2024-1042821E5 Application of 237.5 - RUTT disclosure

Principal Issues:

1. Whether a taxpayer should disclose similar reportable uncertain tax treatments occurring during several taxation years as multiple reportable uncertain tax treatments on Form RC3133. 2. Whether certain uncertain tax treatments are considered to be reflected in the financial statements of a taxpayer. 3. Whether the temporary and non-temporary characterization of reportable uncertain tax treatments follow the same principles as the determination for tax provisions.

Position:

1. Yes 2. Question of fact 3. Should follow the accounting principles used for the relevant financial statements.

Reasons:

See below.

Author: Tan, Serena
Section: Section 237.5 of the Income Tax Act

XXXXXXXXXX                                                                     2024-104282
                                                                                            Serena Tan

March 20, 2025

Dear XXXXXXXXXX,

Re: Reportable Uncertain Tax Treatments

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof (the “Act”).

We are writing in reply to your letter dated November 5, 2024, in which you requested guidance on the application of the reportable uncertain tax treatment rules under section 237.5.

Specifically, you have requested our views on the following:

Question 1

Where the audited financial statements for a year reflect a recurring uncertain tax treatment (“UTT”) spanning across multiple tax years, is the corporation required to report each UTT separately in the prescribed form for the year?

Question 2

When does the CRA consider that uncertainty in respect of a tax treatment is “reflected” in the financial statements of a taxpayer?

Question 3

When determining if an UTT is temporary, can a taxpayer use the principles that is applicable to the determination of the temporary or permanent nature of a tax provision?

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

For the purposes of your request, we have assumed that the taxpayer is a “reporting corporation”, as defined in subsection 237.5(1), and that the financial statements of the taxpayer are “relevant financial statements”, as defined in subsection 237.5(1).

The following are our comments with respect to each of your questions concerning the application of section 237.5 of the Act.

Question 1

The definition of “tax treatment” is provided by subsection 237.5(1) and refers to treatments that a corporation makes of a transaction, or a series of transactions in a return of income or an information return. As such, each tax treatment relates to a specific return of income or information return for a particular tax year.

Therefore, where there are similar reportable uncertain tax treatments (“RUTTs”) spanning across several tax years, and where each RUTT impacts the taxable income of a different tax year, then each RUTT must be individually disclosed in the prescribed form, namely Form RC3133, Reportable Uncertain Tax Treatments Information Return.

Question 2

Per subsection 237.5(1), RUTT is defined as:

“reportable uncertain tax treatment, of a corporation for a taxation year, means a tax treatment of the corporation in respect of which uncertainty is reflected in relevant financial statements of the corporation for the year.” (our emphasis)

Whether the uncertainty of a tax treatment is considered to be “reflected” in the financial statements is a question of fact and would depend on the relevant financial statements of the reporting corporation. However, in announcing the RUTT disclosure rules in its 2021 Budget, the Department of Finance Canada mentioned that these rules would be needed to “strengthen the Canada Revenue Agency’s ability to curtail tax evasion and aggressive tax avoidance in both the domestic and international context”. As such, based on the context in which the RUTT regime was introduced, we are of the view that the definition of a RUTT should be interpreted broadly.

The Technical Notes on the definition of RUTT in subsection 237.5(1) provides the following additional guidance: “uncertainty is considered to be reflected in financial statements when the tax attributes used in the financial statements (e.g., taxable profit, tax loss, tax base, unused tax losses, unused tax credits, tax rates) are not consistent with the tax treatment”.

The Guidance to the Mandatory Disclosure Rules further provides that one of the conditions for the application of the RUTT disclosure rules is that:

“Uncertainty is reflected in those audited financial statements (for example, the entity concluded it is not probable that the tax authority will accept an uncertain tax treatment and thus, as described by the International Financial Reporting Standards Interpretations Committee, it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment).”

Based on the above, we will consider that the uncertainty of tax treatments is “reflected” when such tax treatments impact the relevant financial statements. When that is the case, the RUTTs must be disclosed in Form RC3133 as part of the RUTT disclosure rules by a reporting corporation.

We are also of the view that the notes to the audited financial statements prepared in accordance with the International Financial Reporting Standards (“IFRS”) or any other country-specific generally accepted accounting principles need to be considered when determining whether the uncertainty of tax treatments is reflected in the relevant financial statements, thus impacting the characterization of said tax treatments as RUTTs pursuant to subsection 237.5(1).

Question 3

The determination of whether a RUTT is temporary or non-temporary should be determined according to the accounting principles used in the relevant financial statements of a reporting corporation, either the IFRS or other country-specific generally accepted accounting principles.

We trust our comments will be of assistance.

Yours truly,

Sophie Larochelle
Manager
Specialty tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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