Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters, and Canada has concluded TIEAs with several countries, including Anguilla, Aruba, Bahamas, Bahrain, Bermuda, British Virgin Islands, Brunei, Cayman Islands, Cook Islands, Costa Rica, Dominica, Faroe Islands, Grenada, Guernsey, Isle of Man, Jersey, Liechtenstein, Netherlands Antilles, Panama, Saint Marino, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Turks and Caicos Islands, and Uruguay.

Exchange of Cross-Border Tax Rulings

Canada has agreed to exchange tax rulings with eligible jurisdictions from 1 January 2017 in the implementation of BEPS Action 5. A specific ruling can be exchanged with a relevant jurisdiction if it is international in nature and affects the relevant jurisdiction. The exchange is possible if there is an agreement between Canada and the relevant jurisdiction providing for the spontaneous exchange of tax information. The agreement can be a tax information exchange agreement (TIEA), a tax treaty, or the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Financial Account Information Reporting and Exchange

Effective 2018, Canada has adopted measures to implement the automatic exchange of financial account information with the global standard for the exchange of information developed by the OECD under the Common Reporting Standard (CRS).

Further, Canada concluded an Intergovernmental Agreement (IGA) with the United States on 27 June 2014 to improve international tax compliance and to implement the US Foreign Account Tax Compliance Act (FATCA).

Mandatory Disclosure Rules

The Canadian Tax Code already contains certain rules requiring specified persons to report certain transactions to the Canada Revenue Agency (CRA). However, these rules are not sufficient to mitigate or avoid the aggressive tax planning strategies followed by taxpayers.

To address these concerns, Canada has introduced new enhanced Mandatory Disclosure Rules requiring the disclosure of transactions involving aggressive tax planning. The new Rules expand the scope of existing domestic tax law rules for “reportable transactions” and introduce new requirements for reporting “notifiable transactions” and “uncertain tax treatments”. The CRA has further supplemented the Rules with guidance published on 6 July 2023. The new Rules apply to reportable and notifiable transactions entered into on or after 22 June 2023 and to tax years beginning after 2022 for reportable uncertain tax treatments.

Reportable Transactions and Notifiable Transactions

Meaning of Reportable Transactions

A transaction is reportable under the new Rules if it is an “avoidance transaction” and has one of the following three generic hallmarks:

Contingent fee arrangements - the transaction involves a promoter or tax advisor who is entitled to a direct or indirect fee based on the tax benefit, contingent upon obtaining a tax benefit, or related to the number of taxpayers participating in or accessing advice on the transaction’s tax consequences;
Confidential protection - the promoter or tax advisor requires confidential protection regarding the avoidance transaction, prohibiting the client from disclosing the details or structure of the transaction’s tax treatment to any person; or
Contractual protection - the taxpayer, promoter, advisor, or non-arm’s length persons receive contractual protection related to the transaction, which may include forms of insurance (excluding standard professional liability insurance) or undertakings provided by a promoter to assist individuals in disputes concerning the tax benefit.

Avoidance transaction means a transaction from which it can reasonably be concluded that one of the main purposes of entering into the transaction is to obtain a tax benefit.

Meaning of Notifiable Transactions

Notifiable transactions include transactions that the CRA has found to be abusive and transactions identified as transactions of interest (i.e., where more information is required to determine if a transaction is abusive).

Note that the CRA has not yet officially designated any notifiable transactions. However, based on a backgrounder previously released for public comment by the CRA and the Department of Finance, notifiable transactions include transactions that:

Use back-to-back arrangements to circumvent the application of the thin-capitalization rules or of withholding tax on payments made to non-residents;
Use partnerships in derivative transactions to generate artificial losses and avoid the application of the straddle stop-loss rules; or
Manipulate bankruptcy status to reduce a forgiven amount relating to a commercial obligation.

Reportable Persons

The Rules require all the following persons to report information in respect of the same reportable transaction or notifiable transaction:

A taxpayer who gets or expects to get a tax benefit;
A person who enters into the reportable transaction or notifiable transaction on behalf of the taxpayer benefitting or expecting to benefit from the transaction;
A promoter or an advisor entitled to a fee for the transaction; and
A person who does not deal at arm’s length with the promoter or advisor and who is entitled to receive a fee for the transaction.

However, the reporting obligation does not apply to persons providing only clerical or secretarial services with respect to the transaction. Additionally, the reporting obligation does not apply in respect of information protected under legal professional privilege.

Effective Date and Reporting Deadline

The Rules apply to reportable or notifiable transactions entered into after 22 June 2023. It is clarified that if a person enters into a series of transactions that straddle on 22 June 2023 (i.e., if some transactions in the series were entered into on or before 22 June 2023, while others were entered into after that date), the reporting obligation is triggered by the first reportable transaction or notifiable transaction entered into after 22 June 2023.

The reportable transaction or notifiable transaction must be reported by filing an information return in Form RC312 with the CRA within 90 days from the earlier of when the taxpayer or anyone acting on behalf of the taxpayer enters into the transaction or becomes contractually obligated to enter into the transaction.

Uncertain Tax Treatments

An uncertain tax treatment is a tax treatment used or planned to be used for which there is uncertainty over whether the tax treatment will be accepted as being in accordance with Canadian tax law.

The guidance clarifies that reporting is required only for uncertain tax treatment relating to tax payable under the Income Tax Act and no reporting is required in respect of GST, provincial taxes, or any non-Canadian taxes. Additionally, reporting is required in a relevant year if the financial statements for that year reflect any uncertain tax treatment, including uncertain tax treatments related to income from prior years, even if such amounts have been reported previously. Furthermore, reporting is required on an entity-by-entity, non-consolidated basis, even if the financial statements are consolidated group statements.

Reporting Obligation

A company is required to report an uncertain tax treatment for a relevant year if all the following conditions are met:

It is required to file a corporate tax return in Canada for that year;
It has at least CAD 50 million in assets at the end of that year;
The company, or a consolidated group of which the company is a member, has audited financial statements in accordance with International Financial Reporting Standards or country-specific Generally Accepted Accounting Principles for domestic public companies (e.g., US GAAP); and
One or more uncertain tax treatments are reflected in the audited financial statements of the company for that year.

Effective Date and Reporting Deadline

The Rules apply to tax years beginning after 2022 for uncertain tax treatments.

The uncertain tax treatment must be reported by filing an information return in Form RC313 with the CRA within the due date for filing of the corporate tax return, i.e., within 6 months following the end of the tax year.

Penalties

The penalties for non-compliance with the Rules are as follows:

Model Reporting Rules for Digital Platform Operators

Effective 1 January 2024, Canada will implement model rules developed by the OECD for digital platform operators. These rules require digital platform operators that provide support to reportable sellers for relevant activities to determine the jurisdiction of residence of their reportable sellers and report certain information on the sellers.

Digital collaborative platforms generally consist of any software, including all or part of a website, and applications, including mobile applications, that are accessible to users and allow sellers to connect with other users to carry out a relevant activity, directly or indirectly. It also includes any mechanism for collecting and paying consideration for the relevant activity but excludes software exclusively allowing:

The processing of payments in relation to relevant activities;
Listing or advertising in relation to relevant activities; or
The redirection or transfer of users to another platform.

A reporting platform operator is an entity that is engaged in the following activities:

Contracting directly or indirectly with sellers to make the software that runs a platform available for the sellers to be connected to other users; or
Collecting compensation for the relevant activities facilitated through the platform.

A seller is a person who either provides relevant services or sells goods during the reportable period or is paid or credited consideration in connection with relevant activities during the reportable period.

A platform operator is considered a qualified platform operator if:

It is resident in Canada;
It is resident, incorporated, or managed in a partner jurisdiction, facilitates the provision of relevant activities by sellers resident in Canada or with respect to the rental of immovable property located in Canada and elects to be a reporting platform operator; or
It is not resident in Canada or a partner jurisdiction, and it facilitates the provision of relevant activities by sellers resident in Canada or with respect to the rental of immovable property located in Canada.

An excluded platform operator is an entity that demonstrates that the platform’s entire business model is such that it does not:

Allow sellers to derive a profit from the consideration; or
Have reportable sellers.

Relevant activity means an activity carried out for consideration, including the following:

Renting of real estate, including residential and commercial property and parking lots;
Provision of personal services;
Sale of goods; and
Renting of any mode of transport.

Reporting platform operators must file an information return containing the required information relating to reportable sellers by 31 January of the year following the calendar year in which a seller is identified as a reportable seller.

Information relating to the consideration paid or credited must be reported on a quarterly basis. The consideration must be reported in the currency in which it was paid or credited. Consideration that was not paid by way of Canadian currency must be converted using a consistent conversion or valuation method.

The reports must be filed electronically in the prescribed form.

Failure to comply with the registration or reporting requirements may attract a levy of penalty depending on the nature of the default.

Ultimate Beneficial Ownership Disclosure

Effective June 2019, Canada introduced the Ultimate Beneficial Ownership (UBO) disclosure requirement under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). Under the law, certain financial entities, securities dealers, life insurance brokers, money service businesses, and other transactional organizations in Canada are required to make mandatory disclosure of their ultimate beneficiaries. An ultimate beneficiary generally includes any individual with at least 25% direct or indirect voting rights in an entity or shares representing at least 25% of the fair market value of the entity’s outstanding shares.

The details of the ultimate beneficiaries must be maintained in a register and updated within 15 days of becoming aware of any change in the UBO information. On 23 June 2022, Canada enacted Bill C-19 amending the Canada Business Corporations Act, pursuant to which companies are required to report UBO information to the federal corporate regulator, Corporations Canada. The regulations outlining the format and timeline for submitting the information to Corporations Canada are yet to be published.

The reporting requirements do not apply to companies that are already subject to reporting requirements under securities laws and companies whose shares are listed and posted for trading on a designated stock exchange.

In case of an intentional failure to comply with the UBO requirements, the directors or officers in charge can be liable to a penalty of up to CAD 200,000 or up to 6 months of imprisonment.

Effective 1 April 2023, the Canadian province of Nova Scotia issued a release implementing UBO reporting requirements for reducing the potential for companies to be used for money laundering, tax evasion, and other crimes. The provinces of British Columbia, Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island, and Newfoundland and Labrador have implemented similar legislation. The provincial legislations largely align with the reporting requirements under the Canada Business Corporations Act.

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