The government has been taking more and more measures in recent years to go after “aggressive tax planning” — that is, the use of tax shelters and other schemes to avoid tax in ways not intended by the designers of the tax system. New rules will make it more dangerous than ever to use such schemes.
We are not talking about tax evasion here. Evasion is the criminal offence of falsely reporting (or not reporting) one’s income or credits. But until now, legal tax avoidance has often been worth trying. If a tax planning scheme was audited and it failed, the cost was usually just that the tax and interest were payable.
Now there are more dangers.
Examples of rules that have recently been introduced or passed by Parliament:
- Mandatory reporting of “reportable transactions”. If your tax planning carries any one of 3 “hallmarks”, it must be reported to the CRA. If it is not, both you and the promoter of the scheme can be liable for severe penalties, and the CRA has extra years to find and assess you to deny the tax benefits. The 3 hallmarks:
— Contingency fees: The promoter’s fee is based on whether the tax planning succeeds. (There is an exception for Scientific Research and Experimental Development consultants; they normally get paid a percentage of the tax savings they obtain for their clients.)
— “Confidential protection”, meaning you are not permitted to disclose the details of the scheme to others.
— “Contractual protection”, such as insurance or a promise to defend the scheme if you are reassessed by the CRA to deny its benefits.
Until now, you had to have two of the above “hallmarks” of aggressive tax planning to be required to report. Under amendments to section 237.3 of the Income Tax Act that will be passed by Parliament during June — perhaps by the time you read this — any one of the above is enough to trigger the “reportable transaction” rules.
- Mandatory reporting of “notifiable transactions”. The CRA will publish a list of tax planning schemes that it considers offside. If you are involved in one of these schemes, whether as taxpayer, advisor or promoter, you will have to notify the CRA or again be subject to severe penalties. The Department of Finance has published an initial list of the notifiable schemes. They include: using bankruptcy to eliminate a debt in a way that prevents the negative tax consequences of the commercial debt forgiveness rules; arranging for a corporation to not be a “Canadian-controlled private corporation” so as to avoid the high tax on investment income; avoiding the “21-year deemed disposition” rule for trusts; and several others.
These rules (in section 237.4 of the Income Tax Act) will also be passed by Parliament during June.
- The General Anti-Avoidance Rule (GAAR) has been around for 35 years. However, new proposals to strengthen it will impose an automatic 25% penalty whenever GAAR applies. That’s in addition to interest and other penalties that may apply. As well, a new “economic substance” test and other changes will make it easier for CRA to apply GAAR; and CRA will have 3 extra years to find and assess you if GAAR applies.