Canada Responds to International Attention to Aggressive Tax Planning

As most countries are struggling with deficits and debt, governments are putting increasing emphasis on identifying strategies that put their tax revenues at risk.  Canada is revising its "early disclosure rules" to make the taxpayer, promoter and advisor jointly and severally liable for penalties for non-disclosure.  Under the old rules only the promoter was at risk of penalties.

This initiative is in support of a new global initiative entitled Tackling Aggressive Tax Planning Through Improved Transparency and Disclosure, wherein the Organization for Economic Co-operation and Development (OECD) reviews efforts in several countries to discover and discourage aggressive tax practices, such as charitable donation schemes.

Systems of mandatory disclosure are compared in the report for countries including Canada, Ireland, Portugal, the U.K. and the U.S. These initiatives will assist tax authorities in targeting aggressive schemes in a timely manner.

In Canada, the Province of Quebec has already implemented mandatory early disclosure rules. The 2010 Federal Budget contained proposals defining a "reportable transactionî as an avoidance transaction that exhibits at least two of the following three hallmarks:

1. A tax advisor and/or promoter is entitled to fees tied to the tax benefit.
2. The tax advisor and/or promoter requests "confidential protectionî i.e. the taxpayer is restricted as to whom he can provide details of the tax benefit.
3. The taxpayer obtains contractual protection i.e. insurance against failure of the transaction, expenses incurred and/or return of costs.

These measures will apply to transactions after 2010. Disclosure is required by the filing deadline for the tax year to which the tax benefit applies. Tax payers and their advisors should research any tax strategy considered that may fit the definition of "avoidance transactionî, to see if it is subject to the early disclosure rules.

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