Act in such circumstances, the CRA would consider factors such as the following:

* whether Ms. A is an advisor or a promoter in respect of the sale of the financial product (notably whether Ms. A has acted in a manner described in the definition “advisor” or “promoter” in subsection 237.3(1) of the Act in respect of the sale of the financial product);

* the terms of the sale of the financial product and the series of transactions;

* the terms of the financial product;

* the terms of the consideration received by Ms. A from the financial services corporation that developed the financial product;

* whether Ms. A is dealing at arm’s length with an advisor or promoter in respect of any transactions in the series of transactions; and

* who was, or is, entitled to a fee referred to in paragraph (c) of the definition “reportable transaction” in subsection 237.3(1) of the Act.

With respect to whether a fee is described in paragraph (a) of the definition “reportable transaction” in subsection 237.3(1) of the Act, the CRA would consider statements such as the following from the Explanatory Notes:

* “a fee based solely on the value of the services provided in respect of a transaction or series, determined without reference to the tax results of the transaction or series, would not be a fee described in subparagraph (a)(i)”.

* “Subparagraph (a)(ii) of the definition would not apply if no portion of the fee to which the advisor or promoter is entitled is dependent on the taxpayer obtaining any tax benefit, nor would it apply merely because the fee to which an advisor or promoter is entitled depends on whether a transaction or series is completed provided that the fee is not dependent on any tax benefit from the transaction or series”.

* “Similar transactions or series include transactions or series having the same or similar structure and entered into by different taxpayers, when the objective of those transactions or series is to result in similar tax benefits for each of those taxpayers, even if those transactions or series may involve different properties or obligations”.

Subsection 237.3(11) of the Act provides that a person who is required to file an information return in respect of a reportable transaction is not liable for a penalty under subsection 237.3(8) of the Act if the person has exercised the degree of care, diligence and skill to prevent the failure to file that a reasonable person would have exercised in comparable circumstances. Regarding subsection 237.3(11) of the Act, consideration can be given to the following statement in the Explanatory Notes:

* “A person who is an advisor or a promoter in respect of an avoidance transaction, or a series of transactions that includes an avoidance transaction, and any person who does not deal at arm’s length with such advisor or promoter, would also be required to exercise adequate care, diligence and skill to determine whether a tax benefit could result from the avoidance transaction or series for a person, and whether any two of paragraphs (a) to (c) of the definition “reportable transaction” are applicable to the avoidance transaction or series. A person who is an advisor or promoter would also be required to make reasonable and good faith efforts in identifying information that is required to be provided to the Minister of National Revenue, and take all reasonable steps to ensure that that information is provided to the Minister.”

We note that this response is based on current legislation and does not take into consideration the draft legislative proposals released by the Department of Finance on February 4, 2022.



Terry Young
2022-092870
May 3, 2022

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