Quebec Tax: Quebec introduces measures against aggressive tax planning

The Minister of Finance of the Canadian province of Quebec announced on 15 October 2009 new measures that were contained in the Ministry's Information Bulletin 2009-5, "Fighting Aggressive Tax Planning" (ATP). This Bulletin follows through on announcements made in Quebec's 2008-2009 budget and, more specifically, the Working Paper on "Aggressive Tax Planning" released in January 2009, which provided a detailed discussion of planned legislative measures against ATP.

Despite objections and the specific concerns raised in the various briefs that were submitted in response to the Working Paper, the government decided to move forward and released the Bulletin, outlining proposals that will be applicable in general to transactions carried out on or after 15 October (the Information Bulletin refers to both "transactions" and "series of transactions," at times making certain distinctions which are beyond the scope of this article). On the whole, the proposals replicate the measures announced in the Working Paper, with some important changes in the application terms based on the comments and recommendations received.

ATP has been described by the Ministry as transactions that comply with the letter but not the spirit of the law and, consequently, are contrary to fiscal policy. The Ministry is of the view that ATP threatens Quebec's tax base and attacks the integrity and fairness of the tax system. The Ministry believes that the introduction of new consequences where the general anti-avoidance rule (GAAR) applies, such as penalties and an extended limitation period, together with a preventive disclosure mechanism, will change the risk/reward ratio that currently favors taxpayers who participate in an ATP scheme.


Proposed measures

Four sets of measures, noted by the Ministry that draw on practices implemented by OECD member countries, have been proposed: (1) a mandatory early disclosure mechanism; (2) a penalty regime under the GAAR; (3) an extended limitation period in which the GAAR applies; and (4) amendments to the GAAR.


Mandatory early disclosure mechanism

Two types of transactions have been identified as likely to lead to tax avoidance: (1) a taxpayer (including a partnership) retains the services of an advisor for a transaction and the contract between the taxpayer and the advisor includes an undertaking of confidentiality towards other persons or the tax administration in relation to the transaction; and (2) a taxpayer retains the services of an advisor and the contract between the taxpayer and the advisor includes a contingent fee agreement.

In both cases the transaction must be disclosed by the taxpayer to Revenue Quebec if the transaction results for a taxation year or a fiscal year in a tax benefit of CAD 25,000 or more or an impact of CAD 100,000 or more on income. Failure to make this mandatory disclosure will result in the suspension of the normal limitation period for assessing the tax consequences of the undisclosed transaction and a CAD 10,000 penalty that may increase by CAD 1,000 per day of late disclosure, up to a maximum of CAD 100,000.

The Bulletin notes that certain types of transactions will be excluded from contingent fee transactions, including consumption tax recovery reviews, claims for tax credits (including the research and development (R&D) tax credit), analyses and reviews of interest pursuant to tax assessments and reviews of tax returns after they are filed. The Bulletin also notes that a confidentiality provision that protects an advisor from the inappropriate use of the advisor's opinion by a third party is not considered an undertaking of confidentiality.

The penalty for failure to make mandatory disclosure will not apply to a person who successfully argues a due diligence defense. In this context, the Bulletin does not discuss the nature of the defense and it is unclear how it would apply given reasonably straight-forward (and non-tax) criteria for mandatory disclosure. On the concept of due diligence in the context of the application of the penalty, the Bulletin quotes a decision of the Federal Court of Appeal: "[the due diligence defense] involves considering whether the person believed on reasonable grounds in a non-existent state of facts which, if it had existed, would have made his or her act or omission innocent, or whether he or she took all reasonable precautions to avoid the event leading to imposition of the penalty" (Corporation de l'École Polytechnique v. Canada, 2004 FCA 127, par. 28).

The mandatory disclosure measures will apply in general to transactions carried out on or after 15 October 2009. Disclosure mechanism – Mandatory disclosure must be made by the taxpayer that carried out the transaction using a prescribed form, sent under separate cover, by registered mail or electronically to the Direction principale de la lutte contre les planifications fiscales abusives of Revenue Quebec. The disclosure must contain a complete and detailed description of the facts and a statement of the tax consequences resulting from the transaction – not advice or opinions. The due date for making a mandatory disclosure for a taxation year or a fiscal year is on the taxpayer's tax return filing deadline for that year.

If within 120 days following transmission of the mandatory disclosure form, Revenue Quebec does not contact the taxpayer for additional information, the prescribed form will be considered to have been sent within the required deadline and to contain sufficiently detailed information.


Penalty regime under the GAAR

The Bulletin provides that where the GAAR applies, the taxpayer may also incur a penalty equal to 25% of the amount of the tax benefit resulting from the abusive transaction, and the promoter of such a transaction may be liable to a penalty equal to 12.5% of the amounts the promoter received from the transaction.

A promoter of a transaction would be, in general, any person who meets the following requirements:
- He/she has marketed or promoted an avoidance transaction or otherwise encouraged its growth or the interest it arouses;
- He/she or a related entity receives, or will have the right to receive, consideration for such marketing, promotion or encouragement; and
- It is reasonable to conclude that he/she played a substantial role in such marketing, promotion or encouragement.

The Ministry specifies that an accountant who only prepares a tax return is not in principle a promoter because a person must play a substantial role in marketing, promoting or encouraging the growth of an avoidance transaction to be considered a promoter.

Both the taxpayer and promoter can avoid the penalty if the taxpayer files a preventive (or mandatory, as the case may be) disclosure of the transaction with Revenue Quebec or by submitting a successful defense of due diligence.

Generally speaking, preventive disclosure of a transaction must be made by the taxpayer no later than the filing deadline for the taxpayer's tax return for the taxation year in which the transaction began to be carried out. The disclosure must be made using a prescribed form, sent under separate cover by registered mail or electronically to the Direction principale de la lutte contres les planifications fiscales abusives of Revenue Quebec. The preventive disclosure filing procedure is similar to the one described above for mandatory disclosures.

Measures concerning the taxpayer and promoter penalties will apply, in general, to transactions carried out on or after 15 October 2009.


Extended limitation period where the GAAR applies

Where a taxpayer undertakes, in a taxation year, a transaction covered by the GAAR, the normal limitation period (usually three or four years) will be extended by three years unless the taxpayer has made mandatory or preventive disclosure of the transaction to Revenue Quebec.

Generally, this measure will apply to taxation years ending after 15 October 2009 if the reassessment applies to a transaction carried out on or after that date.


Amendments to the GAAR

Where a transaction is shown to have been undertaken primarily for bona fide purposes other than obtaining a tax benefit under the Quebec Taxation Act, the GAAR does not apply. The GAAR will be clarified so that the obtaining of a tax benefit under a Quebec law other than the Taxation Act or a law of another Canadian jurisdiction – provincial, territorial or federal – is excluded from the concept of bona fide purposes.

This amendment will apply in general to 2009 and subsequent taxation years and to taxation years that Revenue Quebec is entitled to reassess on or after 15 October 2009. In certain circumstances, it will also apply to taxation years covered by an objection or appeal that is based on the GAAR and that is in existence on 15 October 2009.


Conclusion

The anti-ATP measures announced by the Quebec Minister of Finance usher in a complex regime with potentially severe consequences.

Considering the ambiguity inherent in the interpretation of these measures and the extreme difficulty in determining whether the GAAR should apply to a transaction, taxpayers and their advisors, when filing a tax return, must now regularly carefully consider the advisability of filing a mandatory or preventive disclosure to cover any contingency. In this sense, the anti-ATP regime may well create a new administrative burden for Quebec taxpayers and for them alone, as this is the only such system in Canada.

It is hoped that the legislation related to these measures will be tabled as quickly as possible so that taxpayers will be in a position to analyze and understand fully the anti-ATP measures. It is also hoped that the tax authorities will be flexible and reasonable in applying this system. While it is important to protect the integrity and fairness of the Quebec tax system, it is equally important not to burden it with unnecessary administrative complexity.