2021 Federal Budget Commentary

The Honourable Chrystia Freeland, Deputy Prime Minister and Minister of Finance today tabled her first federal budget titled “A Recovery Plan for Jobs, Growth and Resilience”.  With this budget, the government addressed three challenges:  

• Finishing the Fight Against COVID-19
• Creating Jobs and Growth
• Building a Better, Fairer Canada

The following is a brief overview of the key tax measures included within these areas.

Digital Services Tax
As announced in the November 2020 Fall Economic Statement, Budget 2021 proposes to implement a Digital Services Tax (DST). The proposed tax is intended to ensure that revenue earned by large businesses – foreign or domestic – from engagement with online users in Canada, including through the collection, processing, and monetizing of data and content contributions from those users is subject to Canadian tax. The DST is intended to be interim in nature – it would apply as of January 1, 2022 until an acceptable multilateral approach comes into effect with respect to the implicated businesses.

Rate and Base: The DST would apply at a rate of 3 per cent on revenue from certain digital services reliant on the engagement, data, and content contributions of Canadian users.

In-Scope Revenue: The DST would apply to revenue from online business models in which the participation of users, including by the provision of data and content contributions, is a key value driver.

Specifically, it would apply to revenue from:

• Online marketplaces
• Social media
• Online advertising
• User data

Taxpayers: The DST would apply to businesses organized under various forms including corporations, trusts, and partnerships. The DST would apply in a particular calendar year to an entity that meets, or is a member of a business group that meets, both of the following thresholds:

• global revenue from all sources of €750 million or more (the threshold for country-by-country reporting under an Organization for Economic Cooperation and Development (OECD) standard) in the previous calendar year; and
• in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year.

For such entities or groups, the DST would apply only to in-scope revenue associated with Canadian users in excess of the $20 million threshold.

The DST would apply as of January 1, 2022.

The government plans to engage with the provinces and territories to discuss the implications of the DST.

Tax on Unproductive Use of Canadian Housing by Foreign Non-resident Owners
Budget 2021 proposes to introduce a new National one-per-cent tax on the value of non-resident, non-Canadian owned residential real estate considered to be vacant or underused. This tax would be levied annually beginning in 2022.

Beginning in 2023, all owners of residential property in Canada, other than Canadian citizens or permanent residents of Canada, would be required to file an annual declaration for the prior calendar year with the Canada Revenue Agency in respect of each Canadian residential property they own. The requirement to file this declaration would apply irrespective of whether the owner is subject to tax in respect of the property for the year.

The failure to file a declaration with respect to a property for a calendar year as and when required could result in the loss of any available exemptions in respect of the property for the calendar year. Penalties and interest would also be applicable, and the assessment period would be unlimited.

In the coming months, the government will release a backgrounder to provide stakeholders with an opportunity to comment on further parameters of the proposed tax. These parameters would include, for example, the definition of residential property, the value on which the tax would apply, how the tax would apply where a property is owned by multiple individuals and/or non-individuals, potential exemptions and compliance and enforcement mechanisms.

Additionally, the consultation will consider whether, how and when the proposed tax would apply in smaller, resort and tourism communities.

Tax Rates
Budget 2021 does not propose any changes to personal tax rates and does not propose changes to the capital gains inclusion rate.

Disability Tax Credit (DTC)
To be eligible for the DTC, an individual must have a certificate confirming that they have a severe and prolonged impairment in physical or mental functions. The effects of the impairment must be such that, even with appropriate devices, medication and therapy, the individual is blind or is:

• markedly restricted in their ability to perform a basic activity of daily living, or would be so restricted were it not for certain therapy (commonly referred to as “extensive life-sustaining therapy”); or
• significantly restricted in their ability to perform more than one basic activity of daily living where the cumulative effect of those restrictions is comparable to being markedly restricted in a basic activity of daily living.

For these purposes, the Income Tax Act (ITA) recognizes the following basic activities of daily living: walking; feeding or dressing oneself; mental functions necessary for everyday life; speaking; hearing; eliminating bodily waste; and, for the purposes of the “significantly restricted” test noted above, includes seeing.

Mental Functions Necessary for Everyday Life

Budget 2021 proposes that, for the purposes of the DTC, mental functions necessary for everyday life be expanded to include:  attention, concentration, memory,  judgement, perception of reality, problem-solving, goal-setting, regulation of behaviour and emotions, verbal and non-verbal comprehension, and adaptive functioning.

Life-Sustaining Therapy

Under current rules, extensive life-sustaining therapy is therapy that:

• is essential to sustain a vital function;
• is required to be administered at least three times each week for a total duration averaging not less than 14 hours a week; and
• cannot reasonably be expected to be of significant benefit to an individual who does not have a severe and prolonged impairment in physical or mental functions.

Budget 2021 proposes to:

• allow reasonable time spent determining dietary intake and/or physical exertion to be considered part of the therapy, where this information is essential to, and is undertaken for the purpose of, determining the dosage of medication that must be adjusted on a daily basis;
• clarify that the exclusion of time for medical appointments does not apply to appointments to receive therapy or to determine the daily dosage of medication;
• provide that the exclusion of time for recuperation after therapy does not apply to medically required recuperation; and
• in the case of therapy that requires the daily consumption of a medical food or medical formula to limit intake of a particular compound to levels required for the proper development or functioning of the body, allow reasonable time spent on activities that are directly related to the determination of the amount of the compound that can be safely consumed to be considered part of the therapy.

Budget 2021 also proposes that, where an individual is incapable of performing their therapy on their own due to the impacts of their disability, the time reasonably required by another person to assist the individual in performing and supervising the therapy would be allowed to be counted.

Budget 2021 further proposes that the requirement that therapy be administered at least three times each week be reduced to two times each week. The requirement that therapy be of a duration averaging not less than 14 hours a week would remain unchanged.

These proposed changes would apply to the 2021 and subsequent taxation years, in respect of DTC certificates filed with the Minister of National Revenue on or after Royal Assent.

Canada Workers Benefit (CWB)
Budget 2021 proposes to enhance the CWB starting in 2021. Budget 2021 also proposes to introduce a “secondary earner exemption” to the CWB, a special rule for individuals with an eligible spouse. These measures would apply to the 2021 and subsequent taxation years.  Indexation of amounts relating to the CWB would continue to apply after the 2021 taxation year, including the secondary earner exemption.

Northern Residents Deductions
Budget 2021 proposes to expand access to the travel component of the Northern Residents Deductions. This measure would apply to the 2021 and subsequent taxation years.

Postdoctoral Fellowship Income
Budget 2021 proposes to include postdoctoral fellowship income in “earned income” for RRSP purposes. This measure would apply in respect of postdoctoral fellowship income received in the 2021 and subsequent taxation years. This measure would also apply in respect of postdoctoral fellowship income received in the 2011 to 2020 taxation years, where the taxpayer submits a request in writing to the Canada Revenue Agency (CRA) for an adjustment to their RRSP room for the relevant years.

Tax Treatment of COVID-19 Benefit Amounts
Budget 2021 proposes to amend the ITA to allow individuals the option to claim a deduction in respect of the repayment of a COVID-19 benefit amount in computing their income for the year in which the benefit amount was received rather than the year in which the repayment was made. This optionwould be available for benefit amounts repaid at any time before 2023.

For these purposes, COVID-19 benefits would include:

• Canada Emergency Response Benefits (CERB)/Employment Insurance;
• Emergency Response Benefits;
• Canada Emergency Student Benefits (CESB);
• Canada Recovery Benefits (CRB);
• Canada Recovery Sickness Benefits(CRSB); and
• Canada Recovery Caregiving Benefits(CRCB).

Individuals may only deduct benefit amounts once they have been repaid. An individual who makes a repayment, but who has already filed their income tax return for the year in which the benefit was received, would be able to request an adjustment to the return for that year.

Budget 2021 also proposes to amend the ITA to ensure that the COVID-19 benefit amounts noted above, and similar provincial or territorial benefit amounts, are included in the taxable income of those individuals who reside in Canada but are considered non-resident persons for income tax purposes. As a result, COVID-19 benefits received by these non-resident persons would be taxable in Canada in a manner generally similar to employment and business income earned in Canada.

Fixing Contribution Errors in Defined Contribution Pension Plans
Budget 2021 proposes to provide more flexibility to plan administrators of defined contribution pension plans to correct both under-contributions and over-contributions. This measure would apply in respect of additional contributions made, and amounts of over-contributions refunded, in the 2021 and subsequent taxation years.

Taxes Applicable to Registered Investments
Budget 2021 proposes that the tax imposed under Part X.2 of the ITA be pro-rated based on the proportion of shares or units of the registered investment that are held by investors that are themselves subject to the qualified investment rules. This measure would apply to taxes imposed under Part X.2 of the ITA in respect of months after 2020. However, the measure would also apply to taxpayers whose tax liability under Part X.2 in respect of months before 2021 has not been determined by the CRA as of Budget Day.

Registration and Revocation Rules Applicable to Charities

Listed Terrorist Entities - Budget 2021 proposes to allow the Minister of National Revenue to immediately revoke the registration of a charity or other qualified donee upon its listing as a terrorist entity under the Criminal Code.

Ineligible Individuals - Where a charity or Canadian amateur athletic association has an “ineligible individual” as a director, trustee, officer or like official, or where such an individual controls or manages the charity or association, the ITA provides the Minister of National Revenue with the discretion to refuse or revoke its registration, or to suspend its authority to issue official donation receipts.

Budget 2021 proposes to amend the “ineligible individual” definition so that it includes an individual who:

• is, or is a member of, a listed terrorist entity; or
• in respect of a listed terrorist entity, was, during a period in which the entity supported or engaged in terrorist activities, a director, trustee, officer or like official of the entity; or
• an individual that controlled or managed, directly or indirectly, in any manner whatever, the entity.

The existing rule that requires the CRA to only consider circumstances occurring within the preceding five-year period would not apply in relation to this measure.

Budget 2021 proposes to allow the Minister of National Revenue to suspend the authority of a registered charity to issue official donation receipts for one year or to revoke its registration where a false statement amounting to culpable conduct was made for the purpose of maintaining its registration.

All of these amendments would apply on Royal Assent of the enacting legislation.

Electronic Filing and Certification of Tax and Information Returns

Default Method of Correspondence

Budget 2021 proposes to amend the ITA to provide the CRA with the ability to send certain notices of assessment electronically without the taxpayer having to authorize the CRA to do so. This proposal would apply in respect of individuals who file their income tax return electronically and those who employ the services of a tax preparer that files their income tax return electronically.

Taxpayers who continue to file their income tax returns with the CRA in paper format would continue to receive a paper notice of assessment from the CRA.

Budget 2021 also proposes to change the default method of correspondence for businesses that use the CRA’s My Business Account portal to electronic only. However, businesses could still choose to also receive paper correspondence.

This measure would apply in respect of the ITA, Excise Tax Act (ETA), Excise Act, 2001, Air Travellers Security Charge Act, and Part 1 of the Greenhouse Gas Pollution Pricing Act.

These measures would come into force on Royal Assent of the enacting legislation.

Information Returns

Budget 2021 proposes to amend the Income Tax Regulations to allow issuers of T4A (Statement of Pension, Retirement, Annuity and Other Income) and T5 (Statement of Investment Income) information returns to provide them electronically without having to also issue a paper copy and without the taxpayer having to authorize the issuer to do so. This measure would apply in respect of information returns sent after 2021.

Electronic Filing Thresholds - Tax Preparers

Budget 2021 proposes to amend the rule in the ITA that requires, subject to the exception below, professional preparers of income tax returns to file electronically where they prepare more than 10 income tax returns of corporations or 10 income tax returns of individuals (other than trusts) to apply instead where they file more than 5 of either type of return for a calendar year. Furthermore, the exception for trusts would be removed.

Budget 2021 also proposes to amend the exception in the ITA whereby a tax preparer is allowed to a file a maximum of 10 paper income tax returns of corporations and 10 paper income tax returns of individuals per calendar year to instead allow only a maximum of 5 paper returns of each type per calendar year. These measures would apply in respect of calendar years after 2021.

Electronic Filing Thresholds - Filer of Information Returns

Budget 2021 proposes that the threshold for mandatory electronic filing of income tax information returns for a calendar year under the ITA be lowered from 50 to 5 returns, in respect of a particular type of information return.  As such, persons or partnerships that file more than 5 information returns of a particular type for a calendar year would be required to file them electronically.  This measure would apply in respect of calendar years after 2021.

Electronic Filing Thresholds - Corporations and GST/HST Registrants

Budget 2021 proposes to eliminate the mandatory electronic filing thresholds for returns of corporations under the ITA, and of Goods and Services Tax/Harmonized Sales Tax (GST/HST) registrants (other than for charities or Selected Listed Financial Institutions) under the ETA. As such, returns of most corporations and GST/HST registrants under these acts would now be required to be filed electronically. This measure would apply in respect of taxation years that begin after 2021 for the ITA amendments and in respect of reporting periods that begin after 2021 for the ETA.

Electronic Payments

Budget 2021 proposes to clarify that payments required to be made at a financial institution under the ITA, the GST/HST portion of the ETA, the Excise Act, 2001, the Air Travellers Security Charge Act, and Part 1 of the Greenhouse Gas Pollution Pricing Act, include online payments made through such an institution. Budget 2021 also proposes that electronic payments be required for remittances over $10,000 under the ITA and that the threshold for mandatory remittances to be made at a financial institution under the GST/HST portion of the ETA, the Excise Act, 2001, the Air Travellers Security Charge Act, and Part 1 of the Greenhouse Gas Pollution Pricing Act be lowered from $50,000 to $10,000.  This measure would apply to payments made on or after January 1, 2022.

Handwritten Signatures

Budget 2021 proposes to eliminate the requirement that signatures be in writing on certain prescribed forms prescribed under the ITA, as follows:

• T183, Information Return for Electronic Filing of an Individual’s Income Tax and Benefit Return;
• T183CORP, Information Return for Corporations Filing Electronically; and
• T2200, Declaration of Conditions of Employment.

This measure would come into force on Royal Assent of the enacting legislation.

Corporate Tax Rates
Budget 2021 does not propose any changes to Federal small or general business income tax rates.

The Budget does however introduce a new temporary business income tax rate on Eligible Zero-Emission Technology Manufacturing and Production income. This measure is discussed in further detail below, however, reduces the Federal business income taxes as follows on eligible income:

COVID-19 Emergency Business Supports – Introductions & Extensions
With the release of Budget 2021 amid the global COVID-19 pandemic, the Budget includes the extension of numerous business support programs and the introduction of the new Canada Recovery Hiring Program.  These current extensions bring the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Rent Subsidy (CERS) and the Lockdown Support into September 2021 and further gradually decline the subsidy rates over the July 2021 to September 2021 period. The specifics of these changes can be found in our COVID Guidance.

Immediate Expensing of Eligible Capital Expenditures
Budget 2021 introduces a temporary immediate deduction for capital expenditures of a Canadian Controlled Private Corporation (CCPC). Specifically and subject to an annual limitation,  a CCPC may deduct 100% of capital expenditures incurred on eligible property acquire on or after Budget Day and becomes available for use before January 1, 2024.

The immediate deduction is limited to an annual threshold of $1.5M for a group of associated CCPCs. The annual limitation cannot be carried through to future taxation years and is prorated for taxation years shorter than 365 days.

Eligible expenditures is defined to include all capital property that would be subject to the normal capital cost allowance (CCA) rules, other than property that would be included in the following CCA classes:

To the extent that a group of associated CCPC’s incurs capital acquisitions greater than the $1.5M threshold, they would be allowed to electively determine which property will be eligible for the immediate expensing and which would be subject to normal CCA rules.

It should further be noted that previous legislation allowing for enhanced deductions (full expensing for M&P machinery and equipment, etc.) would not reduce the maximum amount available under the $1.5M limit.

Lastly, specific rules have been implemented for property that has been used, or acquired for use, for any purpose before it was acquired by the taxpayer. Such property would be eligible for the immediate expensing only if both of the following conditions are met:

• neither the taxpayer nor a non-arm’s length person previously owned the property; and
• the property has not been transferred to the taxpayer on a tax-deferred “rollover” basis.

The new immediate expense rules do not supersede the existing CCA limitations related to limited partners, specified leasing properties, specified energy properties and rental properties.

Rate Reduction – Zero-Emission Technology
As introduced above, Budget 2021 introduces reduced Federal business income tax rates for eligible zero-emission technology manufacturing and processing income. The eligible income will be taxed at the below reduced rates:

• 7.5 per cent, where that income would otherwise be taxed at the 15 per cent general corporate tax rate; and
• 4.5 per cent, where that income would otherwise be taxed at the 9 per cent small business tax rate.

The details of activities considered to be eligible zero-emission technology manufacturing and processing activities are listed in budget, but are outside the scope of this commentary.

It is proposed that a taxpayer’s eligible income generally be equal to its “adjusted business income” multiplied by the proportion of its total labour and capital costs that are used in eligible activities. The definition of “adjusted business income” as well as the method used to determine labour and capital costs would be substantially based on those used in calculating manufacturing and processing profits under current tax rules.

All of a taxpayer’s labour and capital costs would be deemed to be labour and capital costs that are used in eligible activities if all or substantially all of its labour and capital costs are related to eligible activities.

Eligible income must be at least 10% of gross revenue from all active business carried on in Canada to be eligible for the reduced rates.

It should further be noted that the amount of income taxed at the 4.5 per cent rate plus the amount of income taxed at the current small business rate of 9 per cent would not be allowed to exceed the business limit ($500,000).

The reduced rate will phase out starting 2029.

Capital Cost Allowance (CCA) – Clean Energy Equipment
Budget 2021 includes an expansion to the property applicable for inclusion of CCA Classes 43.1 and 43.2 (Clean Energy Equipment). Specifically, the expansion includes the following:

• pumped hydroelectric storage equipment;
• electricity generation equipment that uses physical barriers or dam-like structures to harness the kinetic energy of flowing water or wave or tidal energy;
• active solar heating systems, ground source heat pump systems, and geothermal energy systems that are used to heat water for a swimming pool;
• equipment used to produce solid and liquid fuels (e.g., wood pellets and renewable diesel) from specified waste material or carbon dioxide;
• a broader range of equipment used for the production of hydrogen by electrolysis of water; and
• equipment used to dispense hydrogen for use in hydrogen-powered automotive equipment and vehicles.

The accelerated CCA would be available in respect of these types of property only if, at the time the property becomes available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met.

In addition to the introduction of the above expanded list, a number of fossil fuel and/or waste fuel systems that were historically eligible for CCA Class 43.1 and 43.2 have had revisions to their eligibility criteria.

The Budget includes details on the various eligible properties, however these details are out of the scope of this commentary.

Film or Video Production Tax Credits
Due to limitations resulting from the pandemic, Budget 2021 includes an extension of certain timelines for the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC).

• CPTC: 25% refundable tax credit on qualified labour expenditures for production of certified Canadian film or video production.
• PSTC: 16% refundable credit on qualified Canadian labour expenditures on foreign films and videos produced in Canada.

The Budget provides for a 12 month extension to the previously defined timelines required for both credits.

Mandatory Disclosure Rules
The government is consulting on proposals to enhance Canada’s mandatory disclosure rules. This consultation will address:

• changes to the ITA’s reportable transaction rules;
• a new requirement to report notifiable transactions;
• a new requirement for specified corporations to report uncertain tax treatments; and
• related rules providing for, in certain circumstances, the extension of the applicable reassessment period and the introduction of penalties.

It is proposed that, to the extent the proposed measure applies to taxation years, amendments made as a result of this consultation would apply to taxation years that begin after 2021. To the extent the proposed measure applies to transactions, the amendments would apply to transactions entered into on or after January 1, 2022. However, the penalties would not apply to transactions that occur before the date on which the enacting legislation receives Royal Assent.

Stakeholders are invited to provide comments on the proposals set out below, as well as on draft legislation and sample notifiable transactions which are expected to be released in the coming weeks as part of the consultation.

Reportable Transactions

To improve the effectiveness of Canada’s mandatory disclosure rules and to bring them in line with international best practices, amendments to the reportable transaction rules are proposed. In particular, it is proposed that only one generic hallmark need be present in order for a transaction to be reportable. It is also proposed that the definition of “avoidance transaction” for these purposes be amended so that a transaction be considered an avoidance transaction if it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.

It is proposed that a taxpayer who enters into a reportable transaction, or another person who enters into such a transaction in order to procure a tax benefit for the taxpayer, would be required to report the transaction to the CRA within 45 days of the earlier of:

• the day the taxpayer becomes contractually obligated to enter into the transaction or a person who entered into the transaction for the benefit of the taxpayer becomes contractually obligated to enter into the transaction; and
• the day the taxpayer enters into the transaction or a person who entered into the transaction for the benefit of the taxpayer enters into the transaction.

It is further proposed that reporting (as a reportable transaction) of a scheme that, if implemented, would be a reportable transaction be required to be made by a promoter or advisor (as well as by persons who do not deal at arm’s length with the promoter or advisor and who are entitled to receive a fee with respect to the transaction) within the same time limits. In addition, it is proposed that an exception to the reporting requirement be available for advisors to the extent that solicitor-client privilege applies.

Notifiable Transactions

To provide the CRA with pertinent information relating to tax avoidance transactions (including series of transactions) and other transactions of interest on a timely basis, it is proposed to introduce a category of specific hallmarks known as “notifiable transactions”. Under this approach, the Minister of National Revenue would have the authority to designate, with the concurrence of the Minister of Finance, a transaction as a notifiable transaction.

A taxpayer who enters into a notifiable transaction, or a transaction or series of transactions that is substantially similar to a notifiable transaction – or another person who enters into such a transaction or series in order to procure a tax benefit for the taxpayer – would be required to report the transaction or series in prescribed form to the CRA within 45 days of the earlier of:

• the day the taxpayer becomes contractually obligated to enter into the transaction or series or a person who entered into the transaction or series for the benefit of the taxpayer becomes contractually obligated to enter into the transaction or series; and
• the day the taxpayer enters into the transaction or series or a person who entered into the transaction or series for the benefit of the taxpayer enters into the transaction or series.

A promoter or advisor who offers a scheme that, if implemented, would be a notifiable transaction, or a transaction or series of transactions that is substantially similar to a notifiable transaction – as well as a person who does not deal at arm’s length with the promoter or advisor and who is entitled to receive a fee in respect of the transaction – would be required to report within the same time limits. In addition, it is proposed that an exception to the reporting requirement be available for advisors to the extent that solicitor-client privilege applies.

These proposed amendments are intended to provide information to the CRA and would not change the tax treatment of a transaction.

Requirement to Report Uncertain Tax Treatments

It is proposed that specified corporate taxpayers be required to report particular uncertain tax treatments to the CRA. A reporting corporation would generally be required to report an uncertain tax treatment in respect of a taxation year where the following conditions are met:

• The corporation is required to file a Canadian return of income for the taxation year. That is, the corporation is a resident of Canada or is a non-resident corporation with a taxable presence in Canada.
• The corporation has at least $50 million in assets at the end of the financial year that coincides with the taxation year (or the last financial year that ends before the end of the taxation year). This threshold would apply to each individual corporation.
• The corporation, or a related corporation, has audited financial statements prepared in accordance with IFRS or other country-specific GAAP relevant for domestic public companies (e.g., U.S. GAAP).
• Uncertainty in respect of the corporation’s Canadian income tax for the taxation year is reflected in those audited financial statements (i.e., the entity concluded it is not probable that the taxation authority will accept an uncertain tax treatment and thus, as described by the IFRS Interpretations Committee, it is probable that the entity will receive or pay amounts relating to the uncertain tax treatment).

The determination of whether a corporation has $50 million in assets would be made using the carrying value of the assets on the corporation’s balance sheet at the end of the financial year.

For each reportable uncertain tax treatment of a corporation, the corporation would be required to provide prescribed information, such as the quantum of taxes at issue, a concise description of the relevant facts, the tax treatment taken (including the relevant sections of the ITA) and whether the uncertainty relates to a permanent or temporary difference in tax.

It is proposed that uncertain tax treatments be required to be reported at the same time that the reporting corporation’s Canadian income tax return is due.

The introduction of a requirement to report particular uncertain tax treatments is intended to provide information to the CRA to allow it to more efficiently administer and enforce the ITA. It would not directly impact the income tax liabilities of corporate taxpayers.

Reassessment Period

In support of the new mandatory disclosure rules, it is proposed that, where a taxpayer has a reporting requirement in respect of a transaction relevant to the taxpayer’s income tax return for a taxation year, the normal reassessment period would not commence in respect of the transaction until the taxpayer has complied with the reporting requirement. As a result, if a taxpayer does not comply with a mandatory disclosure reporting requirement for a taxation year in respect of a transaction, a reassessment of the year in respect of the transaction would not become statute-barred.

Penalties

Taxpayer Penalty

To support the proposed reporting requirements, it is proposed that, with respect to persons who enter into reportable or notifiable transactions, or for whom a tax benefit results from a reportable or notifiable transaction, a penalty of $500 per week apply for each failure to report a reportable transaction or a notifiable transaction,

• up to the greater of $25,000 and 25 per cent of the tax benefit; or
• for corporations that have assets that have a total carrying value of $50 million or more, a penalty of $2,000 per week, up to the greater of $100,000 and 25 per cent of the tax benefit.

Promoter Penalty

It is also proposed that, with respect to advisors and promoters of reportable or notifiable transactions, as well as with respect to persons who do not deal at arm’s length with them and who are entitled to a fee with respect to the transactions, a penalty be imposed for each failure to report equal to the total of:

• 100 per cent of the fees charged by that person to a person for whom a tax benefit results;
• $10,000; and
• $1,000 for each day during which the failure to report continues, up to a maximum of $100,000.

In order to avoid imposing two sets of penalties upon a person who both 1) enters into a reportable or notifiable transaction for the benefit of another person, and 2) is a person who does not deal at arm’s length with an advisor or promoter in respect of the reportable or notifiable transaction and is entitled to a fee, it is proposed that such a person be subject only to the greater of the penalties discussed above.

Uncertain Tax Treatment Penalty

For corporations subject to the requirement to report uncertain tax treatments, it is proposed that the penalty for failure to report each particular uncertain tax treatment be $2,000 per week, up to a maximum of $100,000.

Proceed to part 2