Quebec’s GAAR War Form

Quebec has lined up an army of bureaucrats to dissect our tax planning strategies.

One year ago, Quebec released its proposals to fight aggressive tax planning and The Tax Issue was there to explain it all.

This week, Revenu Québec has released the form to be used to report your questionable series of transactions.

Form TP-1079.DI is a comprehensive form of no less than 11 pages, designed to allow the government full access to every aspect of your tax plan.

For corporations established in Quebec, the form must be completed in French (or at least the French version of the form must be used).

The form sets out the criteria required for mandatory reporting, which should be reviewed by anyone promoting a tax shelter.

Then comes all of the information reporting, and it is exhaustive, to say the least. Your are asked for the names of all parties involved, identification of your tax advisors, dates, tax consequences and a separate section asking for a detailed step-by-step analysis of the series of transactions (add attachments if the room provided is not sufficient).

The form goes on to ask you to identify specifically what taxes you avoided through this series of transactions. (Frankly, I’m surprised it doesn’t feature a remittance slip to allow you to immediately pay back the taxes plus interest.)

Tax shelter promoters who fall into the mandatory filing requirements will have no choice but to comply. I would be very curious, however, to see how many taxpayers will be voluntarily reporting their tax planning transactions as a protective measure. It’s a catch-22, of course. If a transaction is questionable enough to consider filing the form, then you can bet that Revenu Québec will be predisposed to applying the GAAR if they receive the information. If, on the other hand you decide not report, then you escape automatic and immediate scrutiny, but become exposed to the 25% additional penalty as well as the extended reassessment period.

One thing is for certain. Clients and their advisors must be made aware of this law and its inherent risks and the cost of implementing a complex tax plan will rise as a result of these onerous reporting obligations. (OK, that was at least two things 🙂 )

GAAR Wars: The (Quebec) Empire Strikes Back

Not Quebec's Finance Minister

The Minister of Finance of Quebec has announced major new rules in the fight against “Aggressive Tax Planning” (“ATP”).

Remember the “Quebec Shuffle”? How about the Alberta-Resident Trust? These and other tax-planning strategies were once all the rage, saving tax dollars by exploiting differences among provincial tax rules. Before they became well-known, they were marketed by tax planners as “confidential” or “proprietary” tax plans, and clients would have to sign non-disclosure agreements before gaining access to these strategies. Often, the fees charged by tax advisors were contingent – based on the value of the taxes saved.

Although the provinces took steps to eliminate many of these plans by introducing specific legislation over the years, and despite the existence of the General Anti-Avoidance Rule (“GAAR”), last January the government of Quebec issued a discussion paper to float proposed rules to further combat ATP transactions.

On October 15, 2009, the Minister of Finance released Information Bulletin 2009-5, which outlines the final version of new rules that will immediately apply to Quebec taxpayers and their advisors.

Mandatory Disclosure

The centerpiece of the proposed legislation is the new reporting regime. These rules are largely based on the U.S. model of “Reportable Transactions”, which has been in place for some years.

In certain instances, taxpayers will now be required to report the details of a transaction (or series of transactions) to Revenue Quebec by the due date for filing their returns. Taxpayers will have to report a complete and detailed description of the facts and the tax consequences relating to the transaction.

There are two categories of transactions that must be reported:

  • Confidential transaction – where the tax advisor has demanded secrecy from the taxpayer regarding the plan; and
  • Transaction with conditional remuneration – where the tax advisor is being compensated based on some form of contingency arrangement. (this would exclude contracts for R&D and other tax credits)

The mandatory disclosure will apply to either of the above types of transactions; however, they will not apply unless the transaction in question results in a tax benefit of at least $25,000 or a deduction of at least $100,000.

Failure to file the information will result in onerous consequences – a penalty of $10,000 plus $1,000 per day up to a maximum of $100,000, as well as suspension of the limitation period for reassessment until the disclosure is filed.

New Punitive Rules Where GAAR Applies

The Minister proposes to extend the limitation period and assess penalties where a transaction is found to be subject to the GAAR.

Firstly, the normal reassessment period (currently 3 or 4 years) will be extended by a full three years. Furthermore, a penalty of 25% of the additional tax will be levied on the taxpayer; and finally, in all cases where GAAR applies, a promoter who markets the plan will be subject to a penalty of 12.5% of the consideration he receives.

Preventative Disclosure

In order to prevent the possibility of an extended limitation period and the penalties in GAAR cases, taxpayers can choose to disclose any transaction to Revenue Quebec on a voluntary basis. If the transaction is reported by the due date of the taxpayer’s tax return, then the application of the GAAR will not come with the extension of the limitation period for reassessments and the above penalties will not be imposed.

New Administrative Department

I suspect that the government will quickly become inundated with disclosures, especially since now, any over-zealous tax auditor could decide to extend the reassessment period by simply pulling out the “GAAR” card (an over-zealous tax auditor in Quebec? Dave, you can’t be serious!).

To this end, the government has established a division of Revenu Québec, called the Direction principale de la lute contre les planifications fiscales abusifs (hooray! another Quebec bureaucratic department!), where all of the disclosures must be sent, on a prescribed form, separately from tax returns .

Quebec has taken a bold step in the fight against tax avoidance. One wonders how long it will be before the federal rules follow suit.