In October, 2009, the Québec government adopted new measures aimed at aggressive tax planning schemes, which are defined as transactions that comply with the letter of the law but not the spirit. These new measures target transactions that reduce the effective tax rate on a particular source of income to a level below the rate sought by fiscal policy. The Québec government's position is that this type of planning undermines the fairness and integrity of the tax system and threatens the Québec tax base. The Minister hopes these measures will force taxpayers to think twice before undertaking such transactions. In effect, these measures bring the concept of self assessment to a whole new level, and in essence have transformed tax professionals into the Québec government's watchdogs.
In general, these new measures will apply to transactions carried out on or after October 15, 2009. However, they will not apply to a transaction that was part of a series of transactions that began prior to October 15, 2009 and was completed before January 1, 2010.
The following measures were adopted:
- a mandatory early disclosure mechanism;
- an amendment to Quebec's general anti-avoidance rule (GAAR);
- an extension of the normal limitation period for the application of GAAR; and
- a new regime of penalties where GAAR is found to apply.
Mandatory disclosure is now required for all confidential transactions and transactions subject to conditional remuneration. Confidential transactions are those providing a tax benefit of at least $25,000 or a reduction of income of at least $100,000, and that are subject to a contract between the taxpayer and the advisor requiring the taxpayer to respect a confidentiality agreement with regard to third parties. Transactions subject to conditional remuneration are those in which the remuneration of the advisor is contingent upon the realization of the tax benefit.
All confidential transactions and transactions subject to conditional remuneration must be disclosed to Revenue Québec by the taxpayer who carried out the transaction no later than the due date of the taxpayer's first tax return for the year in which the transaction begins. The disclosure must be made on a prescribed form, which must be sent under separate cover, either by registered mail or electronically, to the "Direction principale de la lutte contre les planifications fiscales abusives." The information provided must consist of a detailed description of the facts as well as a statement of the tax consequences resulting from the transaction. It is worth noting that the disclosure will be considered complete if Revenue Québec does not contact the taxpayer and request additional information within 120 days following the transmission of the form.
Failure to disclose a transaction that qualifies for mandatory disclosure by the due date for filing the taxpayer's return of income entails a minimum penalty of $10,000 plus $1,000 a day, to a maximum of $100,000. In addition, failure to disclose will have the effect of suspending the period of limitation with respect to the transaction until the prescribed form is filed. Consequently, Revenue Québec would be able to reassess the taxpayer with respect to any tax consequences arising from the avoidance transaction at any time.
Prior to the enactment of these new measures, GAAR was only applicable to transactions that resulted in abuse or misuse of the Québec Taxation Act. The new measures will expand the definition of an avoidance transaction to make GAAR applicable to transactions the primary purpose of which is to obtain a tax benefit under the laws of Québec, federal laws, or the laws of any other province.
Additionally, the new measures will extend the normal period of limitation by three years in situations where GAAR applies to a transaction, thereby extending the reassessment period to six or seven years. This extension can be avoided by making either a mandatory or preventive disclosure.
The measures also provide for the introduction of a new penalty regime where GAAR is found to apply to a transaction. A taxpayer who has not properly disclosed a transaction to which GAAR applies will be subject to a penalty equal to 25% of the tax benefit derived from the abusive transaction. Moreover, the promoter of the transaction may be liable to a penalty equal to 12.5% of the consideration received from the transaction. The penalty can be avoided by filing a preventive disclosure of the transaction with Revenue Québec. The procedure for making a preventive disclosure is similar to the one described above for mandatory disclosures.
For now, these measures are unique to Québec. One cannot predict how successful they will be in deterring aggressive tax planning in the future. However, what is known is that the consequences for non compliance may be severe. Consequently, any entity with activity in Québec should be familiar with these rules. It remains to be seen whether the federal or any other provincial government will use the Québec experience as a model before enacting similar measures.
Harry Vouitsis, CA, BCL, LLB, is a Senior Tax Manager in the Montreal office of Collins Barrow.
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