New Required Tax Filing by CRA: Issues And Solutions

The government warned in its 2021 budget that tax agencies worldwide lack timely, complete, and relevant information on aggressive tax preparation strategies. This budget announced a consultation on more extensive reporting requirements for some transactions to fill this vacuum.

The 60-day comment process began on February 4, 2022, when draft legislation and backgrounder were released.

This blog article outlines these suggestions. We also list difficulties our members and others have found with these rules and provide solutions.

The current draft has three elements to the proposal:

  • Expand the restrictions for reportable transactions.
  • Make future transactions reportable.
  • Introduce new criteria for select corporations to reveal tax ambiguities (UTT)

In line with the proposed reportable and notifiable transaction requirements, filing is needed within 45 days after the person enters the transaction or becomes contractually bound to do so. A UTT-reporting corporation must file an information return before the yearly income tax filing deadline.


If you don't follow the new rules, you'll be fined, although these penalties won't apply to disclosures needed before the law's Royal Assent.


As long as the transaction isn't documented, the Canada Revenue Agency's (CRA) ability to examine it won't be affected by time. After disclosure, the assessment process begins.


Compliance Burden And CRA Requirements


The first budget release emphasizes finding a balance while defining transparency rules. If the criteria are too rigorous, the CRA may not get the information it needs to administer the tax system properly.


It's essential to avoid burdening taxpayers.


After a transaction, you may be compelled to take action under reportable and notifiable transactions.


The government must clarify that the CRA must collect this information quickly and independently.


If the CRA could acquire the extra information on a conventional tax return, submitting a separate return within 45 days would be unnecessary.


The suggestions include heavy penalties for not submitting standard tax information, which sounds unfair. Proposals involve harsh punishments.


The OECD has highlighted the need for balance in creating tax reporting rules along with clarity, effectiveness, and flexibility.


Mandatory disclosure regimes must be clear and straightforward to understand, that they strike a balance between increased compliance costs to taxpayers and the advantages acquired by the tax administration, that they correctly identify the schemes to be declared, and that they are flexible and dynamic enough to enable the tax administration to adapt the system to react to new risks (or carve-out outmoded hazards) and that the tax administration can respond to unknown risks.

We'll summarise some of the most notable contributions below.

Regulated transactions


ITA section 237.3 requires a transaction to be documented. A transaction must fulfill two requirements. First, the transaction must be an "avoidance transaction" under the tax avoidance rule (GAAR). This term encompasses any transaction that results in a tax advantage, directly or indirectly, unless it was conducted or organized for another legal purpose. This term covers any transaction with a direct or indirect tax advantage.

Second, the transaction must include at least two "hallmarks" of possibly abusive tax avoidance transactions:


The fee hallmark applies if an avoidance transaction's charge is:

  • based on tax benefit
  • if a tax benefit is realized (or not),
  • Depending on the number of participants

Personal protection hallmark: This hallmark applies if an advisor has anything that would prohibit the disclosure of avoidance transaction information to anybody or the CRA. Contractual protection applies when the avoidance transaction fulfills these criteria:

  • Includes insurance or other protection against a transaction's failure to produce a tax advantage (excluding standard professional liability insurance) or against the possibility that such a failure would result in a loss.
  • Allows the payment or reimbursement of any expenditure, charge, tax, interest, or penalty resulting from a tax dispute.
  • We feel that the government's determination to widen the scope of the regulations is motivated by the fact that only a small number of disclosures have occurred since the laws were first introduced.

Proposed transactional changes

Under the proposed rules, a taxation avoidance transaction would comprise any activity (or sequence of transactions) for which attaining a tax benefit may be inferred. The new definition is comprehensive for two reasons.


It's logical to infer that the guidelines would include all sorts of tax preparation, including bare acts compliant with the ITA. Incorporating a sole proprietorship would be considered an avoidance transaction. It has paragraph 85's election (1).


Second, a succession of business operations may be called an evasion activity. Even simple tax prep might cause problems. Therefore, taxpayers may need to compare all tax plans, aggressive and regular, to see whether the law applies to them.


The proposals also reduce the number of identifiers.


The Joint Committee worries that the reporting net would be based on hallmarks since the amended avoidance transaction definition might include so many transactions. The altered purpose might affect numerous transactions, causing anxiety.


The Joint Committee noted problems and had all three hallmarks, which may lead to legitimate financial activities, standard tax preparation, or reporting practices. Since a disclosure duty only needs a single signature, these issues are more significant.


A recently introduced exemption from the legal security hallmark for "a kind of insurance, protection, or undertaking that is supplied to a wide class of individuals and in a regular business and investment setting in which participants deal with one another at ease and comfortable and behave responsibly, knowledgeably, and freely" has been added to the current hallmark definitions.


As much as we understand the government's need for additional data to help with tax administration, we also feel that achieving the right balance between proportion and detail is critical to saving taxpayers and the CRA from incurring high costs and inefficiencies. It would be unreasonable to punish a failure to submit what may be regular tax information under these provisions, which carry severe fines.


We have great expectations that the Finance Ministry will take the Committee and CPA's views and ideas into account when making financial decisions in the future. We're excited to continue providing the government with input as these concepts get closer to becoming legislation.

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