Reportable Transactions: Due Diligence Defence Possible Under Section 237.3

The CRA has new teeth: new Section 237.3, Reportable Transactions, may in fact, give the Canada Revenue Agency (“CRA”) a real advantage if transactions that seek to avoid taxation fall foul of pre-disclosure rules. 

While the new rules around “Reportable Transactions” contain a due diligence defence to avoid penalties, the onus will be on taxpayers to establish that they exercised the degree of care, due diligence, and skill that a reasonably prudent person would have exercised in similar circumstances to make sure they did not circumvent the intent of the law.

Specifically, according to the explanatory notes released by Finance Canada, “. . .a person would be required to make reasonable efforts to determine whether a transaction is a reportable transaction, whether they are subject to an information reporting requirement in respect of the reportable transaction, and what information would have to be provided to the Minister of National Revenue. If a transaction is a reportable transaction and the person is subject to an information reporting requirement, then the person must determine whether the reporting requirement to which they are subject has been satisfied in all respects by another person. If not, then the person must identify all the information to be provided in respect of the reportable transaction.”

“If after making reasonable efforts to that effect, a particular person determines that no reporting requirement exists, or that another person has satisfied the reporting requirement to which the particular person is subject, the Minister of National Revenue will consider the particular person to have met the due diligence defence test. Whether a person has made such efforts would have to be determined according to the facts and circumstances of each case.”

These new rules apply to individuals, corporations, trusts and partnerships. If there is more than one tax advisor involved in the reportable transaction, all must file an information return to the CRA. A close look at the required form RC312 reveals they will be required to disclose the names, SINs, BNs, Partnership and Trust Account numbers of all taxpayers involved in the transaction or series of transactions, as well as detailed descriptions of all the facts and anticipated tax consequences.

“Prudent Planning” will be on the agenda of the Distinguished Advisor Workshops Trio this year—November's Corporate Tax and Year End Planning Bootcamp, January's Personal Tax Bootcamp, and May's Audit Defence and Regulatory Compliance Bootcamp—as we provide more details and business management tools to help. Early registration ends September 30.

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